$144,950,000 OAKLAND JOINT POWERS FINANCING AUTHORITY REFUNDING REVENUE BONDS

Transcription

1 NEW ISSUE BOOK-ENTRY ONLY Ratings: Moody s: Aaa Standard & Poor s: AAA Fitch: AAA (See RATINGS herein) In the opinion of Bond Counsel, under existing law and assuming compliance with the tax covenants described herein, and the accuracy of certain representations and certifications made by the Authority and the City described herein, interest on the Oakland Joint Powers Financing Authority Refunding Revenue Bonds, Tax-Exempt 2005 Series A-1 and Series A-2 (the Tax-Exempt Bonds ) is excluded from gross income for Federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the Code ). Bond Counsel is also of the opinion that such interest is not treated as a preference item in calculating the alternative minimum tax imposed under the Code with respect to individuals and corporations. Interest on the Tax-Exempt Bonds is, however, included in the adjusted current earnings of certain corporations for purposes of computing the alternative minimum tax imposed on such corporations. Bond Counsel is further of the opinion that interest on the Oakland Joint Powers Financing Authority Refunding Revenue Bonds, Taxable 2005 Series B, is included in gross income for Federal income tax purposes. Bond Counsel is further of the opinion that interest on the Bonds is exempt from California personal income taxes. See TAX MATTERS herein regarding certain other tax considerations. $144,950,000 OAKLAND JOINT POWERS FINANCING AUTHORITY REFUNDING REVENUE BONDS $63,500, SERIES A-1 (AUCTION RATE SECURITIES) (Tax-Exempt Bonds) (CUSIP 67227RBB1) $63,475, SERIES A-2 (AUCTION RATE SECURITIES) (Tax-Exempt Bonds) (CUSIP 67227RBC9) $17,975, SERIES B (AUCTION RATE SECURITIES) (Taxable Bonds) (CUSIP 67227RBD7) Dated: Date of Delivery Price: 100% Due: as set forth on the inside front cover The Oakland Joint Powers Financing Authority (the Authority ) is offering $144,950,000 of its Refunding Revenue Bonds, comprised of $63,500, Series A-1 Bonds (the 2005 Series A-1 Bonds ), $63,475, Series A-2 Bonds (the 2005 Series A-2 Bonds ) and $17,975,000 Series B Bonds (the 2005 Series B Bonds, and collectively with the 2005 Series A-1 Bonds and the 2005 Series A-2 Bonds, the 2005 Bonds ), in fully registered form initially registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ( DTC ). The 2005 Bonds will initially be issued as auction rate bonds, subject to subsequent conversion by the Authority to an alternate Interest Rate Period (as defined herein). See THE 2005 BONDS herein. Individual purchases of 2005 Bonds will be made in book-entry form only in Authorized Denominations of $25,000 or integral multiples thereof. Purchasers of 2005 Bonds will not receive physical delivery of 2005 Bonds. Payments of the principal of, premium, if any, and interest on the 2005 Bonds will be made by The Bank of New York Trust Company, N.A., San Francisco, California, as trustee for the 2005 Bonds, to Cede & Co., as nominee of DTC, as registered owner of the 2005 Bonds, to be subsequently disbursed to DTC participants and thereafter to the beneficial owners of the 2005 Bonds, all as further described herein. The principal of the 2005 Bonds is payable at maturity on the dates set forth on the inside front cover. Interest on the 2005 Bonds is initially payable on the dates shown on the inside cover. Deutsche Bank Trust Company Americas, New York, New York, will serve as Auction Agent (the Auction Agent ) pursuant to an Auction Agreement, dated as of June 1, 2005, between the Trustee and the Auction Agent. The 2005 Bonds are subject to optional, mandatory and extraordinary mandatory redemption prior to maturity as described herein. The 2005 Bonds are being sold, issued and delivered to (i) refund and defease all of the Authority s outstanding Lease Revenue Bonds, 1998 Series A, which were issued to refund Special Refunding Revenue Bonds (Pension Financing) 1988 Series A issued by the City of Oakland, California (the City ), (ii) fund a portion of the City s obligation under its Charter to make payments to its Police and Fire Retirement System (the Retirement System ) in order to fund retirement benefits accruing to the members of the Retirement System, (iii) pay the premium for a financial guaranty insurance policy and a debt service reserve surety bond, and (iv) pay certain costs of issuance associated with the 2005 Bonds. The 2005 Bonds are payable from Revenues consisting primarily of Base Rental Payments to be made by the City to the Authority for the sublease of certain real property and improvements thereon under a Sublease (as defined herein). The City has covenanted in the Sublease to take such action as may be necessary to include Base Rental Payments and Additional Payments due under the Sublease in its annual budget, and to make necessary annual appropriations therefor. In addition, the City is making a subordinate pledge of its Tax Override Revenues (described herein) to the payment of the Base Rental Payments. See SECURITY AND SOURCE OF PAYMENT FOR THE 2005 BONDS herein. The Base Rental Payments are subject to abatement as described herein. See RISK FACTORS herein. Payment of the principal of, and interest on, the 2005 Bonds when due will be insured by a financial guaranty insurance policy to be issued by XL Capital Assurance Inc. (the Bond Insurer ) simultaneously with the delivery of the 2005 Bonds. See THE FINANCIAL GUARANTY INSURANCE POLICY herein. Upon satisfaction of certain conditions, the 2005 Bonds may be converted to a Daily Interest Rate Period, Weekly Interest Rate Period or a Long-Term Interest Rate Period, as described herein. If at any time the 2005 Bonds are converted to bear interest at an alternate rate as permitted under the Trust Agreement, such 2005 Bonds will be subject to mandatory tender. See THE 2005 BONDS Auction Rate Provisions. This Official Statement describes the 2005 Bonds only while they bear interest at an auction rate and are subject to the DTC book-entry only system. Owners and potential Owners of the 2005 Bonds should not rely on this Official Statement for information after a conversion of any 2005 Bonds to an alternate Interest Rate Period, but should look solely to the offering documents to be used in connection with any such conversion. Prospective purchasers of the 2005 Bonds should carefully review the Auction Procedures described herein, including APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS and APPENDIX D SUMMARY OF AUCTION PROCEDURES, and should note that: (i) a Bid or Sell Order constitutes a commitment to purchase or sell 2005 Bonds based upon the results of an Auction; (ii) Auctions will be conducted by authorized Broker-Dealers for the 2005 Bonds through electronic communications; and (iii) settlement for purchases and sales will be made on the next Business Day following an Auction. THE 2005 BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE AUTHORITY AND WILL BE PAYABLE FROM AND SECURED SOLELY BY THE PROCEEDS, REVENUES AND AMOUNTS PLEDGED THEREFOR. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BASE RENTAL PAYMENTS OR THE PRINCIPAL OR REDEMPTION PRICE OF OR INTEREST ON THE 2005 BONDS, EXCEPT TO THE EXTENT OF THE TAX OVERRIDE REVENUES. THE AUTHORITY HAS NO TAXING POWER. NEITHER THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE 2005 BONDS NOR THE OBLIGATION OF THE CITY TO MAKE BASE RENTAL PAYMENTS UNDER THE SUBLEASE CONSTITUTES A DEBT OF THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF THE CONSTITUTION OR THE LAWS OF THE STATE OF CALIFORNIA. This cover page contains information for general reference only. It is not intended to be a summary of the security or terms of the 2005 Bonds. Prospective purchasers are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. The 2005 Bonds will be offered when, as and if issued, subject to the approval of validity by Nixon Peabody LLP, San Francisco, California, Bond Counsel. Certain legal matters will be passed upon for the Authority and the City by John Russo, Counsel to the Authority and City Attorney of the City of Oakland. Gibbs & Gonzalez LLP served as special counsel to the City Attorney. Certain legal matters will be passed upon for the Underwriters by Sidley Austin Brown & Wood LLP. It is expected that the 2005 Bonds will be delivered through the facilities of DTC on or about June 21, 2005, in New York, New York, against payment therefor. Morgan Stanley (Underwriter and Broker-Dealer) Backstrom McCarley Berry & Co., LLC (Underwriter and Broker-Dealer) Dated: June 14, 2005 CUSIP numbers are provided for convenience of reference only. Neither the Authority, the City nor the Underwriters assume any responsibility for the accuracy of such numbers.

2 BOND MATURITY SCHEDULE The interest rate established by the Authority and the Broker-Dealers for the 2005 Bonds will apply to the Initial Period for each Series of the 2005 Bonds commencing on their date of issuance to and including the applicable Initial Auction Date specified below for each such Series. Thereafter, each Series of the 2005 Bonds will bear interest at an Auction Rate resulting from an Auction conducted for each Auction Period on each Auction Date in accordance with the Auction Procedures described in this Official Statement, subject to certain conditions and exceptions. Interest on each Series of the 2005 Bonds will be payable on each Interest Payment Date. The Initial Period, Initial Auction Date, each Auction Date thereafter, the Subsequent Auction Period, the First Interest Payment Date and Subsequent Interest Payment Dates are set forth below for each Series of the 2005 Bonds. Deutsche Bank Trust Company Americas will serve as Auction Agent. See THE 2005 BONDS Auction Rate Provisions herein. Series Principal Amount Maturity Date (January 1) Initial Auction Date (1) Subsequent Auction Period (2) Subsequent Auction Dates (1) First Interest Payment Date Subsequent Interest Payment Dates A-1 $63,500, July 1, 2005 Generally, 7 days Generally, each Friday thereafter July 5, 2005 Generally, each Monday thereafter A-2 $63,475, July 15, 2005 Generally, 28 days Generally, each fourth Friday thereafter July 18, 2005 Generally, each fourth Monday thereafter B $17,975, July 15, 2005 Generally, 28 days Generally, each fourth Friday thereafter July 18, 2005 Generally, each fourth Monday thereafter (1) (2) Subject to certain conditions and exceptions described herein. Subject to certain exceptions. See APPENDIX D SUMMARY OF AUCTION PROCEDURES Definitions Auction Period herein. The length of an Auction Period for each Series of the 2005 Bonds may be changed as described herein. The 2005 Bonds will not be subject to mandatory tender for purchase upon a change in the length of an Auction Period; however, notice of such change will be given as further described herein and any 2005 Bonds that are not the subject of a specific Hold Order or Bid shall be deemed to be subject to a Sell Order.

3 OAKLAND JOINT POWERS FINANCING AUTHORITY AUTHORITY GOVERNING BOARD EDMUND G. BROWN, JR., PRESIDENT DESLEY BROOKS NANCY NADEL JANE BRUNNER JEAN QUAN HENRY CHANG, JR. LARRY REID IGNACIO DE LA FUENTE PATRICIA KERNIGHAN CITY OF OAKLAND, CALIFORNIA CITY COUNCIL EDMUND G. BROWN, JR. MAYOR IGNACIO DE LA FUENTE, President JANE BRUNNER, Vice-Mayor DESLEY BROOKS JEAN QUAN HENRY CHANG, JR. LARRY REID NANCY NADEL PATRICIA KERNIGHAN AUTHORITY AND CITY OFFICIALS DEBORAH A. EDGERLY, Executive Director and City Administrator CHERYL A.P. THOMPSON, Assistant City Administrator WILLIAM E. NOLAND, Treasurer and Director, Finance and Management Agency JOHN RUSSO, City Attorney LATONDA SIMMONS, Secretary and City Clerk ROLAND E. SMITH, City Auditor KATANO KASAINE, Treasury Manager BOND COUNSEL Nixon Peabody LLP San Francisco, California FINANCIAL ADVISOR Public Financial Management, Inc. San Francisco, California AUCTION AGENT Deutsche Bank Trust Company Americas New York, New York TRUSTEE The Bank of New York Trust Company, N.A. San Francisco, California i

4 No dealer, broker, salesperson or other person has been authorized by the Authority to give any information or to make any representations other than as set forth herein and, if given or made, such other information or representation must not be relied upon as having been authorized by the Authority. 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 2005 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. The information set forth in this Official Statement has been obtained from sources that are believed to be reliable. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Authority, the City or the Bond Insurer since the date hereof. This Official Statement is submitted in connection with the sale of the 2005 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. Other than with respect to information concerning the Bond Insurer contained under the caption THE FINANCIAL GUARANTY INSURANCE POLICY and in APPENDIX I FORM OF FINANCIAL GUARANTY BOND INSURANCE POLICY and APPENDIX J FORM OF RESERVE FUND SURETY POLICY, none of the information in this Official Statement has been supplied or verified by the Bond Insurer and the Bond Insurer makes no representation or warranty, express or implied, as to (i) the accuracy or completeness of such information; (ii) the validity of the 2005 Bonds; or (iii) the tax exempt status of the interest on the 2005 Series A-1 and the 2005 Series A-2 Bonds. 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 a part of, their respective responsibilities 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. Certain statements contained in this Official Statement do not reflect historical facts but are forecasts and forward-looking statements. No assurance can be given that the future results discussed herein will be achieved, and actual results may differ materially from the forecasts described herein. In this respect, the words estimate, forecast, project, anticipate, expect, intend, plan, believe and similar expressions are intended to identify forwardlooking statements. All projections, forecasts, assumptions and other forward-looking statements are expressly qualified in their entirety by the cautionary statements set forth in this Official Statement. In connection with this offering, the Underwriters may overallot or effect transactions which stabilize or maintain the market price of the 2005 Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. ii

5 TABLE OF CONTENTS Page INTRODUCTION...1 General...1 City of Oakland...2 The Authority...2 The Leased Property...2 Authority for Issuance of the 2005 Bonds...2 Security for the 2005 Bonds...3 Bond Insurance...3 Bonds Constitute Limited Obligations; Sublease Payments Not Debt...3 Continuing Disclosure...4 Reference to Original Documents...4 Additional Information...4 PLAN OF FINANCE...4 THE RETIREMENT SYSTEM...5 ESTIMATED SOURCES AND USES OF FUNDS...5 THE 2005 BONDS...6 General...6 Redemption Provisions...7 Auction Rate Provisions...10 SECURITY AND SOURCE OF PAYMENT FOR THE 2005 BONDS...16 General...16 Base Rental Payments...16 Appropriations Covenant...18 Tax Override Revenues...19 Reserve Fund...22 Reserve Fund Surety Bond...23 Use of the Leased Property...24 Insurance...24 Abatement Due to Damage or Destruction...26 Eminent Domain...27 Option to Purchase, Sell or Dispose of Leased Property...27 Defaults and Remedies...27 Additional Bonds...28 THE FINANCIAL GUARANTY INSURANCE POLICY...28 General...28 Reinsurance...29 Financial Strength and Financial Enhancement Ratings of XLCA...29 Capitalization of the Bond Insurer...30 Incorporation by Reference of Financials...30 Regulation of the Bond Insurer...30 THE LEASED PROPERTY...31 BASE RENTAL PAYMENT SCHEDULE...32 THE CITY...32 THE AUTHORITY...32 RISK FACTORS...33 Base Rental Payments Not City Debt...33 Appropriation of Base Rental Payments...33 Legal Limitations on City s Revenues...34 Abatement...35 Seismic Risks...35 Risks Involving State Budget and Legislation...36 iii

6 TABLE OF CONTENTS (continued) Page Limitation on Enforcement of Remedies, Limited Recourse on Default...36 Bankruptcy...36 Changes in Law...37 Hazardous Substances...37 Investment of Funds...37 No Liability of the Authority to the Owners...37 APPROVAL OF LEGAL PROCEEDINGS...37 CONTINUING DISCLOSURE...38 TAX MATTERS Series A Bonds Series B Bonds...40 UNDERWRITING...43 FINANCIAL ADVISOR...43 LITIGATION...43 RATINGS...43 MISCELLANEOUS...45 APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND...A-1 APPENDIX B CITY OF OAKLAND AUDITED FINANCIAL STATEMENTS, JUNE 30, B-1 APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS... C-1 APPENDIX D SUMMARY OF AUCTION PROCEDURES...D-1 APPENDIX E CITY OF OAKLAND INVESTMENT POLICY FISCAL YEAR E-1 APPENDIX F FORM OF BOND COUNSEL OPINION...F-1 APPENDIX G FORM OF CONTINUING DISCLOSURE AGREEMENT...G-1 APPENDIX H THE DEPOSITORY TRUST COMPANY...H-1 APPENDIX I FORM OF FINANCIAL GUARANTY BOND INSURANCE POLICY...I-1 APPENDIX J FORM OF RESERVE FUND SURETY POLICY... J-1 iv

7 OFFICIAL STATEMENT $144,950,000 OAKLAND JOINT POWERS FINANCING AUTHORITY REFUNDING REVENUE BONDS $63,500, SERIES A-1 (AUCTION RATE SECURITIES) (Tax-Exempt Bonds) $63,475, SERIES A-2 (AUCTION RATE SECURITIES) (Tax-Exempt Bonds) $17,975, SERIES B (AUCTION RATE SECURITIES) (Taxable Bonds) INTRODUCTION This Introduction is subject in all respects to the more complete information contained elsewhere in this Official Statement. The offering of the 2005 Bonds to potential investors is made only by means of the entire Official Statement. Capitalized terms used in this Introduction and not otherwise defined herein shall have the respective meanings assigned to them elsewhere in this Official Statement, including in APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS and APPENDIX D SUMMARY OF AUCTION PROCEDURES. General The purpose of this Official Statement, which includes the cover page and appendices hereto, is to set forth certain information concerning the sale and delivery by the Oakland Joint Powers Financing Authority (the Authority ) of its $144,950,000 Refunding Revenue Bonds, comprised of $63,500, Series A-1 Bonds, (the 2005 Series A-1 Bonds ), $63,475, Series A-2 Bonds (the 2005 Series A-2 Bonds, and together with the 2005 Series A-1 Bonds, the 2005 Series A Bonds ) and $17,975, Series B Bonds (the 2005 Series B Bonds, and collectively with the 2005 Series A Bonds, the 2005 Bonds ). This Official Statement describes the 2005 Bonds only while they bear interest at an Auction Rate and are subject to the DTC book-entry only system. Owners and potential Owners of the 2005 Bonds should not rely on this Official Statement for information after a conversion of the interest rate on the 2005 Bonds to an alternate Interest Rate Period, but should look solely to the offering documents used in connection with any such conversion. The 2005 Bonds are being issued to (i) refund and defease all of the Authority s outstanding Lease Revenue Bonds, 1998 Series A (the Refunded Bonds ) which were issued to refund the City of Oakland Special Refunding Revenue Bonds (Pension Financing) 1988 Series A (the 1988 Pension Bonds ), (ii) fund a portion of the City s obligation under its Charter to make payments to its Police and Fire Retirement System (the Retirement System ) to fund retirement benefits accruing to the members of the Retirement System, (iii) pay the premium for a financial guaranty insurance policy and a debt service reserve surety bond, and (iv) pay certain of the costs of issuance of the 2005 Bonds. See PLAN OF FINANCE, ESTIMATED SOURCES AND USES OF FUNDS and THE LEASED PROPERTY herein. The 2005 Bonds are initially issued as Auction Rate Bonds ( ARBs ), subject to subsequent conversion by the Authority of all, but not less than all, of the 2005 Bonds to an alternate Interest Rate Period (as defined herein), upon the terms and conditions described herein. See THE 2005 BONDS Auction Rate Provisions Conversion to Alternate Interest Rate Period.

8 The interest rate established by the Authority and the Broker-Dealers for the 2005 Bonds will apply to the Initial Period commencing on the date of delivery thereof to and including the applicable initial Auction Date. Thereafter, the 2005 Bonds will bear interest at an Auction Rate resulting from an Auction conducted for each Auction Period on each Auction Date in accordance with the Auction Procedures described herein, subject to certain conditions and exceptions. Interest on the 2005 Bonds will be payable on each Interest Payment Date. The Initial Period, initial Auction Date, each Auction Date thereafter, the subsequent Auction Period, the first Interest Payment Date and subsequent Interest Payment Dates for the 2005 Bonds are shown on the inside cover of this Official Statement. Upon conversion of the 2005 Bonds to bear interest at a Daily Interest Rate, Weekly Interest Rate or Long-Term Interest Rate, such 2005 Bonds will be subject to mandatory tender for purchase on the proposed Conversion Date (defined herein) at a purchase price equal to the principal amount thereof plus accrued interest. The principal portion of the purchase price is payable only from remarketing proceeds. The Authority has no obligation to purchase 2005 Bonds that are subject to mandatory tender for purchase that have not been remarketed. If any 2005 Bonds are not purchased on the Conversion Date, the Owners will continue to hold all of the 2005 Bonds at the ARB Maximum Rate (defined herein) until the next succeeding Auction Period following such proposed Conversion Date, then at the Applicable ARB Rate. City of Oakland The City of Oakland (the City ) was incorporated as a town in 1852 and became a charter city in The City is located in the County of Alameda, California (the County ) across the San Francisco Bay, approximately seven miles east of San Francisco. The City contains approximately 53.8 square miles in total area and had a population estimated at 411,600 as of January 1, See THE CITY and APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND herein. The Authority The Authority is a joint exercise of powers agency organized under the laws of the State of California (the State ) in February 1993 with the City and the Redevelopment Agency of the City of Oakland (the Agency ) as its two constituent members. The Authority was formed to assist in the financing and refinancing of public capital improvements, such as the Leased Property (defined below). The City and the Agency are each sometimes referred to herein as a Member of the Authority. See THE AUTHORITY herein. The Leased Property The Leased Property, as more fully described herein, includes a portion of the City s sewer system. See THE LEASED PROPERTY herein. Authority for Issuance of the 2005 Bonds The 2005 Bonds are being issued pursuant to the Marks-Roos Local Bond Pooling Act of 1985, constituting Article 4 of Chapter 5 of Division 7 of Title 1 of the Government Code of the State (the Act ), provisions of Article 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State (the Refunding Law ) and a Trust Agreement, dated as of June 1, 2005 (the Trust Agreement ), by and between the Authority and The Bank of New York Trust Company, N.A., San Francisco, California, as trustee (the Trustee ). The City and the Authority will enter into the Sublease (as defined below) pursuant to and in accordance with the City s Charter, Resolution No adopted by the City Council of the City (the City Council ) on May 17, 2005, and Resolution No adopted by the Governing Board of the Authority on May 17, Deutsche Bank Trust Company 2

9 Americas has been appointed by the Authority to act as auction agent (the Auction Agent ) for the 2005 Bonds so long as such 2005 Bonds bear interest at an Auction Rate. The 2005 Bonds, together with all other Series of Additional Bonds issued pursuant to the Trust Agreement, are referred to as the Bonds. Security for the 2005 Bonds The 2005 Bonds are special limited obligations of the Authority payable primarily from Revenues (as hereinafter defined) pledged therefor in the Trust Agreement, consisting primarily of certain sublease payments (the Base Rental Payments ) payable by the City, as lessee, to the Authority, as lessor, pursuant to the Amended and Restated Sublease Agreement, dated as of June 1, 2005 (the Sublease ), by and between the Authority and the City (amending and restating the Sublease, dated as of July 1, 1998, between the Authority and the City). The City will lease the Leased Property to the Authority pursuant to the Amended and Restated Lease, dated as of June 1, 2005 (the Lease ), by and between the City and the Authority (amending and restating the Lease, dated as of July 1, 1998, between the City and the Authority), and the Authority will lease the Leased Property back to the City pursuant to the Sublease. The Base Rental Payments are designed to be sufficient in both time and amount to pay, when due, the principal of and interest on the 2005 Bonds. The Base Rental Payments are payable by the City from its General Fund for the right to the use and possession by the City of the Leased Property. The City is also making a subordinate pledge of certain Tax Override Revenues (defined herein) collected by the City pursuant to the levy of an ad valorem tax. See THE LEASED PROPERTY and SECURITY AND SOURCE OF PAYMENT FOR THE 2005 BONDS herein. A Reserve Fund is pledged to pay principal of and interest on the 2005 Bonds. See SECURITY AND SOURCE OF PAYMENT FOR THE 2005 BONDS Reserve Fund herein. To satisfy the Reserve Fund Requirement for the 2005 Bonds, the Authority will deposit to the Reserve Fund the surety bond (the Surety Bond ) issued by XL Capital Assurance Inc. (the Bond Insurer or XLCA ) in connection with the 2005 Bonds in the amount of $14,500,000 and expiring on January 1, For additional information regarding the Bond Insurer and the Surety Bond, see SECURITY AND SOURCE OF PAYMENT FOR THE 2005 BONDS Reserve Fund Surety Bond, THE FINANCIAL GUARANTY INSURANCE POLICY and APPENDIX J FORM OF RESERVE FUND SURETY BOND herein. Bond Insurance Payment of the principal of and interest on the 2005 Bonds when due is insured by a financial guaranty insurance policy (the Policy ) to be issued by the Bond Insurer simultaneously with the delivery of the 2005 Bonds. See THE FINANCIAL GUARANTY INSURANCE POLICY and APPENDIX I FORM OF FINANCIAL GUARANTY BOND INSURANCE POLICY herein. Bonds Constitute Limited Obligations; Sublease Payments Not Debt The 2005 Bonds are special limited obligations of the Authority and are not secured by a legal or equitable pledge of, or charge or lien upon, any property of the Authority or any of its income or receipts, except the Revenues. Neither the full faith and credit nor the taxing power of the City, any Member of the Authority, the State of California or any subdivision thereof is pledged for the payment of the interest on or the principal or redemption price of the 2005 Bonds or for the payment of Base Rental Payments, except to the extent of the Tax Override Revenues. Neither the payment of the principal of or interest on the 2005 Bonds nor the obligation of the City to make Base Rental Payments under the Sublease constitutes a debt, liability or obligation of the City, the State of California, any political subdivision thereof or any Member of the Authority for which any such entity is obligated, to levy or pledge any form 3

10 of taxation or for which any such entity has levied or pledged any form of taxation, except to the extent of the Tax Override Revenues. The Authority has no taxing power. Continuing Disclosure The Authority and the City have covenanted for the benefit of the Owners and the beneficial owners of the 2005 Bonds to provide certain financial information and operating data relating to the City and the Authority no later that 270 days following the end of the City s fiscal year (presently June 30) (the Annual Report ), commencing with the report for the fiscal year, and to provide notices of the occurrence of certain enumerated events, if deemed by the Authority or the City to be material under federal securities laws. The Annual Report will be filed by the City on behalf of both entities with each Nationally Recognized Municipal Securities Information Repository. The notices of material events will be filed by the City on behalf of both entities with each National Repository or the Municipal Securities Rulemaking Board. The specific nature of the information to be contained in the Annual Report or the notices of material events is set forth below in APPENDIX G FORM OF CONTINUING DISCLOSURE AGREEMENT herein. These covenants have been made in order to assist the Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). events. Neither the Authority nor the City has ever failed to provide annual reports or notices of material Reference to Original Documents Brief descriptions of the 2005 Bonds, the Authority, the City and the Leased Property are included in this Official Statement, together with summaries of the Trust Agreement, the Sublease and the Auction Procedures. Such descriptions and summaries do not purport to be comprehensive or definitive. All references herein to the 2005 Bonds, the Trust Agreement, the Sublease, the Broker-Dealer Agreement and the Auction Agreement are qualified in their entirety by reference to the actual documents, or with respect to the 2005 Bonds, the forms thereof included in the Trust Agreement, copies of all of which are available for inspection at the corporate trust office of the Trustee at 550 Kearny Street, Suite 600, San Francisco, California Additional Information The City regularly prepares a variety of reports, including audits, budgets and related documents, as well as certain periodic activity reports. Any Owner may obtain a copy of any such report, as available, from the Trustee or the City. Additional information regarding this Official Statement may be obtained by contracting the Trustee or the Treasury Manager, City of Oakland, Treasury Division, 150 Frank H. Ogawa Plaza, 5th Floor, Oakland, California , (510) PLAN OF FINANCE The Authority will use a portion of the proceeds from the sale of the 2005 Series A-1 and the 2005 Series A-2 Bonds, together with certain other available moneys (including funds, if any, currently held under the Prior Trust Agreement as defined below), to refund the outstanding Refunded Bonds which were issued pursuant to a Trust Agreement, dated as of July 1, 1998, by and between the Authority and U.S. Bank National Association, as successor trustee (the Prior Trust Agreement ). The Refunded Bonds are to be redeemed on June 21, 2005, contingent upon the delivery of the 2005 Series A-1 Bonds and the 2005 Series A-2 Bonds. 4

11 The Authority will use a portion of the proceeds from the sale of the 2005 Series B Bonds to fund a portion of the City s obligation under its Charter to make payments to the Retirement System in order to fund retirement benefits accruing to the members of such Retirement System. THE RETIREMENT SYSTEM The Retirement System is established pursuant to the Retirement Law and is a defined benefit pension system for the members of the City s Police and Fire Departments hired prior to July 1, The Retirement System is now closed; no new members can join the Retirement System. As of June 30, 2004, the Retirement System covered three current employees and 1,395 retired employees. The Retirement System provides for the payment of retirement allowances and disability and death benefits to its members and their beneficiaries. The Retirement System is governed by a seven-member Police and Fire Retirement Board (the Retirement Board ), which controls the operation, investment and disbursement of the Retirement System s funds. The Retirement System is subject to federal and California law and the Retirement Board has discretion to invest plan assets under the prudent person standard of the City Charter Article XXVI, the California Constitution and other applicable law. The Retirement System has a stated investment objective to maintain the purchasing power of the principal of Retirement System investments over the long term. For further information concerning the Retirement System, see APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND - Retirement Programs herein. Neither the Retirement System nor its assets are obligated for the payment of debt service on the 2005 Bonds. ESTIMATED SOURCES AND USES OF FUNDS The following table sets forth the estimated sources and uses of funds, including proceeds from the sale of the 2005 Bonds. See PLAN OF FINANCE herein. Sources of Funds 2005 SERIES A BONDS Principal Amount of 2005 Series A Bonds $126,975,000 Transfer of Refunded Bond Funds 17,709,888 Total Sources of Funds $144,684,888 Uses of Funds Redemption of Refunded Bonds $143,093,669 Costs of Issuance (1) 1,069,220 Underwriters Discount 521,999 Total Uses of Funds $144,684,888 5

12 Sources of Funds 2005 SERIES B BONDS Principal Amount of 2005 Series B Bonds $17,975,000 Total Sources of Funds $17,975,000 Uses of Funds Retirement System Fund (2) $17,709,888 Costs of Issuance (1) 191,216 Underwriters Discount 73,896 Total Uses of Funds $17,975,000 (1) (2) Includes fees and expenses of Bond Counsel, the Financial Advisor, the Auction Agent and the Trustee, printing costs, rating agency fees, surety and bond insurance premiums and other miscellaneous costs of issuance. Proceeds deposited to the Retirement System Fund will be used to fund a portion of the City s obligation under its Charter to the Retirement System. THE 2005 BONDS This section contains only brief descriptions of the auction and settlement procedures for the 2005 Bonds so long as such 2005 Bonds bear interest at an Auction Rate. The 2005 Bonds may be converted to an alternate Interest Rate Period upon satisfaction of certain requirements set forth in the Trust Agreement. This Official Statement provides information as of its date with respect to the 2005 Bonds (including the terms of such 2005 Bonds) prior to a Conversion from an ARB Interest Rate Period. There are significant changes in the terms of the 2005 Bonds not described in this Official Statement when the 2005 Bonds are not in an ARB Interest Rate Period. Purchasers of the 2005 Bonds should not rely on this Official Statement for information concerning the 2005 Bonds in connection with any Conversion of the 2005 Bonds, but should look solely to the offering document to be used in connection with any such Conversion. General The 2005 Bonds will initially be issued as auction rate bonds subject to subsequent conversion by the Authority of all, but not less than all, of any such 2005 Bonds to an alternate Interest Rate Period. The interest rate established by the Authority and the Broker-Dealers for the 2005 Bonds will apply to the Initial Period commencing on the date of delivery of such 2005 Bonds to and including the applicable initial Auction Date specified on the inside cover of this Official Statement. Thereafter, the 2005 Bonds will bear interest at an Auction Rate resulting from an Auction conducted for each Auction Period on each Auction Date in accordance with the Auction Procedures set forth in the Trust Agreement and described in this Official Statement, subject to certain conditions and exceptions. Interest on the 2005 Bonds will be payable on each Interest Payment Date. See Auction Rate Provisions Auctions and Auction Dates below. The 2005 Bonds will be dated the date of delivery thereof. The 2005 Series A Bonds will mature on January 1, 2017 and the 2005 Series B Bonds will mature on January 1, The 2005 Bonds will be issued in fully registered form, individual purchases being made in book-entry form only, in Authorized Denominations of $25,000 or any integral multiple thereof. Principal of and interest on the 2005 Bonds are payable by the Trustee to The Depository Trust Company, New York, New York ( DTC ), as the 6

13 registered Owner of the 2005 Bonds, which will in turn remit such principal and interest to the DTC Participants (as defined in APPENDIX H THE DEPOSITORY TRUST COMPANY ) for subsequent disbursement to the Beneficial Owners (as defined in APPENDIX H THE DEPOSITORY TRUST COMPANY ) of the 2005 Bonds. See APPENDIX H THE DEPOSITORY TRUST COMPANY herein. Redemption Provisions Optional Redemption. While any Auction Rate is in effect with respect to the 2005 Bonds, such 2005 Bonds shall be subject to redemption, at the written direction of the Authority, from moneys deposited with the Trustee by the Authority or the City, as a whole or in part on any Interest Payment Date, at a Redemption Price equal to 100% of the principal amount thereof, plus accrued interest to the date fixed for redemption, without premium. Mandatory Sinking Fund Redemption. The 2005 Series A-1 Bonds maturing on January 1, 2017 (the 2005 Series A-1 Term Bonds ) are subject to mandatory sinking fund redemption prior to maturity, in part, on January 1 of each year on and after January 1, 2006, by lot, solely from sinking fund payments, at a redemption price equal to the sum of the principal amount of such 2005 Series A-1 Term Bonds to be redeemed, plus accrued interest thereon to the redemption date, without premium. The principal amount of such 2005 Series A-1 Term Bonds to be so redeemed and the dates therefor will be as indicated on the following table: Final Maturity Series A-1 Mandatory Sinking Fund Redemption Date (January 1) Principal Amount 2006 $4,125, ,300, ,500, ,700, ,800, ,050, ,275, ,550, ,875, ,125, ,450, ,750,000 The 2005 Series A-2 Bonds maturing on January 1, 2017 (the 2005 Series A-2 Term Bonds ) are subject to mandatory sinking fund redemption prior to maturity, in part, on January 1 of each year on and after January 1, 2006, by lot, solely from sinking fund payments, at a redemption price equal to the sum of the principal amount of such 2005 Series A-2 Term Bonds to be redeemed, plus accrued interest thereon to the redemption date, without premium. The principal amount of such 2005 Series A-2 Term Bonds to be so redeemed and the dates therefor will be as indicated on the following table: 7

14 Final Maturity. Mandatory Sinking Fund Redemption Date (January 1) 2005 Series A-2 Principal Amount 2006 $4,125, ,300, ,500, ,700, ,775, ,025, ,300, ,575, ,825, ,150, ,475, ,725,000 The 2005 Series B Bonds maturing on January 1, 2026 (the 2005 Series B Term Bonds ) are subject to mandatory sinking fund redemption prior to maturity, in part, on January 1 of each year on and after January 1, 2018, by lot, solely from sinking fund payments, at a redemption price equal to the sum of the principal amount of such 2005 Series B Term Bonds to be redeemed, plus accrued interest thereon to the redemption date, without premium. The principal amount of such 2005 Series B Term Bonds to be so redeemed and the dates therefor will be as indicated on the following table: Final Maturity. Mandatory Sinking Fund Redemption Date (January 1) 2005 Series B Principal Amount 2018 $1,600, ,700, ,725, ,875, ,000, ,100, ,200, ,325, ,450,000 In lieu of the mandatory redemption set forth above, the Trustee may apply amounts held for the purpose of such mandatory redemption to the purchase, at public or private sale, of such Term Bonds scheduled to be redeemed, as and when and at such prices as are set forth in the Trust Agreement. Extraordinary Mandatory Redemption. The 2005 Bonds are subject to extraordinary mandatory redemption by the Authority on any date prior to their respective stated maturities, upon notice as described below, as a whole or in part by lot within each stated maturity in integral multiples of Authorized Denominations, from prepayments (from insurance or eminent domain proceeds) made by the 8

15 City pursuant to the Sublease, at a redemption price equal to the sum of the principal amount thereof, without premium, plus accrued interest thereon to the redemption date. Whenever less than all of the Outstanding Bonds are to be redeemed on any one date, the Trustee shall select, the Bonds to be redeemed in part from all 2005 Bonds subject to redemption and not previously called for redemption, by lot in any manner which the Trustee in its sole discretion shall deem appropriate and fair. Pursuant to the Sublease and the Trust Agreement, in the event of any damage to or destruction of any part of the Leased Property caused by the perils covered by insurance or condemnation proceeds, the Authority, except as otherwise provided in the Sublease and the Trust Agreement and described herein, will cause the proceeds of such insurance or condemnation proceeds to be used for the repair, reconstruction or replacement of the damaged or destroyed portion of the Leased Property. Alternatively, if the proceeds of such insurance and any amounts transferable from the Reserve Fund as allocable to the Bonds to be redeemed, together with any other moneys then available for the purpose are at least sufficient to redeem an aggregate principal amount of Outstanding 2005 Bonds equal to the amount of Outstanding 2005 Bonds attributable to the portion of the Leased Property so destroyed or damaged (determined by reference to the proportion which the cost of such portion of the Leased Property bears to the aggregate cost of the Leased Property), the Authority may elect not to repair, reconstruct or replace the damaged or destroyed portion of the Leased Property and thereupon will cause said proceeds to be used for the redemption of Outstanding 2005 Bonds pursuant to the provisions of the Trust Agreement described above. Under the Sublease, the City will develop a plan to repair the Leased Property or to use the insurance or condemnation proceeds to prepay all or a portion of the Base Rental Payments within forty-five (45) days from the date notice is given by the City to the Authority and the Trustee of the damage or destruction. The aggregate annual amounts of Base Rental Payments which will be payable after such prepayment date will be as nearly proportional as practicable to the aggregate annual amounts of Base Rental Payments unpaid prior to the prepayment date. Insurance or condemnation proceeds will not be used for a partial redemption of the 2005 Bonds unless the Base Rental Payments on the undamaged portion of the Leased Property will be sufficient to pay the initially-scheduled principal and interest on the 2005 Bonds remaining unpaid after such redemption. Notwithstanding the foregoing, to the extent that moneys are available for the payment of Base Rental Payments in any of the funds and accounts established under the Trust Agreement or are available as Tax Override Revenues or rental interruption insurance proceeds, Base Rental Payments will not be abated and the 2005 Bonds will not be subject to extraordinary redemption as described above, but rather will be payable by the City as a special obligation payable solely from said funds, accounts and revenues. Procedure for and Notice of Redemption. Notice of redemption will be mailed by first-class mail by the Trustee, not less than thirty (30) nor more than sixty (60) days prior to the redemption date, to the parties specified in the Trust Agreement including the respective Owners of the 2005 Bonds designated for redemption at their addresses appearing on the registration books of the Trustee. Each notice of redemption will state the date of such notice, the date of issue of the 2005 Bonds, the redemption date, the Redemption Price, the place or places of redemption (including the name and appropriate address of the Trustee), the CUSIP number (if any) of the maturity or maturities, and, if less than all of any such maturity is to be redeemed, the distinctive certificate numbers of the 2005 Bonds of such maturity, to be redeemed and, in the case of 2005 Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. Each such notice will also state that on said date there will become due and payable on each of said Bonds the redemption price thereof, together with interest accrued thereon to the redemption date, and that from and after such redemption date interest thereon will cease to accrue, and will require that such 2005 Bonds be then surrendered at the address of the Trustee 9

16 specified in the redemption notice. Failure to receive such notice will not invalidate any of the proceedings taken in connection with such redemption. The Authority may, at its option, prior to the date fixed for redemption in any notice of redemption and must, in the event there will be insufficient funds held by the Trustee on the redemption date to pay the redemption price (including premium, if any) of the 2005 Bonds, rescind and cancel such notice of redemption by Written Request to the Trustee and the Trustee will mail notice of such cancellation to the recipients of the notice of redemption being cancelled. If notice of redemption has been duly given as aforesaid and money for the payment of the redemption price of the 2005 Bonds called for redemption is held by the Trustee, then on the redemption date designated in such notice Bonds so called for redemption will become due and payable, and from and after the date so designated interest on such 2005 Bonds will cease to accrue, and the Owners of such 2005 Bonds will have no rights in respect thereof except to receive payment of the redemption price thereof. All Bonds redeemed as described above will be cancelled by the Trustee and will be destroyed with a certificate of destruction furnished to the Authority upon its request and will not be reissued. Selection of 2005 Bonds for Redemption. The Authority will designate which maturities of 2005 Bonds are to be redeemed. If less than all Outstanding of the same Series maturing by their terms on any one date are to be redeemed at any one time, the Trustee will select the 2005 Bonds of such maturity date to be redeemed by lot in any manner that it deems appropriate. For purposes of such selection, Bonds will be deemed to be composed of multiples of minimum Authorized Denominations and any such multiple may be separately redeemed. In the event Term Bonds are designated for redemption, the Authority may designate which sinking account payments are allocated to such redemption. Auction Rate Provisions General The 2005 Bonds are initially issued as ARBs, subject to subsequent conversion by the Authority of all, but not less than all, of the 2005 Bonds to an alternate Interest Rate Period, as described herein. See Conversion to Alternate Interest Rate Period herein. This Official Statement provides information as of its date with respect to the 2005 Bonds (including the terms of such 2005 Bonds) prior to a Conversion from an ARB Interest Rate Period. There are significant changes in the terms of the 2005 Bonds not described in this Official Statement when the 2005 Bonds are not in an ARB Interest Rate Period. Purchasers of the 2005 Bonds should not rely on this Official Statement for information concerning the 2005 Bonds in connection with any Conversion of the 2005 Bonds, but should look solely to the offering document to be used in connection with any such Conversion. Except as otherwise specifically provided in the Trust Agreement, the provisions of the Trust Agreement shall govern the interest rates per annum and the payment terms with respect to the ARBs. See also Calculation and Payment of Interest-Calculation of Interest Rates and Determination and Notice of ARB Interest Rate herein. Auction Agent and Auction Agreement The Trustee and Deutsche Bank Trust Company Americas (together with any successor bank or trust company or other entity entering into a similar agreement with the Trustee, the Auction Agent ) will enter into an Auction Agreement, dated as of June 1, 2005 (the Auction Agreement ) which 10

17 provides, among other things, that the Auction Agent will follow the Auction Procedures for the purposes of determining the Auction Rate so long as the Auction Rate is to be based on the results of an Auction. Broker-Dealers and Broker-Dealer Agreements Each Auction requires the participation of one or more Broker-dealers. Morgan Stanley & Co. Incorporated and Backstrom McCarley Berry & Co., LLC will act as the initial Broker-Dealers with respect to the 2005 Bonds (individually, each a Broker-Dealer and collectively, the Broker-Dealers ). The Auction Agent and the Authority will enter into separate Broker-Dealer Agreements with the Broker-Dealers and may enter into similar agreements (collectively, the Broker-Dealer Agreements ) with one or more additional Broker-Dealers selected by the Authority and acceptable to the Bond Insurer. The Authority or the Bond Insurer may remove any Broker-Dealer at any time, provided that a Broker-Dealer may not be removed if the removal would result in no Broker-Dealer being appointed with respect to the 2005 Bonds. The Auction Agent will pay to each Broker-Dealer after each Auction, from funds provided by the Corporation, a service charge that will be based on a rate equal to the percentage of the stated value of the 2005 Bonds held by such Broker-Dealer and such Broker-Dealer s customers upon settlement in an Auction calculated on an annualized basis. A Broker-Dealer may share a portion of such fee with a non-participating Broker-Dealer that submit Bids to the Broker-Dealer that are fulfilled at an Auction. Auctions and Auction Dates Except as otherwise provided in the Trust Agreement, an Auction to determine the ARB Interest Rate for each ARB Interest Rate Period will be held on each Auction Date. The first Auction Date with respect to the 2005 Series A-1 Bonds will be July 1, 2005 and the first Auction Date with respect to the 2005 Series A-2 Bonds and the 2005 Series B Bonds will be July 15, Thereafter, an Auction will be held on the Business Day immediately preceding the first day of each Auction Period, except for: (a) each Auction Period commencing after the ownership of the ARBs is no longer maintained in book entry form by DTC; (b) each Auction Period commencing after the occurrence and during the continuance of an ARB Payment Default; or (c) any Auction Period commencing less than the applicable number of Business Days after the cure or waiver of an ARB Payment Default; provided, however, that the last Auction Date for any ARB Interest Rate Period with respect to ARBs shall be the earlier of (i) the Business Day next preceding the Interest Payment Date next preceding the Conversion Date for such ARBs, and (ii) the Business Day next preceding the Interest Payment Date next preceding the final maturity date for such ARBs. Notwithstanding the foregoing, the Auction Date for one or more Auction Periods may be changed as provided in the Trust Agreement. See APPENDIX D SUMMARY OF AUCTION PROCEDURES Changes in Auction Periods or Auction Date herein. The term Auction Period means (i) with respect to the 2005 Series A-1 Bonds (a) the Initial Period, and (b) each successive 7-day period thereafter, commencing on a Monday (or the day following the last day of the prior Auction Period, if the prior Auction Period does not end on a Sunday) and ending on the Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case such Auction Period will end on the next succeeding day that is followed by a Business Day), and (ii) with respect to the 2005 Series A-2 Bonds and the 2005 Series B Bonds (a) the Initial Period, and (b) each successive 28-day period thereafter, commencing on a Monday (or the day following the last day of the prior Auction Period, if the prior Auction Period does not end on a Sunday) and ending on the fourth Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case such Auction Period will end on the next succeeding day that is followed by a Business Day), as the same may be 11

18 changed as provided in the Trust Agreement. See APPENDIX D SUMMARY OF AUCTION PROCEDURES Changes in Auction Periods or Auction Date herein. Calculation and Payment of Interest Interest Rate Periods. The 2005 Bonds will initially bear interest at the rate set by the Authority and the Underwriters for the 2005 Bonds and will be payable on the initial Interest Payment Date for the 2005 Bonds as set forth on the inside cover. Thereafter, the interest rate will be established pursuant to the Auction Procedures described in APPENDIX D SUMMARY OF AUCTION PROCEDURES herein. During the Initial Period, interest on the 2005 Series A-1 Bonds will be paid on July 5, 2005 (being the Business Day immediately following the Initial Period for the 2005 Series A-1 Bonds) and interest on the 2005 Series A-2 Bonds and the 2005 Series B Bonds will be paid on July 18, Thereafter, interest will be payable on each Interest Payment Date, as follows: (i) during an ARB Interest Rate Period, on the Business Day immediately following each Auction Period; (ii) on each Mandatory Tender Date; (iii) on any date on which the 2005 Bonds are redeemed as described under Redemption Provisions-Optional Redemption or Redemption Provisions-Mandatory Sinking Fund Redemption above; and (iv) on the Maturity Date. Calculation of Interest Rates. The applicable interest rate for each Auction Period with respect to the 2005 Bonds will be: (i) if Sufficient Clearing Bids exist, the Winning Bid Rate, provided, however, if all of the 2005 Bonds are the subject of Submitted Hold Orders, the All-Hold Rate; and (ii) if Sufficient Clearing Bids do not exist, the ARB Maximum Rate; provided, however, in no event may the ARB Interest Rate exceed the ARB Maximum Rate. The term Sufficient Clearing Bids means an Auction for which the aggregate principal amount of the 2005 Bonds that are the subject of Submitted Bids by Potential Owners specifying one or more rates not higher than the ARB Maximum Rate is not less than the aggregate principal amount of the 2005 Bonds that are the subject of Submitted Sell Orders and of Submitted Bids by Existing Owners specifying rates higher than the ARB Maximum Rate. The term Winning Bid Rate means, with respect to the 2005 Bonds, the lowest rate specified in any Submitted Bid, which if selected by the Auction Agent as the ARB Interest Rate would cause the aggregate principal amount of the 2005 Bonds that are the subject of Submitted Bids specifying a rate not greater than such rate to be not less than the aggregate principal amount of Available Bonds. Index. The term All-Hold Rate means, as of any Auction Date, fifty-five percent (55%) of the LIBOR The term ARB Maximum Rate means twelve percent (12%) per annum. Determination and Notice of ARB Interest Rate Determination of Auction Rate. The ARB Interest Rate applicable to the 2005 Bonds during each Auction Period shall be determined by the Auction Agent and notice thereof shall be given as provided in the Trust Agreement, except that the initial ARB Interest Rate during the Initial Period for the 2005 Bonds shall be as established by the Authority and the Underwriters for the 2005 Bonds. In the event the Auction Agent fails to calculate or, for any reason, fails to timely provide the ARB Interest Rate for any Auction Period, (i) if the preceding Auction Period was a period of 35 days or 12

19 less, the new Auction Period will be the same as the preceding Auction Period, and (ii) if the preceding Auction Period uses a period of greater than 35 days, the new Auction Period will be a seven-day Auction Period. In both cases, the Auction Rate for the new Auction Period will be the same as the Auction Rate for the preceding Auction Period, provided however that it shall not exceed the ARB Maximum Rate. If the ownership of the Auction Rate Bonds is no longer maintained in book-entry form by DTC, the rate of interest on the 2005 Bonds shall be the ARB Maximum Rate and the Trustee will calculate the ARB Maximum Rate on the Business Day immediately preceding the first day of each Auction Period commencing after the delivery of certificates representing the ARBs pursuant to the Trust Agreement. Notice of Auction Rate. On each Auction Date for the 2005 Bonds, the Auction Agent shall notify by telephone or by other acceptable electronic communication device each Broker-Dealer that participated in the Auction held on such Auction Date of the following: (i) the ARB Interest Rate determined on such Auction Date for the succeeding Auction Period; (ii) Bid Rate; whether Sufficient Clearing Bids existed for the determination of the Winning (iii) if such Broker-Dealer submitted a Bid or a Sell Order on behalf of an Existing Owner, whether such Bid or Sell Order was accepted or rejected and the principal amount of 2005 Bonds, if any, to be sold by such Existing Owner; (iv) if such Broker-Dealer submitted a Bid on behalf of a Potential Owner, whether such Bid was accepted or rejected, in whole or in part, and the principal amount of 2005 Bonds, if any, to be purchased by such Potential Owner; (v) if the aggregate principal amount of the 2005 Bonds to be sold by all Existing Owners on whose behalf such Broker-Dealer submitted Bids or Sell Orders is different from the aggregate principal amount of such 2005 Bonds to be purchased by all Potential Owners on whose behalf such Broker-Dealer submitted a Bid, the name or names of one or more Broker-Dealers (and the Agent Member, if any, of each such other Broker-Dealer) and the principal amount of such 2005 Bonds to be (A) purchased from one or more Existing Owners on whose behalf such other Broker-Dealers submitted Bids or Sell Orders or (B) sold to one or more Potential Owners on whose behalf such Broker-Dealer submitted Bids; and (vi) the immediately succeeding Auction Date. On each Auction Date for 2005 Bonds for which an Auction was held on such Auction Date, each Broker-Dealer that submitted an Order on behalf of any Existing Owner or Potential Owner will: (i) advise each Existing Owner and Potential Owner on whose behalf such Broker-Dealer submitted an Order as to (A) the ARB Interest Rate determined on such Auction Date, (B) whether any Bid or Sell Order submitted on behalf of each such Owner was accepted or rejected, and (C) the immediately succeeding Auction Date; (ii) instruct each Potential Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, to instruct such Potential Owner s Agent Member to pay to such Broker-Dealer (or its Agent Member) through the Depository the amount necessary to purchase the principal amount of 2005 Bonds to be purchased pursuant to such Bid against receipt of such 2005 Bonds; and (iii) instruct each Existing Owner on whose behalf such Broker-Dealer submitted a Sell Order that was accepted or a Bid that was rejected in whole or in part, to instruct such Existing Owner s Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Depository the 13

20 principal amount of such 2005 Bonds to be sold pursuant to such Bid or Sell Order against payment therefor. Computation of Interest During Auction Rate Period. The amount of interest distributable to Holders of ARBs bearing interest at the Auction Rate in respect of each $25,000 in principal amount thereof for any Auction Period or part thereof will be computed by the Trustee on the basis of a 360-day year for the number of days actually elapsed. In the event an Interest Payment Date occurs in any Auction Period on a date other than the first day of such Auction Period, the Trustee, after confirming the calculation required above, will calculate the portion of the Interest Amount payable on such Interest Payment Date and the portion payable on the next succeeding Interest Payment Date. The Trustee will make the calculation above not later than the close of business on each Auction Date. Special Considerations Relating to the Auction Rate Bonds Bearing Interest at Auction Period Rates The Auction Agreement will provide that the Auction Agent may resign from its duties as Auction Agent by giving at least 90 days notice to the Authority, the Trustee, the Bond Insurer and the Broker-Dealers and does not require, as a condition to the effectiveness of such resignation, that a replacement Auction Agent be in place if its fee has not been paid. The Broker-Dealer Agreements each will provide that the Broker-Dealer thereunder may resign upon 30 business days notice or immediately, in certain circumstances, and does not require, as a condition to the effectiveness of such resignation, that a replacement Broker-Dealer be in place. For any Auction Period during which there is no duly appointed Auction Agent, or during which there is no duly appointed Broker-Dealer, it will not be possible to hold Auctions, with the result that the interest rate on the ARBs will be determined as follows: (i) if the preceding Auction Period was a period of 35 days or less, the new Auction Period will be the same as the preceding Auction Period and the Auction Rate for the new Auction Period will be the same as the Auction Rate for the preceding Auction Period, and (ii) if the preceding Auction Period uses a period of greater than 35 days, the new Auction Period will be a seven-day Auction Period and the Auction Rate for the new Auction Period will be the same as the ARBs Rate for the preceding Auction Period. The Broker-Dealer Agreements each will provide that a Broker-Dealer may submit Orders in Auctions for its own account. In the Broker-Dealer Agreements, each Broker-Dealer will agree to handle customers orders in accordance with its duties under applicable securities laws and rules. Any Broker-Dealer submitting an Order for its own account in any Auction could have an advantage over other Potential or Existing Holders in that it would have knowledge of other Orders placed through it in that Auction. A Broker-Dealer would not, however, have specific knowledge of Orders submitted by other non-affiliated Broker-Dealers, if any. Also, a Broker-Dealer may exercise discretion regarding client orders which could be an advantage to those clients because the Broker-Dealer exercising discretion would have knowledge of other orders placed through it in the Auction. In addition, as a result of bidding by a Broker-Dealer in an Auction, the Auction Rate may be higher or lower than the rate that would have prevailed had the Broker-Dealer not bid. A Broker-Dealer may also bid in an Auction in order to prevent what would otherwise be (a) a failed Auction, (b) an all-hold Auction, or (c) the implementation of an Auction Rate that the Broker-Dealer believes, in its sole judgment, does not reflect the market for such securities at the time of the Auction. A Broker-Dealer may also encourage additional or revised investor bidding in order to prevent an all-hold Auction. The Securities and Exchange Commission (the Commission ) has requested information from a number of Broker-Dealers regarding certain of their practices in connection with auction rate securities. The Broker-Dealers have advised the Authority and the Corporation that (i) they, as participants in the auction rate securities markets, have each received a letter from the Commission requesting that they 14

21 voluntarily conduct an investigation regarding certain of their practices and procedures in connection with those markets and (ii) the Broker-Dealers are cooperating and expect to continue to cooperate with the Commission in providing the requested information. No assurance can be given as to whether the results of this process will affect the market for the ARBs or the Auctions therefor. During an Auction Rate Period a beneficial owner of an Auction Rate Bond may sell, transfer or dispose of an Auction Rate Bond only pursuant to a Bid or Sell Order in accordance with the Auction Procedures (see APPENDIX D SUMMARY OF AUCTION PROCEDURES ) or through a Broker-Dealer. A beneficial owner of the ARBs may not be able to sell some or all of such ARBs at an Auction if the Auction fails; that is, if there are more ARBs offered for sale than there are buyers for such ARBs. Also, a beneficial owner of the ARBs that places Hold Orders (orders to retain ARBs) at an Auction only at a specified rate will not retain their ARBs if that specified rate exceeds the rate set at the Auction. Finally, a beneficial owner of the ARBs that places a Bid for ARBs or submits a Hold Order for ARBs, in either case without specifying a minimum rate, may receive a rate lower than the expected market rate for the ARBs. Any number of factors may have an effect on the level of interest from time to time in Auctions for the ARBs or in auction rate securities in general, including, among other things, the availability and attractiveness of alternative investments, the perceived risk of owning the security (whether related to credit, liquidity or any other risk), uncertainties related to regulatory inquiries and actions, changes in tax or accounting treatments available to potential investors and market sentiment generally. For example, recent clarifications of U.S. generally accepted accounting principles relating to the treatment of auction rate securities may affect demand for the ARBs and auction rate securities generally among certain corporate investors. Neither the Underwriters, the Authority nor the City can predict the extent to which any of these or other factors may affect the market for the ARBs or Auctions from time to time. Changes to the Auction Periods and Auction Dates do not require the amendment of the Auction Procedures. Conversion to Alternate Interest Rate Period Conversion at Option of Authority. At the option of the Authority, the 2005 Bonds bearing interest at an Auction Rate may be converted to bear interest at a Daily Interest Rate, Weekly Interest Rate or Long-Term Interest Rate. The ARBs to be converted to an alternate Interest Rate Period as described above shall be subject to mandatory tender for purchase on a Proposed Conversion Date at a price equal to the Purchase Price. The Trustee shall give Notice by Mail to the owners of the 2005 Bonds at their addresses shown on the registration books kept by the Trustee, of the mandatory tender of 2005 Bonds not less than 30 days prior to the date of mandatory tender. Purchase of 2005 Bonds: Bonds Deemed Purchased. The Trustee shall pay the Purchase Price of such 2005 Bonds only from the proceeds of the remarketing thereof. Payment of the Purchase Price of any 2005 Series A Bond shall be made in immediately available funds, but only upon presentation and surrender of such 2005 Series A Bond to the Trustee, except as otherwise provided in the Trust Agreement. Payment of the Purchase Price of any 2005 Bonds held in book-entry form shall be made in immediately available funds by 3:00 p.m., New York City time. If moneys sufficient to pay the Purchase Price of 2005 Bonds to be purchased shall be held by the Trustee on the date such 2005 Bonds are to be purchased, such 2005 Bonds shall be deemed to have been purchased and shall be purchased according to the terms of the Trust Agreement, irrespective of whether 15

22 or not such 2005 Bonds shall have been delivered to the Trustee, and the former holder of such 2005 Bonds shall have no claim thereon, under the Trust Agreement or otherwise, for any amount other than the purchase price thereof. In the event any 2005 Bonds purchased shall not be presented to the Trustee, the Trustee shall segregate and hold the moneys for the Purchase Price of such 2005 Bonds in trust, without liability for interest thereon, for the benefit of the former owners of such 2005 Bonds, who shall, except as provided in the following sentence, thereafter be restricted exclusively to such moneys for the satisfaction of any claim for the purchase price of such 2005 Bonds. Any moneys which the Trustee shall segregate and hold in trust for the payment of the purchase price of any 2005 Series A Bond and remaining unclaimed for two (2) years after the date of purchase shall be paid to the Authority. After the payment of such unclaimed moneys to the Authority, the former holder of such 2005 Series A Bond shall look only to the Authority for the payment thereof. Failed Conversion. If on a Proposed Conversion Date, any condition precedent to such conversion required under the Trust Agreement will not be satisfied, the Trustee will give written notice by first class mail postage prepaid as soon as practicable and in any event not later than the next succeeding Business Day to the Auction Rate Owners and the Bond Insurer that such conversion has not occurred, that such Auction Rate Bonds will not be purchased on the failed Conversion Date, that the Auction Agent will continue to implement the Auction Procedures on the Auction Dates with respect to the ARBs which otherwise would have been converted, excluding however the Auction Date falling on the Business Day next preceding the failed Conversion Date, and that the interest rate will continue to be the Auction Rate; provided, however, that the interest rate borne by the 2005 Bonds during the Auction Period commencing on such failed Conversion Date will be the ARB Maximum Rate for an Auction Period the same length as the prior Auction Period. General SECURITY AND SOURCE OF PAYMENT FOR THE 2005 BONDS The 2005 Bonds constitute special limited obligations of the Authority, and are payable solely from and secured as to principal and interest thereon, and as to any premiums upon the redemption of any thereof, solely by (i) the Revenues, (ii) all amounts on deposit in the Revenue Fund, (iii) any other amounts (including proceeds of the sale of the 2005 Bonds) held by the Trustee in any fund or account established under the Trust Agreement (other than the Rebate Fund or the Bond Purchase Fund). The 2005 Bonds do not constitute an indebtedness of the Authority or the City within the meaning of any constitutional or statutory debt limitation or restriction and do not constitute obligations, nor evidence any indebtedness, of the City or of the State. Revenues are defined in the Trust Agreement to mean (i) all Base Rental Payments paid by the City and received by the Authority pursuant to the Sublease (but not Additional Payments), and (ii) all interest or other income from any investment of any money in any fund or account (other than the Rebate Fund) established pursuant to the Trust Agreement or the Sublease. Base Rental Payments The obligation of the City to make Base Rental Payments, when due, is a General Fund obligation of the City and does not constitute a debt of the City for which the City is obligated to pledge or levy any form of taxation or for which the City has levied or pledged any form of taxation, except to the extent of the Tax Override Revenues. Base Rental Payments will be made from amounts included in the City s annual budget and appropriated therefor except to the extent payments are made from proceeds of the 16

23 2005 Bonds, rental interruption insurance, the net proceeds of insurance or condemnation awards or certain other moneys held under the Trust Agreement, including moneys held in the Reserve Fund established under the Trust Agreement and the Tax Override Revenues (defined below) collected by the City. The City has pledged on a subordinate basis its Tax Override Revenues to the payment of the Base Rental Payments. The Tax Override Revenues are defined in the Sublease as the revenues generated and collected by the City in each fiscal year as proceeds of its annual tax levy authorized by Measure R, adopted by the voters of the City on June 8, 1976 ( Measure R ), which amended certain provisions of the City Charter establishing the Retirement Law and required the City to amortize the unfunded accrued actuarial liability of the City to the Retirement System of the City (the UAAL ) by the year Beginning in 1981, the City Council levied the Tax Override to fund the UAAL. Measure O, adopted by the voters of the City on June 7, 1986 ( Measure O ) extended the period for amortizing the UAAL by 10 years to The City covenants in the Sublease, so long as any Base Rental Payments and Additional Payments remain unpaid under the Sublease, to levy the Tax Override (up to the maximum tax permitted by applicable law) in each fiscal year, in an amount sufficient, when aggregated with the other amounts legally available to the City and amounts budgeted by the City in such fiscal year and expected to be available, to pay all Base Rental Payments and Additional Payments due. See Tax Override Revenues herein. The City covenants in the Sublease to take such action as may be necessary to include the Base Rental Payments and Additional Payments estimated by the City to be payable under the Sublease as a separate line item in its annual budget, and to make necessary annual appropriations (and to the extent necessary, supplemental appropriations) for the Base Rental Payments and Additional Payments. These appropriations will be made from the City s General Fund. See APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND and APPENDIX B CITY OF OAKLAND AUDITED FINANCIAL STATEMENTS, JUNE 30, 2004 attached hereto for information on amounts historically available in the General Fund. The amounts available to the City from its General Fund and Tax Override Revenues for the payment of Base Rental Payments are subject to economic and other factors. See RISK FACTORS herein. The Trustee, pursuant to the Trust Agreement and the Sublease, will receive Base Rental Payments for the benefit of the Bond Owners. The City is required under the Sublease to make Base Rental Payments from legally available funds on or before each Base Rental Due Date, being each third Business Day preceding the first day of each calendar month, and payments of any Related Obligations (defined herein) due on or before the first day of the month following the Base Rental Due Date. The Base Rental Payments are scheduled to be sufficient to pay, when due, the principal of, redemption premium, if any, and interest on the Bonds. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease herein. The amount of each Base Rental Payment will vary from time to time, as required by the Authority to pay the principal of and interest on the Bonds and payments of any Related Obligations due following the Base Rental Due Date; provided that to the extent the Authority has received revenues available to pay debt service on the Bonds and any Related Obligations and has deposited such revenues with the Trustee by the Business Day immediately preceding the Base Rental Due Date, the City shall receive a credit to the extent of such revenues on the installment of the Base Rental Payment for said month. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease Base Rental Payments herein. The Trustee s obligation to make such payments to Bond Owners is limited to amounts designated as principal of, redemption premium, if any, and interest on the Bonds. Additional Payments 17

24 due from the City under the Sublease include amounts sufficient to pay certain administrative costs, including the fees and expenses of the Trustee. Base Rental Payments and Additional Payments will be abated during any period in which by reason of any material damage, destruction or condemnation there is substantial interference with the use of the Leased Property by the City to the extent the Leased Property rendered unusable reduces the fair rental value of the Leased Property below the amount of Base Rental Payments and Additional Payments during any Rental Payment Period, except to the extent Tax Override Revenues, rental interruption insurance proceeds and the Reserve Fund are available to make such payments. See Abatement Due to Damage or Destruction, Eminent Domain and RISK FACTORS Abatement herein. The City is also responsible for repair and maintenance of the Leased Property during the term of the Sublease. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease herein. If the City defaults on its obligations to make Base Rental Payments with respect to the Leased Property, the Authority may (1) collect each installment of rent as it becomes due and enforce any other terms or provision of the Sublease, regardless of whether or not the City has abandoned the Leased Property, or (2) terminate the Sublease. Any suit for rent or money damages would be subject to limitations on legal remedies against cities in California, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. See Defaults and Remedies below and APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease herein. The exercise of any rights or remedies under the Sublease do not permit acceleration of Base Rental Payments and are subject to the terms and provisions of the Trust Agreement, including the right of the Bond Insurer to direct all remedies under the Sublease. Appropriations Covenant The City has covenanted in the Sublease to take such action as may be necessary to include all Base Rental Payments and Additional Payments as a separate line item in its annual budget and to make the necessary annual appropriations (and, to the extent necessary, supplemental appropriations) therefor. The City plans to budget and appropriate Base Rental Payments and Additional Payments with respect to the 2005 Series A Bonds based on the lesser of (i) the weighted average interest rate borne by such Bonds during such period or (ii) the 25 Bond Revenue Bond Index most recently published in The Bond Buyer preceding the applicable date of calculation, and with respect to the 2005 Series B Bonds, the lesser of (i) the weighted average interest rate borne by such Bonds during such period or (ii) the then applicable LIBOR swap rate for the remaining average life of such Bonds. The City has agreed that the rentals and other payments provided for in the Sublease are to be an absolute net return to the Authority, free and clear of any expenses, charges or set-offs whatsoever. The Sublease provides that the covenants of the City thereunder are deemed duties imposed by law, and it further provides that it will be the duty of each and every public official of the City to take such action and do such things as are required by law in the performance of the official duty of such official to enable the City to carry out and perform the covenants and agreements of the City contained in the Sublease. The Sublease provides that the Authority and the City intend that the obligation of the City to pay Base Rental Payments and Additional Payments will constitute a current expense of the City and is not to be construed to be a debt of the City in contravention of any applicable constitutional or statutory limitation or requirement concerning the creation of indebtedness by the City, nor is anything contained in the Sublease intended to constitute a pledge of the general tax revenues, funds or moneys of the City. Base Rental Payments and Additional Payments due under the Sublease will be payable only from current funds which are budgeted and appropriated or otherwise legally available for the purpose of paying Base Rental Payments and Additional Payments or other payments due under the Sublease as consideration for 18

25 the use of the Leased Property. The City has not pledged the full faith and credit of the City, the State or any agency or department thereof to the payment of the Base Rental Payments and Additional Payments or any other payments due under the Sublease. Tax Override Revenues The City is authorized to levy the Tax Override on all taxable property within the City pursuant to Measure R. The City has pledged a lien on and security interest in all right, title and interest of the City in and to the Tax Override Revenues for the payment of its outstanding Taxable Pension Obligation Bonds, Series 1997 and Series 2001, which were issued under and secured by the Master Trust Agreement, dated as of February 1, 1997 (the Master Trust Agreement ), by and between the City and The Chase Manhattan Bank, Houston, Texas (successor trustee to Texas Commerce Bank National Association), as amended to date (together with any additional bonds which may be secured on a parity basis, the Senior Pension Bonds ). The Master Trust Agreement authorizes the City to issue additional Senior Pension Bonds and additional subordinate obligations at any time subject to the terms and conditions of the Master Trust Agreement. No restriction is imposed by the Master Trust Agreement on the maximum principal amount of Senior Pension Bonds or additional subordinate obligations to be issued. The Master Trust Agreement provides that such lien and security interest to the payment of the Senior Pension Bonds shall be prior in right to any other pledge, lien or security interest created by the City in the Tax Override Revenues as and to the extent therein provided, including the pledge of Tax Override Revenues to the payment of the Base Rental Payments. In the Master Trust Agreement, the City has covenanted that the Tax Override Revenues levied and collected in each fiscal year shall be pledged and applied to pay principal of and interest on and the redemption price of the Senior Pension Bonds in such fiscal year. The Master Trust Agreement further provides that, to the extent that, commencing on June 30, 1998 and on June 30 of each fiscal year thereafter during the term of any bonds outstanding thereunder, any surplus amount of Tax Override Revenues remains on deposit in the Pledged Revenues Fund after payment of all principal of and interest on and the redemption price of such bonds during such fiscal year, such amounts may be applied on and after July 1 of the next succeeding fiscal year for any lawful purpose of the City, at the written direction of the City to the Trustee. The Master Trust Agreement requires the City to deposit all Tax Override Revenues into the Tax Override Revenue Account in the General Fund held by the City. The City is further required, on or before August 1 of each year, to deposit with the Trustee an aggregate amount, from its legally available revenues (including, but not limited to, the Tax Override Revenues held in the Tax Override Revenue Account of the City), sufficient to pay all principal and interest due on all the Senior Pension Bonds on the next succeeding December 15 and June 15. If this deposit is made by August 1 of each year, then the Master Trust Agreement imposes no further limitations upon the City s use of Tax Override Revenues held in the Tax Override Revenue Account of the City. The 2005 Bonds are being issued to (i) refund and defease the Refunded Bonds which were issued to refund the 1988 Pension Bonds which were issued to fund a portion of the City s unfunded accrued actuarial liability to the Retirement System, and (ii) to fund a portion of its current obligation to the Retirement System. Accordingly, the City has determined that Base Rental Payments shall be secured by the Tax Override Revenues and has declared in the Sublease that its obligation to pay the Base Rental Payments to be Subordinated Obligations for purposes of the Master Trust Agreement. The Sublease states that the lien and security interest pledged and assigned by the City to the Authority and the Trustee in the Tax Override Revenues is junior and subordinate to the lien on and the security interest in any Tax Override Revenues granted to secure any Senior Pension Bonds. The determination by the City Council in any year of the amount of the tax levy rate for the Tax Override may be subject to a variety of factors, including the amount of other City revenues, the 19

26 prevailing levels of property taxation within the City, the assessed valuation of property in the City and political considerations and policies of the City Council at the time of the levy. In 1982, a taxpayer filed a lawsuit challenging the Tax Override as violating Article XIIIA of the California Constitution and arguing the Tax Override was not indebtedness which had been approved by the voters prior to July 1, 1978, as required by Article XIIIA. That challenge was rejected in 1983 by the Court of Appeal of California, First Appellate District, in Valentine v. City of Oakland. The Valentine Court concluded that the obligation of the City to fund its contributions to the Retirement System constituted indebtedness which had been approved by the voters in 1976 when they adopted Measure R. The Court also rejected the challenge that the voters must approve the specific tax levied to pay the indebtedness to the Retirement System because the City Council, under the City s home rule power as a charter city, had the legal authority to levy the Tax Override. In a validation action filed in the Alameda County Superior Court prior to the issuance of the Series 1997 Bonds, the Court determined that the City may use the Tax Override Revenues to pay principal of, interest on, and the redemption price, if any, on the Senior Pension Bonds. State legislation enacted in 1985 limits the rate of the levy of the Tax Override to the rate levied by the City in fiscal year 1983 or 1984, which was % of the assessed value of taxable property within the City. In addition, the tax levy rate may be affected by other existing and future statutory and constitutional limitations on taxes and appropriations, which may limit tax levy rates or otherwise have an adverse effect on the taxing or spending powers of the City. See RISK FACTORS Appropriation of Base Rental Payments and APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND Constitutional and Statutory Limitations on Taxes and Appropriations herein. For fiscal year , the City Council has levied the Tax Override on all taxable property within the City at a rate of % and has budgeted collection of Tax Override Revenues in the amount of $47.8 million. The City has levied the Tax Override at this % rate since The City is authorized pursuant to Measure O to levy the Tax Override through fiscal year Tax Override Revenues have grown an average annual rate of 6.2% over the last 10 fiscal years. The amount of Tax Override Revenues and the annual growth rate of such Tax Override Revenues for the last 10 fiscal years are shown in the following table: 20

27 City of Oakland Tax Override Revenues Fiscal Years through Fiscal Year (June 30) Assessed Valuation (1) Tax Levy Tax Override Revenues Collected Annual Growth Rate Annual Delinquency Rate $16,945, % $26,833, % 4.75% ,224, ,418, ,758, ,969, ,677, ,990, ,575, ,592, ,090, ,634, ,302, ,005, ,173, ,615, ,414, ,556, ,642, ,809,000 (2) 4.9 N/A (3) (1) (2) (3) In $000s. Estimate. Annual delinquency rate for fiscal year not yet available. Source: City of Oakland Finance and Management Agency The Annual Delinquency Rate in the payment of the Tax Override has averaged 4.19% for the previous nine fiscal years. The following table sets forth the debt service obligations of the City s outstanding Senior Pension Bonds. 21

28 Fiscal Year City of Oakland Senior Pension Bonds Fiscal Year Debt Service Taxable Pension Obligation Bonds, Series 1997 Taxable Pension Obligation Bonds, Series 2001 Total Debt Service 2006 $ 34,947,586 $ 34,947, ,967,615 35,967, ,011,289 37,011, ,082,816 38,082, ,181,314 39,181, ,305,000 40,305, $ 38,375,000 38,375, ,555,000 39,555, ,765,000 40,765, ,010,000 42,010, ,285,000 43,285, ,590,000 44,590, ,925,000 45,925, ,295,000 47,295, ,700,000 48,700, ,140,000 50,140, ,620,000 51,620, ,130,000 53,130,000 Total $225,495,620 $545,390,000 $770,885,620 As discussed above, the City has no obligation under the Sublease to levy the Tax Override in any Fiscal Year to the extent other legally available revenues are available or budgeted by the City in such Fiscal Year and expected by the City to be available for the payment of the Bonds. The pledge of the Tax Override Revenues to the payment of the Senior Pension Bonds is prior in right to any other pledge, lien or security interest created by the City in the Tax Override Revenues, including the pledge of Tax Override Revenues to the payment of the 2005 Bonds. The City may also issue additional Senior Pension Bonds and additional subordinate obligations secured by the Tax Override Revenues in the future. Reserve Fund A Reserve Fund is pledged to pay principal of and interest on the 2005 Bonds. The Reserve Fund is required to be funded in an amount equal to the Reserve Fund Requirement. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS. Upon issuance of the 2005 Bonds, the Reserve Fund Requirement will be $12,449, The Trust Agreement provides that the Authority may fund all or part of the Reserve Fund Requirement with a surety bond or insurance policy issued by a municipal bond insurer rated Aaa by Moody s Investors Service ( Moody s ) and AAA by Standard & Poor s Rating Group ( S&P ) and Fitch Ratings ( Fitch ), or with or letter of credit issued or confirmed by a state or national bank, or a foreign bank with an agency or branch located in the continental United States, which has outstanding an issue of unsecured long term debt securities rated at least equal to the second highest rating category (by Moody s, S&P and Fitch). If the municipal bond insurer providing such surety bond or insurance policy or the bank providing such letter of credit falls below the required ratings, the Authority will use its reasonable best efforts to procure within thirty (30) days from the date of the decline, a replacement surety bond, insurance policy or letter of credit meeting the requirements set forth above. 22

29 Amounts on deposit in the Reserve Fund may be used solely for the purpose of funding the Interest Account or the Principal Account, in that order, in the event of any deficiency in either of such accounts on a Principal or Interest Payment Date. If the Reserve Fund Requirement is satisfied by a surety bond, insurance policy or letter of credit (a Reserve Facility ), the Trustee will draw on such Reserve Facility in accordance with its terms, in a timely manner, to the extent necessary to fund any such deficiency in the Interest Account or the Principal Account; provided that the Trustee will apply cash and investments, if any, in the Reserve Fund prior to a drawing on any Reserve Facility. In the event there is more than one Reserve Facility, draws on the Reserve Facilities will be made on a pro-rata basis (calculated by reference to the coverage then available under each Reserve Facility) and only after applying all available cash and investments in the Reserve Fund. To satisfy the Reserve Fund Requirement for the 2005 Bonds, the Authority will deposit to the Reserve Fund the surety bond (the Surety Bond ) issued by the Bond Insurer in connection with the 2005 Bonds in the amount of $14,500,000 and expiring on January 1, For additional information regarding the Bond Insurer and the Surety Bond, see Reserve Fund Surety Bond below, THE FINANCIAL GUARANTY INSURANCE POLICY and APPENDIX J FORM OF RESERVE FUND SURETY POLICY herein. Payment of all obligations of the Authority to reimburse the Bond Insurer for any amounts paid by the Bond Insurer under the Surety Bond (together with any obligations of the Authority under any hedge agreement, bond insurance, reserve insurance, credit agreement or similar agreement designated in the Trust Agreement or pursuant to a Supplemental Trust Agreement, including, but are not limited to, obligations relating to payment of fees, expenses, indemnities and increased costs, collectively the Related Obligations ) shall be made from Base Rental Payments which are credited to the Reserve Fund, and available amounts from Base Rental Payments shall be applied towards reimbursement of the Bond Insurer. Payments to reimburse the Bond Insurer for a draw under the Surety Bond shall be due over a period of twelve months from the date of such draw in twelve substantially equal payments, commencing 30 days after such draw. Reserve Fund Surety Bond The Surety Bond issued by the Bond Insurer in connection with the 2005 Bonds in the amount of $14,500,000 and expiring on January 1, 2026, will be deposited in the Reserve Fund to satisfy the Reserve Fund Requirement for the 2005 Bonds. The Surety Bond provides that upon the later of (i) one (1) day after receipt by the Bond Insurer of a demand for payment executed by the Trustee certifying that provision for the payment of principal of or interest on the 2005 Bonds when due has not been made or (ii) the Interest Payment Date specified in the Demand for Payment submitted to the Bond Insurer, the Bond Insurer will promptly deposit funds with the Trustee sufficient to enable the Trustee to make such payments due on the 2005 Bonds, but in no event exceeding the Surety Bond Coverage, as defined in the Surety Bond. Pursuant to the terms of the Surety Bond, the Surety Bond Coverage is automatically reduced to the extent of each payment made by the Bond Insurer under the terms thereof, and the Authority is required to reimburse the Bond Insurer for any draws under the Surety Bond with interest at a market rate. Upon such reimbursement, the Surety Bond is reinstated to the extent of each principal reimbursement up to but not exceeding the Surety Bond Coverage. The reimbursement obligation of the Authority is subordinate to the Authority s obligations with respect to the 2005 Bonds. In the event the amount on deposit, or credited to the Reserve Fund, exceeds the amount of the Surety Bond, any draw on the Surety Bond shall be made only after all the funds in the Reserve Fund have been expended. In the event that the amount on deposit in, or credited to, the Reserve Fund, in addition to the amount available under the Surety Bond, includes amounts available under a letter of credit, insurance policy, surety bond or other such funding instrument (the Additional Funding Instrument ), draws on the Surety Bond and the Additional Funding Instrument shall be made on a pro rata basis to fund the insufficiency. The Trust 23

30 Agreement provides that the Reserve Fund shall be replenished in the following priority: (i) principal and interest on the Surety Bond and on the Additional Funding Instrument shall be paid from first available Revenues on a pro rata basis; (ii) after all such amounts are paid in full, amounts necessary to fund the Reserve Fund to the required level, after taking into account the amounts available under the Surety Bond and the Additional Funding Instrument shall be deposited from next available Revenues. The Surety Bond does not insure against nonpayment caused by the insolvency or negligence of the Trustee. For additional information regarding the Bond Insurer and the Surety Bond, see THE FINANCIAL GUARANTY INSURANCE POLICY and APPENDIX J FORM OF RESERVE FUND SURETY POLICY herein. Use of the Leased Property General. The City has covenanted in the Sublease not to install, use, operate or maintain the Leased Property improperly, carelessly, in violation of any applicable law or in a manner contrary to that contemplated by the Sublease. The City shall provide all permits and licenses, if any, necessary for the installation and operation of the Leased Property. In addition, the City agrees to comply in all respects (including, without limitation, with respect to the use, maintenance and operation of the Leased Property) with all laws of the jurisdictions in which their operations may extend and any legislative, executive, administrative or judicial body exercising any power or jurisdiction over the Leased Property; provided, however, that the City may contest in good faith the validity or application of any such law or rule in any reasonable manner which does not adversely affect the estate of the Authority in and to the Leased Property or its interest or rights under the Sublease. Maintenance and Utilities. Throughout the term of the Sublease, all maintenance and repair, both ordinary and extraordinary, of the Leased Property will be the responsibility of the City, which will at all times maintain or otherwise arrange for the maintenance of the Leased Property, and the City will pay for or otherwise arrange for the payment of all utility services supplied to the Leased Property, which may include, without limitation, janitor service, security, power, gas, telephone, light, heating, ventilation, air conditioning, water and all other utility services, and will pay for or otherwise arrange for payment of the cost of the repair and replacement of the Leased Property resulting from ordinary wear and tear or want of care on the part of the City or any assignee or sublessee thereof or any other cause and will pay for or otherwise arrange for the payment of all insurance policies required to be maintained with respect to the Leased Property. Changes to the Leased Property. Subject to the Sublease, the City will, at its own expense, have the right to remodel the Leased Property or to make additions, modifications and improvements to the Leased Property. All such additions, modifications and improvements will thereafter comprise part of the Leased Property and be subject to the provisions of the Sublease. Such additions, modifications and improvements may not in any way damage the Leased Property or cause it to be used for purposes other than those authorized under the provisions of State and federal law; and the Leased Property, upon completion of any additions, modifications and improvements made pursuant to the Sublease, must be of a value which is at least equal to the value of the Leased Property immediately prior to the making of such additions, modifications and improvements. Liens. The City has covenanted in the Sublease not to grant or permit any encumbrances or liens upon the Leased Property except for Permitted Encumbrances or as expressly provided therein. Insurance The Sublease provides that all policies of insurance described below must be provided by an insurance company with a claims paying ability rated at least A by Moody s and S&P (unless the Bond 24

31 Insurer will approve an insurance company with a lower rating or unless the alternative method of selfinsurance described below is utilized). The Sublease does not require the City to maintain rental interruption insurance on the Leased Property due to loss of use and occupancy of the Leased Property caused by earthquakes, flood or terrorism. See RISK FACTORS herein. Hazard Insurance. The Sublease provides that the City will maintain, at its own expense, will insure or have insured the Leased Property in an amount equal to the replacement cost (without deduction for depreciation) of all property constituting any part of the Leased Property, excluding the cost of excavations, of grading and filling, and of the land of said replacement cost for any one loss and except that such insurance may be subject to deductible clauses for any one loss of not to exceed two hundred fifty thousand dollars ($250,000) or a comparable deductible adjusted for inflation, or, in the alternative, will be in an amount and in a form sufficient, in the event of total or partial loss, to enable all Bonds then Outstanding to be redeemed. The City is not required to obtain earthquake, flood or terrorism insurance on the Leased Property. In the event of any damage to or destruction of any part of the Leased Property caused by the perils covered by such insurance, or in the event of receipt of condemnation proceeds, the Authority, except as described below, will cause the proceeds of such insurance or condemnation proceeds to be used for the repair, reconstruction or replacement of the damaged or destroyed portion of the Leased Property, and the Trustee will hold said proceeds under the Trust Agreement separate and apart from all other funds, in a special fund to be designated the Insurance and Condemnation Fund, to the end that such proceeds will be applied to the repair, reconstruction or replacement of the Leased Property to at least the same good order, repair and condition as it was in prior to the damage or destruction, insofar as the same may be accomplished by the use of said proceeds. Any balance of said proceeds not required for such repair, reconstruction or replacement will be treated by the Trustee as Base Rental Payments and applied in the manner provided by the Trust Agreement. Alternatively, the Authority, if the proceeds of such insurance and any amounts transferable from the Reserve Fund as allocable to the Bonds to be redeemed, together with any other moneys then available for the purpose are at least sufficient to redeem an aggregate principal amount of Outstanding Bonds equal to the amount of Outstanding Bonds attributable to the portion of the Leased Property so destroyed or damaged (determined by reference to the proportion which the cost of such portion of the Leased Property bears to the aggregate cost of the Leased Property), may elect not to repair, reconstruct or replace the damaged or destroyed portion of the Leased Property and thereupon will cause said proceeds to be used for the redemption of Outstanding Bonds pursuant to the provisions of the Trust Agreement. The Authority and the City will promptly apply for federal disaster aid or State disaster aid in the event that the Leased Property is damaged or destroyed as a result of an earthquake or other disaster occurring at any time. Any proceeds received as a result of such disaster aid will be used to repair, reconstruct, restore or replace the damaged or destroyed portions of the Leased Property, or to redeem Outstanding Bonds if such use of such disaster aid is permitted. Liability Insurance. The Sublease also requires the City to procure or cause to be procured and maintain or cause to be maintained, throughout the term of the Sublease a standard comprehensive general liability insurance policy or policies in protection of the Authority and its members, directors, officers, agents and employees, and the Trustee, indemnifying said parties against all direct or contingent loss or liability for damages for personal injury, death or property damage occasioned by reason of the operation of the Leased Property, with minimum liability limits of five million dollars ($5,000,000) for personal injury or death of each person and ten million dollars ($10,000,000) for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of seven hundred fifty thousand dollars ($750,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy in the 25

32 amount of ten million dollars ($10,000,000) covering all such risks. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance carried by the City. As an alternative to providing the insurance described above, or any portion thereof, the City may provide a self-insurance method or plan of protection if and to the extent such self-insurance method or plan of protection will afford reasonable protection to the Authority, its members, directors, officers, agents and employees and the Trustee, in light of all circumstances, giving consideration to cost, availability and similar plans or methods of protection adopted by public entities in the State other than the City. Before such other method or plan may be provided by the City, and annually thereafter so long as such method or plan is being provided to satisfy the requirements of the Sublease, there will be filed with the Trustee a certificate of an Insurance Consultant or other qualified person setting forth the details of such substitute method or plan and stating that, in the opinion of the signer, the substitute method or plan of protection is in accordance with the requirements described above and, when effective, would afford reasonable protection to the Authority, its members, directors, officers, agents and employees and the Trustee against loss and damage from the hazards and risks covered thereby. Rental Interruption or Use and Occupancy Insurance. The Sublease requires the City to procure or cause to be procured and maintain or cause to be maintained throughout the term of the Sublease, to the extent such insurance is commercially available, rental interruption or use and occupancy insurance to cover loss, total or partial, of the rental income from or the use of the Leased Property as the result of any of the hazards covered by the insurance described under Hazard Insurance above, in an amount sufficient to pay Base Rental Payments (assuming a 12% interest rate on the 2005 Bonds) hereunder for a 3-month period except that such insurance may be subject to a deductible clause of not to exceed an amount equal to 30 days of Base Rental Payments for the portion of the Lease Property damaged or destroyed. Any proceeds of such insurance and any amounts transferred from the Reserve Fund will be used by the Trustee to reimburse to the City any rental theretofore paid by the City under the Sublease attributable to such structure for a period of time during which the payment of rental under the Sublease is abated, and any proceeds of such insurance not so used will be applied as Base Rental Payments or Additional Payments, as provided in the Sublease. The Sublease does not require the City to maintain rental interruption insurance on the Leased Property due to loss of use and occupancy of the Leased Property caused by earthquakes. See RISK FACTORS herein. Worker s Compensation. The Sublease requires the City to maintain worker s compensation insurance issued by a responsible carrier authorized under the laws of the State to insure their employees against liability for compensation under the Worker s Compensation Insurance and Safety Act, or any act hereafter enacted as an amendment or supplement thereto. As an alternative, such insurance may be maintained as part of or in conjunction with any other insurance carried by the City. Such insurance may be maintained by the City in the form of self-insurance. Abatement Due to Damage or Destruction Base Rental Payments and Additional Payments due under the Sublease will be abated proportionately during any period in which by reason of any material damage or destruction (other than by condemnation which is described in the following paragraph) there is substantial interference with the use of the Leased Property by the City in the proportion in which the cost of that portion of the Leased Property rendered unusable bears to the cost of the whole of the Leased Property. Such abatement will continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction. In the event of any such damage or destruction, the Sublease will continue in full force and effect and the City has waived the benefits of California Civil 26

33 Code Section 1932(2) and 1933(4), and any and all other rights to terminate the Sublease by virtue of any such damage or destruction or interference. Notwithstanding the foregoing, to the extent that moneys are available for the payment of Base Rental Payments in any of the funds and accounts established under the Trust Agreement or are available as Tax Override Revenues or rental interruption insurance proceeds, Base Rental Payments will not be abated as described above, but rather will be payable by the City as a special obligation payable solely from said funds, accounts and revenues. Eminent Domain If the whole of the Leased Property or so much thereof as to render the remainder unusable for the purposes for which it was used by the City is taken under the power or threat of eminent domain, the term of the Sublease will cease as of the day that possession is taken. If less than the whole of the Leased Property is taken under the power or threat of eminent domain and the remainder is usable for the purposes for which it was used by the City at the time of such taking, then the Sublease will continue in full force and effect as to such remainder, and in such event there shall be a partial abatement of the rental due under the Sublease in an amount equivalent to the amount by which the annual payments of principal of and interest on the Bonds then Outstanding will be reduced by the application of the award in eminent domain to the redemption of Outstanding Bonds. So long as any of the Bonds shall be Outstanding, any award made in eminent domain proceedings for taking the Leased Property or any portion thereof will be paid to the Trustee and applied to the prepayment of the Base Rental Payments as provided in the Sublease. Any such award made after all of the Base Rental Payments and Additional Payments have been fully paid, or provision therefor made, will be paid to the City. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease Prepayment herein. The City has covenanted in the Sublease that it will not take the Authority s interest in the Leased Property under the power or threat of eminent domain unless the City prepays all Base Rental Payments pursuant to the Sublease. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease Prepayment herein. Option to Purchase, Sell or Dispose of Leased Property The City shall have the option to purchase the Authority s interest in any part of the Leased Property upon the payment to the Authority of an option price in an amount sufficient to provide funds to pay the rent attributable to such part of the Leased Property for the remaining term of the Sublease. The City may request the Authority sell, exchange or otherwise transfer, convey or dispose of any part of the Leased Property, and release said part of the Leased Property from the Sublease if (i) in the opinion of the City the property so sold or exchanged is no longer required or useful in connection with the operation of the Leased Property, and (ii) the consideration to be received from the property is of a value substantially equal to the value of the property to be released or the property is being replaced with property which has fair rental value at least equal to the Base Rental Payments. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease Option to Purchase; Sale or Disposition of Leased Property herein. Defaults and Remedies Events of default under the Sublease include: (1) failure of the City to pay any Base Rental Payment, Additional Payment or other amount payable thereunder when the same becomes due and payable as provided in the Sublease, (2) certain events of bankruptcy with respect to the City, (3) assignment of all or part of the City s interest in the Sublease without the prior written consent of the 27

34 Authority and the Bond Insurer, (4) abandonment of the Leased Property by the City, or (5) failure by the City to observe and perform any covenants or conditions contained in the Sublease, including failure to make any Additional Payment, for a period of 30 days (or for such additional time as is reasonably required, in the discretion of the Trustee (with the consent of the Bond Insurer)) after written notice specifying such failure and requesting that it be remedied is given to the City by the Authority, the Trustee or the Bond Insurer. Upon the occurrence of an event of default, the Authority, subject to the right of the Bond Insurer to direct all remedies, has the right, at its option, without any further demand or notice, to terminate the Sublease in the manner provided in the Sublease, or, without terminating the Sublease, to collect each installment of rent as it becomes due and enforce any other terms or provision thereof to be kept or performed by the City, regardless of whether or not the City has abandoned the Leased Property. In the event the Authority does not elect to terminate the Sublease as described above, the City will remain liable and has agreed to keep or perform all covenants and conditions set forth in the Sublease and to pay the full amount of the rent to the end of the term of the Sublease. The Authority also has such other remedies as are legally available. In no event does the Authority have the right to accelerate the payment of any Base Rental Payments under the Sublease. See SECURITY AND SOURCE OF PAYMENT FOR THE 2005 BONDS and APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease Defaults and Remedies herein. Additional Bonds The Authority may issue additional bonds under the Trust Agreement on a parity with Outstanding Bonds, subject to the terms and conditions set forth therein. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS herein. THE FINANCIAL GUARANTY INSURANCE POLICY The following information has been supplied by the Bond Insurer for inclusion in this Official Statement. No representation is made by the Authority, the City, nor the Underwriters as to the accuracy or completeness of the information. The Bond Insurer accepts no responsibility for the accuracy or completeness of this Official Statement or any other information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding the Bond Insurer and its affiliates set forth under this heading. In addition, the Bond Insurer makes no representation regarding the 2005 Bonds or the advisability of investing in the 2005 Bonds. General XL Capital Assurance Inc. (the Bond Insurer or XLCA ) is a monoline financial guaranty insurance company incorporated under the laws of the State of New York. The Bond Insurer is currently licensed to do insurance business in, and is subject to the insurance regulation and supervision by, all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Singapore. The Bond Insurer is an indirect wholly owned subsidiary of XL Capital Ltd, a Cayman Islands corporation ( XL Capital Ltd ). Through its subsidiaries, XL Capital Ltd is a leading provider of insurance and reinsurance coverages and financial products to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. The common stock of XL 28

35 Capital Ltd is publicly traded in the United States and listed on the New York Stock Exchange (NYSE: XL). XL Capital Ltd is not obligated to pay the debts of or claims against the Bond Insurer. The Bond Insurer was formerly known as The London Assurance of America Inc. ( London ), which was incorporated on July 25, 1991 under the laws of the State of New York. On February 22, 2001, XL Reinsurance America Inc. ( XL Re ) acquired 100% of the stock of London. XL Re merged its former financial guaranty subsidiary, known as XL Capital Assurance Inc. (formed September 13, 1999) with and into London, with London as the surviving entity. London immediately changed its name to XL Capital Assurance Inc. All previous business of London was 100% reinsured to Royal Indemnity Company, the previous owner at the time of acquisition. Reinsurance The Bond Insurer has entered into a facultative quota share reinsurance agreement with XL Financial Assurance Ltd ( XLFA ), an insurance company organized under the laws of Bermuda, and an affiliate of the Bond Insurer. Pursuant to this reinsurance agreement, the Bond Insurer expects to cede up to 90% of its business to XLFA. The Bond Insurer may also cede reinsurance to third parties on a transaction-specific basis, which cessions may be any or a combination of quota share, first loss or excess of loss. Such reinsurance is used by the Bond Insurer as a risk management device and to comply with statutory and rating agency requirements and does not alter or limit the Bond Insurer s obligations under any financial guaranty insurance policy. With respect to any transaction insured by XLCA, the percentage of risk ceded to XLFA may be less than 90% depending on certain factors including, without limitation, whether XLCA has obtained third party reinsurance covering the risk. As a result, there can be no assurance as to the percentage reinsured by XLFA of any given financial guaranty insurance policy issued by XLCA, including the Policy. Based on the audited financials of XLFA, as of December 31, 2004, XLFA had total assets, liabilities, redeemable preferred shares and shareholders equity of $1,173,450,000, $558,655,000, $39,000,000 and $575,795,000, respectively, determined in accordance with generally accepted accounting principles in the United States ( US GAAP ). XLFA s insurance financial strength is rated Aaa by Moody s and AAA by S&P and Fitch Inc. In addition, XLFA has obtained a financial enhancement rating of AAA from S&P. The obligations of XLFA to the Bond Insurer under the reinsurance agreement described above are unconditionally guaranteed by XL Insurance (Bermuda) Ltd ( XLI ), a Bermuda company and one of the world s leading excess commercial Bond Insurers. XLI is a wholly owned indirect subsidiary of XL Capital Ltd. In addition to A.M. Best s rating of A+ (Negative Outlook), XLI s insurance financial strength rating is Aa2 (Outlook Negative) by Moody s, AA- by Standard & Poor s and AA (Ratings Watch Negative) by Fitch. The ratings of XLFA and XLI are not recommendations to buy, sell or hold securities, including the Bonds and are subject to revision or withdrawal at any time by Moody s, Standard & Poor s or Fitch. Notwithstanding the capital support provided to the Bond Insurer described in this section, the Bondholders will have direct recourse against the Bond Insurer only, and neither XLFA nor XLI will be directly liable to the Bondholders. Financial Strength and Financial Enhancement Ratings of XLCA The Bond Insurer s insurance financial strength is rated Aaa by Moody s and AAA by Standard & Poor s and Fitch, Inc. ( Fitch ). In addition, XLCA has obtained a financial enhancement rating of AAA from Standard & Poor s. These ratings reflect Moody s, Standard & Poor s and Fitch s 29

36 current assessment of the Bond Insurer s creditworthiness and claims-paying ability as well as the reinsurance arrangement with XLFA described under Reinsurance above. The above ratings are not recommendations to buy, sell or hold securities, including the Bonds and are subject to revision or withdrawal at any time by Moody s, Standard & Poor s or Fitch. Any downward revision or withdrawal of these ratings may have an adverse effect on the market price of the Bonds. The Bond Insurer does not guaranty the market price of the 2005 Bonds nor does it guaranty that the ratings on the 2005 Bonds will not be revised or withdrawn. Capitalization of the Bond Insurer Based on the audited financials of XLCA, as of December 31, 2004, XLCA had total assets, liabilities, and shareholder s equity of $827,815,000, $593,849,000, and $233,966,000, respectively, determined in accordance with U.S. GAAP. Based on the audited statutory financial statements for XLCA as of December 31, 2004 filed with the State of New York Insurance Department, XLCA has total admitted assets of $341,937,000, total liabilities of $143,494,000 and total capital and surplus of $198,443,000 determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities ( SAP ). Incorporation by Reference of Financials For further information concerning XLCA and XLFA, see the financial statements of XLCA and XLFA, and the notes thereto, incorporated by reference in this Official Statement. The financial statements of XLCA and XLFA are included as exhibits to the periodic reports filed with the Securities and Exchange Commission (the Commission ) by XL Capital Ltd and may be reviewed at the EDGAR website maintained by the Commission. All financial statements of XLCA and XLFA included in, or as exhibits to, documents filed by XL Capital Ltd pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 on or prior to the date of this Official Statement, or after the date of this Official Statement but prior to termination of the offering of the Bonds, shall be deemed incorporated by reference in this Official Statement. Except for the financial statements of XLCA and XLFA, no other information contained in XL Capital Ltd s reports filed with the Commission is incorporated by reference. Copies of the statutory quarterly and annual statements filed with the State of New York Insurance Department by XLCA are available upon request to the State of New York Insurance Department. Regulation of the Bond Insurer The Bond Insurer is regulated by the Superintendent of Insurance of the State of New York. In addition, the Bond Insurer is subject to regulation by the insurance laws and regulations of the other jurisdictions in which it is licensed. As a financial guaranty insurance company licensed in the State of New York, the Bond Insurer is subject to Article 69 of the New York Insurance Law, which, among other things, limits the business of each Bond Insurer to financial guaranty insurance and related lines, prescribes minimum standards of solvency, including minimum capital requirements, establishes contingency, loss and unearned premium reserve requirements, requires the maintenance of minimum surplus to policyholders and limits the aggregate amount of insurance which may be written and the maximum size of any single risk exposure which may be assumed. The Bond Insurer is also required to file detailed annual financial statements with the New York Insurance Department and similar supervisory agencies in each of the other jurisdictions in which it is licensed. 30

37 The extent of state insurance regulation and supervision varies by jurisdiction, but New York and most other jurisdictions have laws and regulations prescribing permitted investments and governing the payment of dividends, transactions with affiliates, mergers, consolidations, acquisitions or sales of assets and incurrence of liabilities for borrowings. THE FINANCIAL GUARANTY INSURANCE POLICIES ISSUED BY THE BOND INSURER, INCLUDING THE INSURANCE POLICY, ARE NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. The principal executive offices of the Bond Insurer are located at 1221 Avenue of the Americas, New York, New York and its telephone number at this address is (212) THE LEASED PROPERTY The Leased Property consists of all of the eight-inch diameter sewer pipeline (which is generally located under or adjacent to City streets) owned by the City, including all property which may be acquired by the City in replacement of such existing property and which is located within the City. The Leased Property does not include sewer pipeline which connects collection sewers to residences and businesses and any other pipeline not owned by the City. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 31

38 BASE RENTAL PAYMENT SCHEDULE The following table presents the estimated annual Base Rental Payments for the 2005 Bonds. Year Ending 2005 Series A Bonds 2005 Series B Bonds June 30 Principal Interest (1) Principal Interest (1) Total Debt Service 2006 $8,250,000 $3,764,390 $906,240 $12,920, ,600,000 3,478, ,736 12,986, ,000,000 3,212, ,736 13,120, ,400,000 2,961, ,736 13,270, ,575,000 2,645, ,736 13,129, ,075,000 2,348, ,736 13,332, ,575,000 2,036, ,736 13,520, ,125,000 1,710, ,736 13,743, ,700,000 1,365, ,736 13,974, ,275,000 1,011, ,736 14,195, ,925, , ,736 14,453, ,475, , ,736 14,606, $1,600, ,514 2,474, ,700, ,722 2,491, ,725, ,847 2,480, ,875, ,340 2,483, ,000, ,736 2,510, ,100, ,458 2,507, ,200, ,153 2,499, ,325, ,538 2,510, ,450,000 65,333 2,515,333 TOTAL $126,975,000 $25,377,250 $17,975,000 $15,400,979 $185,728,230 (1) Calculated at an assumed interest rate of 3.00% on the 2005 Series A Bonds and an assumed interest rate of 5.00% on the 2005 Series B Bonds. Actual debt service may be higher or lower than the assumed rate. THE CITY The City ranges from industrialized lands bordering the Bay in the west to suburban foothills in the east. Historically the industrial heart of the Bay Area, the City has developed into a financial, commercial and governmental center. The City is the hub of an extensive transportation network which includes freeway systems and the western terminals of major railroads and trucking firms, as well as one of the largest container-ship ports in the United States. The City supports an expanding international airport and rapid-transit lines which connect it with most of the Bay Area. The City is the seat of government for the County and is the eighth most populous city in the State. See APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND and APPENDIX B CITY OF OAKLAND AUDITED FINANCIAL STATEMENTS, JUNE 30, 2004 herein. THE AUTHORITY The Authority was established pursuant to a Joint Exercise of Powers Agreement, dated as of February 1, 1993, by and between the City and the Agency. The Authority is authorized pursuant to the Act to borrow money for the purpose of financing or refinancing the cost of any public capital improvement. The Authority functions as an independent entity and its policies are determined by its governing board. The governing board is comprised in its entirety of members of the City Council. The 32

39 Authority has no employees and all staff work is done by the City staff or by consultants to the Authority. The current officers of the Authority are Deborah A. Edgerly, Executive Director, William E. Noland, Treasurer and LaTonda Simmons, Secretary. Base Rental Payments Not City Debt RISK FACTORS The 2005 Bonds are special limited obligations of the Authority and will be payable from and secured solely by (i) the Revenues, (ii) all amounts on deposit in the Revenue Fund, (iii) any other amounts (including proceeds of the sale of the 2005 Bonds) held by the Trustee in any fund or account established under the Trust Agreement (other than the Rebate Fund or the Bond Purchase Fund). Neither the faith and credit nor the taxing power of the City, the State or any political subdivision thereof is pledged to the payment of the Base Rental Payments or the principal or redemption price of or interest on the 2005 Bonds, except to the extent of the Tax Override Revenues. The pledge of the Tax Override Revenues to the payment of the 2005 Bonds is subordinate to the pledge of the Tax Override Revenues to the payment of the City s Senior Pension Bonds. There can be no assurances that the City will not issue additional Senior Pension Bonds secured by the pledge of Tax Override Revenues. The City is also authorized to issue additional subordinate obligations secured by the pledge of Tax Override Revenues. The Authority has no taxing power. Neither the 2005 Bonds nor the obligation of the City to make Base Rental Payments under the Sublease constitutes a debt of the City, the State or any political subdivision thereof within the meaning of the Constitution or the laws of the State. Appropriation of Base Rental Payments The obligation of the City to make Base Rental Payments, when due, is a General Fund obligation of the City and, does not constitute a debt of the City for which the City is obligated to pledge or levy any form of taxation or for which the City has levied or pledged any form of taxation, except to the extent of the Tax Override Revenues. Base Rental Payments will be made from amounts included in the City s annual budget and appropriated therefor, except to the extent payments are made from rental interruption insurance, the net proceeds of insurance or condemnation awards, or certain other accounts, funds or moneys held under the Trust Agreement, including the Reserve Fund established under the Trust Agreement, or from the Tax Override Revenues. The obligation of the City to make Base Rental Payments is in consideration of the right of the City to the continued beneficial use and possession of the Leased Property. In the event of failure of such beneficial use and possession, the obligation of the City may be abated in whole or in part as described herein. The City plans to budget and appropriate Base Rental Payments with respect to the 2005 Series A Bonds based on the lesser of (i) the weighted average interest rate borne by such Bonds during such period or (ii) the 25 Bond Revenue Bond Index most recently published in The Bond Buyer preceding the applicable date of calculation, and with respect to the 2005 Series B Bonds, the lesser of (i) the weighted average interest rate borne by such Bonds during such period or (ii) the then applicable LIBOR swap rate for the remaining average life of such Bonds. As a result, the amount initially budgeted and appropriated in any fiscal year may be less than the amount actually required to make the Base Rental Payments in such fiscal year as a result of subsequent market conditions and events. Although the Sublease does not create a pledge, lien or encumbrance upon the funds of the City except the Tax Override Revenues, the City is obligated under the Sublease to pay the Base Rental Payments and Additional Payments from any source of legally available funds and the City has covenanted in the Sublease that, for so long as the Leased Property is available for its use, it will make the necessary annual appropriations (and to the extent necessary, supplemental appropriations) within its budget for the Base Rental Payments and Additional Payments. The City is currently liable and may become liable on other 33

40 obligations, including the City s Senior Pension Bonds, payable from its General Fund, some of which may have a priority over the Base Rental Payments. The City has also covenanted in the Sublease, so long as any Base Rental Payments and Additional Payments remain unpaid under the Sublease, to levy the Tax Override (up to the maximum tax permitted by applicable law) in each fiscal year, in an amount sufficient when aggregated with the other amounts legally available to the City and amounts budgeted by the City in such fiscal year and expected to be available to pay all Base Rental Payments and Additional Payments due. The amount of annual Tax Override Revenues available to the City is determined by the rate of the levy of the Tax Override by the City Council, the assessed valuation of property in the City and the amounts of taxes collected. Changes in the City s assessed valuation have occurred and will continue to occur. Economic and other factors beyond the City s control, such as a general market decline in land values, reclassification of property to a class exempt from taxation, whether by ownership or use (such as exemptions for property owned by State and local agencies and property used for qualified educational, hospital, charitable or religious purposes), or the complete or partial destruction of taxable property caused by natural or manmade disaster, such as earthquake, flood, fire, terrorist activities, toxic dumping, etc., could cause a reduction in the assessed value of taxable property within the City and could thereby result in a decrease in the amount of annual Tax Override Revenues available. The pledge of the Tax Override Revenues to the payment of the 2005 Bonds is subordinate to the pledge of the Tax Override Revenues to the payment of the City s Senior Pension Bonds. The City has the capacity to enter into other obligations which may be payable from its General Fund and to issue additional obligations secured by Tax Override Revenues, including additional Senior Pension Bonds and additional subordinate obligations. To the extent that additional obligations are incurred by the City, the funds available to make Base Rental Payments may be decreased. The same result could occur if, because of State constitutional and statutory limits on expenditures, the City is not permitted to appropriate and spend all of its collected taxes. See APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND-Constitutional and Statutory Limitations on Taxes and Appropriations herein. The City relies on a number of revenue sources that are dependent on economic conditions and that could be reduced or eliminated by State legislation, including, among others, sales and use taxes, property taxes, and motor vehicle license fees. There can be no assurance that the State will not adopt legislation to reduce or eliminate one or more of these revenue sources. See RISK FACTORS Risks Involving State Budget and Legislation herein. Legal Limitations on City s Revenues There are legal limitations on the ability of the City to increase revenues payable to the General Fund of the City. The ability of the City to increase ad valorem property taxes (a major source of revenues for cities in California) is limited pursuant to Article XIIIA of the State Constitution, which was enacted in In addition, in 1986 California voters approved an initiative statute (Proposition 62) which attempts to limit the imposition of new or higher taxes by local agencies, including the City. These same legal limitations generally restrict the ability of cities to increase fees in excess of the reasonable amount needed to provide the service or facilities with respect to which such fees are charged. An initiative approved by the voters on November 5, 1996 (Proposition 218), further limits the ability of local governments to raise revenues and grants voters expanded initiative powers to reduce or repeal property related taxes. See SECURITY AND SOURCE OF PAYMENT FOR THE 2005 BONDS Tax Override Revenues and APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND Constitutional and Statutory Limitations on Taxes and Appropriations herein. 34

41 State legislation enacted in 1985 limits the rate of the levy of the Tax Override to %, the rate levied by the City Council in fiscal year 1983 and At the same time as limitations have been imposed on the ability of the City to raise revenues, State and federally mandated expenditures for justice, health and welfare have increased. At times, the annual increase in mandated expenditures has exceeded the annual increase in City revenues. In the event the City s revenue sources are less than its total obligations, the City could choose to fund other municipal services before paying debt service on the 2005 Bonds and in some cases may be obligated to fund such other services prior to paying debt service. Abatement Beneficial Use and Possession of the Leased Property. The obligation of the City under the Sublease to make Base Rental Payments is in consideration for the beneficial use and possession of the Leased Property. The obligation of the City to make Base Rental Payments (other than to the extent that funds are available in the Revenue Fund, including the Reserve Fund, or from the proceeds of rental interruption insurance, if available) may be abated in whole or in part if the City does not have full use and possession of the Leased Property. See SECURITY AND SOURCE OF PAYMENT FOR THE 2005 BONDS Abatement Due to Damage or Destruction and APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease herein. Damage or Destruction: Eminent Domain. If damage or destruction or eminent domain proceedings with respect to the Leased Property result in abatement or adjustment of Base Rental Payments and the resulting Base Rental Payments, together with moneys in the Reserve Fund (and in the event of damage or destruction, together with rental interruption insurance proceeds, if any) or Tax Override Revenues, are insufficient to make all payments of principal of and interest on the Bonds during the period that the Leased Property is being restored, repaired or reconstructed, then such payments of principal and interest may not be made in full and no remedy is available to the Trustee or the Owners of the Bonds under the Sublease or Trust Agreement for nonpayment under such circumstances. The City, however, is obligated under the Sublease to maintain casualty insurance. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease herein. Seismic Risks The City is in a seismically active area. During the past 150 years, the San Francisco Bay Area has experienced several major and numerous minor earthquakes. The largest was the 1906 San Francisco earthquake along the San Andreas fault with an estimated magnitude of 8.3 on the Richter scale. The most recent major earthquake was the October 17, 1989 Loma Prieta Earthquake with a magnitude of 7.1 on the Richter scale and an epicenter near Santa Cruz, approximately 60 miles south of Oakland. Both the San Francisco and Oakland area sustained significant damage. The City experienced significant damage to the elevated Cypress freeway and to several buildings within the City, especially unreinforced masonry buildings constructed prior to 1970 and prior to current building code requirements. The Leased Property does not include any unreinforced masonry buildings. Much of the damage resulting from the Loma Prieta earthquake was due to soil liquefaction, a phenomenon during which loose, saturated, noncohesive soils temporarily lose shear strength during ground shaking induced by severe earthquakes. The liquefaction potential at the Leased Property sites is considered very low, and therefore, the potential damage to the Leased Property resulting from a major earthquake due to soil liquefaction is minimal. The Leased Property lies close to three major active earthquake faults (the Hayward, Calaveras and San Andreas faults) and may sustain damage as a result of an earthquake. The City is not obligated under the Sublease to provide earthquake insurance on the Leased Property. In the event of damage or 35

42 destruction to the Leased Property caused by perils for which the City is not required to provide insurance under the Sublease, the City will not be obligated to repair, replace or reconstruct the Leased Property or to make Base Rental Payments with respect to any damaged portion of the Leased Property. The obligation of the City to make Base Rental Payments may be abated if the Leased Property or any improvements thereon are damaged or destroyed by hazards such as earthquakes. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease herein. Risks Involving State Budget and Legislation The State has been experiencing serious budgetary shortfalls for the past three fiscal years, and it is currently projected to experience budgetary shortfalls in the future. Although the ability of the State to use local government revenues to balance future State budgets has been limited by Proposition 1A, enacted in March 2005, State Budget decisions may still have a profound impact on the City. See APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND State Budget herein. Limitation on Enforcement of Remedies, Limited Recourse on Default The enforcement of any remedies provided in the Sublease and Trust Agreement could prove both expensive and time consuming. The Authority does not have the authority under the Sublease to relet the Leased Property. See THE LEASED PROPERTY herein. In the event of a default under the Sublease, there is no available remedy of acceleration of the total Base Rental Payments due over the term of the Sublease. The City will only be liable for Base Rental Payments on an annual basis as they come due, and the Trustee would be required to seek separate judgments for each annual Base Rental Payments. The Senior Pension Bonds, however, are subject to acceleration. In addition, any such suit for rent or money damages could be subject to limitations on legal remedies against public agencies in California, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. The Trustee is not empowered to sell the Leased Property for the benefit of the Owners. See SECURITY AND SOURCE OF PAYMENT FOR THE 2005 BONDS and APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Sublease Defaults and Remedies herein. IN NO EVENT DOES THE AUTHORITY OR ANY ASSIGNEE HAVE THE RIGHT TO ACCELERATE THE PAYMENT OF ANY BASE RENTAL PAYMENTS UNDER THE SUBLEASE. Bankruptcy In addition to the limitation on remedies contained in the Trust Agreement, the rights and remedies provided in the Trust Agreement and the Sublease may be limited by and are subject to the provisions of federal bankruptcy laws, as now or hereafter enacted, and to other laws or equitable principles that may affect the enforcement of creditors rights. Under Chapter 9 of the Bankruptcy Code (Title 11, United States Code), which governs the bankruptcy proceedings for public agencies, there are no involuntary petitions in bankruptcy. If the City were to file a petition under Chapter 9 of the Bankruptcy Code, the Owners, the Trustee and the Authority could be prohibited from taking any steps to enforce their rights under the Sublease, and from taking any steps to collect amounts due from the City under the Sublease. 36

43 If a Bankruptcy Court were to determine that the Sublease is a lease for the purposes of the Bankruptcy Code, the City would have the right to reject (i.e., terminate) the Sublease. The Bankruptcy Code severely limits any claim for damages suffered as a result of rejection of a lease. Changes in Law There can be no assurance that the California electorate will not at some future time adopt initiatives or that the Legislature will not enact legislation that will amend the laws or the Constitution of the State resulting in a reduction of the funds legally available to the City to make Base Rental Payments, and, consequently, having an adverse effect on the source of payment for the 2005 Bonds. Hazardous Substances Hazardous substances may exist on or near the Leased Property, although the City knows of no such existing hazardous substances which require remedial action. There are numerous laws which regulate the use or release of hazardous substances and the liability of an owner of property for any contamination. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERCLA or the Superfund Act, is the most well known and widely applicable of these laws, but California laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition of property whether or not the owner (or operator) has anything to do with creating or handling the hazardous substance. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly and adversely affect the operations and finances of the City and/or the value of the Leased Property. The City does not currently carry insurance covering the risks of hazardous substances. Investment of Funds The funds held under the Trust Agreement are required to be invested in Permitted Investments as provided under the Trust Agreement. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS Definitions of Certain Terms for a summary of the definition of Permitted Investments. All investments, including the Permitted Investments and those authorized by law from time to time for investments by municipalities, contain a certain degree of risk. Such risks include, but are not limited to, a lower rate of return than expected, decline in market value and loss or delayed receipt of principal. The occurrence of these events with respect to amounts held under the Trust Agreement or the funds and accounts held by the City could have a material adverse affect on the source of payment for the 2005 Bonds and/or the financial condition of the City. No Liability of the Authority to the Owners Except as expressly provided in the Trust Agreement, the Authority will not have any obligation or liability to the Owners with respect to the payment when due of the Base Rental Payments by the City, or with respect to the performance by the City of other agreements and covenants required to be performed by it contained in the Sublease or the Trust Agreement, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Trust Agreement. APPROVAL OF LEGAL PROCEEDINGS The validity of the 2005 Bonds and certain other legal matters are subject to the approval of Nixon Peabody LLP, San Francisco, California, Bond Counsel to the Authority. Bond Counsel expects to 37

44 deliver an approval opinion at the time of issuance of the 2005 Bonds substantially, in the form set forth in APPENDIX F herein, subject to the matters discussed under TAX MATTERS. Certain legal matters will be passed on for the Authority and the City by John Russo, Esq., Counsel to the Authority and Oakland City Attorney. Gibbs and Gonzalez LLP served as special counsel to the City Attorney. Certain legal matters will be passed on for the Underwriters by Sidley Austin Brown & Wood LLP. CONTINUING DISCLOSURE The Authority and the City have covenanted for the benefit of the Owners and the beneficial owners of the 2005 Bonds to provide certain financial information and operating data relating to the City no later that 270 days following the end of the City s fiscal year (presently June 30) (the Annual Report ), commencing with the report for the fiscal year, and to provide notices of the occurrence of certain enumerated events, if deemed by the Authority or the City to be material under federal securities laws. The Annual Report will be filed by the Trustee on behalf of both entities with each Nationally Recognized Municipal Securities Information Repository. The notices of material events will be filed by the City on behalf of both entities with each National Repository or the Municipal Securities Rulemaking Board. The specific nature of the information to be contained in the Annual Report or the notices of material events is set forth below in APPENDIX G FORM OF CONTINUING DISCLOSURE AGREEMENT. These covenants have been made in order to assist the Underwriters in complying with S.E.C. Rule 15c2-12(b)(5). The Authority and the City have never failed to comply in any material respect with any previous undertakings with regard to said Rule to provide annual reports or notices of material events Series A Bonds Federal Income Taxes TAX MATTERS The Internal Revenue Code of 1986, as amended (the Code ), imposes certain requirements that must be met subsequent to the issuance and delivery of the 2005 Series A Bonds (the Tax-Exempt Bonds ) for interest thereon to be and remain excluded from gross income for Federal income tax purposes. Noncompliance with such requirements could cause the interest on the Tax-Exempt Bonds to be included in gross income for Federal income tax purposes retroactive to the date of issue of the Tax- Exempt Bonds. Pursuant to the Trust Agreement, the Sublease and the Tax Certificate, the Authority and the City have covenanted to comply with the applicable requirements of the Code in order to maintain the exclusion of the interest on the Tax-Exempt Bonds from gross income for Federal income tax purposes pursuant to Section 103 of the Code. In addition, the Authority and the City have made certain representations and certifications in the Trust Agreement, the Sublease and the Tax Certificate. Nixon Peabody LLP, Bond Counsel, will not independently verify the accuracy of those representations and certifications. In the opinion of Bond Counsel, under existing law and assuming compliance with the aforementioned covenant, and the accuracy of certain representations and certifications made by the Authority and the City described above, interest on the Tax-Exempt Bonds is excluded from gross income for Federal income tax purposes under Section 103 of the Code. Bond Counsel is also of the opinion that such interest is not treated as a preference item in calculating the alternative minimum tax imposed under 38

45 the Code with respect to individuals and corporations. Interest on the Tax-Exempt Bonds is, however, included in the adjusted current earnings of certain corporations for purposes of computing the alternative minimum tax imposed on such corporations. State Taxes Bond Counsel is of the opinion that interest on the Tax-Exempt Bonds is exempt from California personal income taxation. Certain Federal Tax Information General. The following is a discussion of certain additional Federal income tax matters under existing statutes. It does not purport to deal with all aspects of Federal taxation that may be relevant to particular investors. Prospective investors, particularly those who may be subject to special rules, are advised to consult their own tax advisors regarding the Federal tax consequences of owning and disposing of the Tax-Exempt Bonds, as well as any tax consequences arising under the laws of any state or other taxing jurisdiction. Social Security and Railroad Retirement Payments. The Code provides that interest on taxexempt obligations is included in the calculation of modified adjusted gross income in determining whether a portion of Social Security or railroad retirement benefits received are to be included in taxable income. Branch Profits Tax. The Code provides that interest on tax-exempt obligations is included in effectively connected earnings and profits for purposes of computing the branch profits tax on certain foreign corporations doing business in the United States. Borrowed Funds. The Code provides that interest paid (or deemed paid) on borrowed funds used during a tax year to purchase or carry tax-exempt obligations is not deductible. In addition, under rules used by the Internal Revenue Service for determining when borrowed funds are considered used for the purpose of purchasing or carrying particular assets, the purchase of obligations may be considered to have been made with borrowed funds even though the borrowed funds are not directly traceable to the purchase of such obligations. Property and Casualty Insurance Companies. The Code contains provisions relating to property and casualty insurance companies whereunder the amount of certain loss deductions otherwise allowed is reduced (in certain cases below zero) by a specified percentage of, among other things, interest on taxexempt obligations acquired after August 7, Financial Institutions. The Code provides that commercial banks, thrift institutions and other financial institutions may not deduct the portion of their interest expense allocable to tax-exempt obligations acquired after August 7, 1986, other than certain qualified obligations. The Tax-Exempt Bonds are not qualified obligations for this purpose. S Corporations. The Code imposes a tax on excess net passive income of certain S corporations that have subchapter C earnings and profits. Interest on tax-exempt obligations must be included in passive investment income for purposes of this tax. Earned Income Credit. For any taxable year beginning after December 31, 1995, the Code denies the earned income credit to persons otherwise eligible for it if the aggregate amount of disqualified income of the taxpayer for the taxable year exceeds $2,200, subject to adjustment for inflation for taxable 39

46 years beginning after December 31, Interest on the Tax-Exempt Bonds will constitute disqualified income for this purpose. Changes in Federal Tax Law and Post Issuance Events. From time to time proposals are introduced in Congress that, if enacted into law, could have an adverse impact on the potential benefits of the exclusion from gross income for Federal income tax purposes of the interest on the Tax-Exempt Bonds, and thus on the economic value of the Tax-Exempt Bonds. This could result from reductions in Federal income tax rates, changes in the structure of the Federal income tax rates, changes in the structure of the Federal income tax or its replacement with another type of tax, repeal of the exclusion of the interest on the Tax-Exempt Bonds from gross income for such purposes, or otherwise. It is not possible to predict whether any legislation having an adverse impact on the tax treatment of holders of the Tax- Exempt Bonds may be proposed or enacted. Bond Counsel has not undertaken to advise in the future whether any events after the date of issuance and delivery of the Tax-Exempt Bonds may affect the tax status of interest on the Tax-Exempt Bonds. Bond Counsel expresses no opinion as to any Federal, State or local tax law consequences with respect to the Tax-Exempt Bonds, or the interest thereon, if any action is taken with respect to the Tax- Exempt Bonds or the proceeds thereof upon the advice or approval of other counsel Series B Bonds The following is a summary of certain anticipated United States federal income tax consequences of the purchase, ownership and disposition of the 2005 Series B Bonds (the Taxable Bonds ). The summary is based upon the provisions of the Code, the regulations promulgated thereunder and the judicial and administrative rulings and decisions now in effect, all of which are subject to change. The summary generally addresses Taxable Bonds held as capital assets and does not purport to address all aspects of federal income taxation that may affect particular investors in light of their individual circumstances or certain types of investors subject to special treatment under the federal income tax laws, including but not limited to financial institutions, insurance companies, dealers in securities or currencies, persons holding such Bonds as a hedge against currency risks or as a position in a straddle for tax purposes, or persons whose functional currency is not the United States dollar. Potential purchasers of the Taxable Bonds should consult their own tax advisors in determining the federal, state or local tax consequences to them of the purchase, holding and disposition of the Taxable Bonds. The advice set forth in this section was not intended or written by Bond Counsel to be used and cannot be used by an owner of the Taxable Bonds for the purpose of avoiding penalties that may be imposed on the owner of the Taxable Bonds. The advice set forth herein is written to support the promotion or marketing of the Taxable Bonds. Each owner of the Taxable Bonds should seek advice based on its particular circumstances from an independent tax advisor. Federal Income Taxes In the opinion of Nixon Peabody LLP, Bond Counsel, interest on the Taxable Bonds is not excluded from gross income for federal income tax purposes and so will be fully subject to federal income taxation. Purchasers other than those who purchase Taxable Bonds in the initial offering at their principal amounts will be subject to federal income tax accounting rules affecting the timing and/or characterization of payments received with respect to such bonds. In general, interest paid on the Taxable Bonds and recovery of accrued original issue and market discount, if any, will be treated as ordinary income to a bondholder and, after adjustment for the foregoing, principal payments will be treated as a return of capital. 40

47 State Taxes Bond Counsel is of the opinion that interest on the Taxable Bonds is exempt from California personal income taxation. Market Discount Any owner who purchases a Taxable Bond at a price which includes market discount in excess of a prescribed de minimis amount (i.e., at a purchase price that is less than its adjusted issue price in the hands of an original owner) will be required to recharacterize all or a portion of the gain as ordinary income upon receipt of each scheduled or unscheduled principal payment or upon other disposition. In particular, such owner will generally be required either (a) to allocate each such principal payment to accrued market discount not previously included in income and to recognize ordinary income to that extent and to treat any gain upon sale or other disposition of such a Taxable Bond as ordinary income to the extent of any remaining accrued market discount (under this caption) or (b) to elect to include such market discount in income currently as it accrues on all market discount instruments acquired by such owner on or after the first day of the taxable year to which such election applies. The Code authorizes the Treasury Department to issue regulations providing for the method for accruing market discount on debt instruments the principal of which is payable in more than one installment. Until such time as regulations are issued by the Treasury Department, certain rules described in the legislative history of the Tax Reform Act of 1986 will apply. Under those rules, market discount will be included in income either (a) on a constant interest basis or (b) in proportion to the accrual of stated interest. An owner of a Taxable Bond who acquires such Bond at a market discount also may be required to defer, until the maturity date of such Taxable Bonds or the earlier disposition in a taxable transaction, the deduction of a portion of the amount of interest that the owner paid or accrued during the taxable year on indebtedness incurred or maintained to purchase or carry a Taxable Bond in excess of the aggregate amount of interest (including original issue discount) includable in such owner s gross income for the taxable year with respect to such Taxable Bond. The amount of such net interest expense deferred in a taxable year may not exceed the amount of market discount accrued on the Taxable Bond for the days during the taxable year on which the owner held the Taxable Bond and, in general, would be deductible when such market discount is includable in income. The amount of any remaining deferred deduction is to be taken into account in the taxable year in which the Taxable Bond matures or is disposed of in a taxable transaction. In the case of a disposition in which gain or loss is not recognized in whole or in part, any remaining deferred deduction will be allowed to the extent gain is recognized on the disposition. This deferral rule does not apply if the bondowner elects to include such market discount in income currently as described above. Bond Premium A purchaser of a Taxable Bond who purchases such Taxable Bond at a cost greater than its then principal amount will have amortizable bond premium. Purchasers of any Taxable Bonds who acquire such Bonds at a premium should consult with their own tax advisors with respect to the determination and treatment of such premium for federal income tax purposes and with respect to state and local tax consequences of owning such Taxable Bonds. 41

48 Sale or Redemption of Taxable Bonds A bondowner s tax basis for a Taxable Bond is the price such owner pays for the Taxable Bond plus the amount of any original issue discount and market discount previously included in income, reduced on account of any payments received (other than qualified periodic interest payments) and any amortized bond premium. Gain or loss recognized on a sale, exchange or redemption of a Taxable Bond, measured by the difference between the amount realized and the Taxable Bond basis as so adjusted, will generally give rise to capital gain or loss if the Taxable Bond is held as a capital asset (except as discussed above under Market Discount ). Backup Withholding A bondowner may, under certain circumstances, be subject to backup withholding (currently the rate of this withholding tax is 30% (although the rate is scheduled to be reduced over the next few years)) with respect to interest or original issue discount on the Taxable Bonds. This withholding generally applies if the owner of a Taxable Bond (a) fails to furnish the Trustee or other payor with its taxpayer identification number; (b) furnishes the Trustee or other payor an incorrect taxpayer identification number; (c) fails to report properly interest, dividends or other reportable payments as defined in the Code; or (d) under certain circumstances, fails to provide the Trustee or other payor with a certified statement, signed under penalty of perjury, that the taxpayer identification number provided is its correct number and that the holder is not subject to backup withholding. Backup withholding will not apply, however, with respect to certain payments made to bondowners, including payments to certain exempt recipients (such as certain exempt organizations) and to certain Nonresidents (as defined below). Owners of the Taxable Bonds should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining the exemption. The amount of reportable payments for each calendar year and the amount of tax withheld, if any, with respect to payments on the Taxable Bonds will be reported to the bondowners and to the Internal Revenue Service. Nonresident Bondowners Under the Code, interest and original issue discount income with respect to Taxable Bonds held by nonresident alien individuals, foreign corporations or other non-united States persons ( Nonresidents ) generally will not be subject to the United States withholding tax (or backup withholding) if the Agency (or other person who would otherwise be required to withhold tax from such payments) is provided with an appropriate statement that the beneficial owner of the Taxable Bond is a Nonresident. Notwithstanding the foregoing, if any such payments are effectively connected with a United States trade or business conducted by a Nonresident bondowner, they will be subject to regular United States income tax, but will ordinarily be exempt from United States withholding tax. ERISA The Employees Retirement Income Security Act of 1974, as amended ( ERISA ), and the Code generally prohibit certain transactions between a qualified employee benefit plan under ERISA or taxqualified retirement plans and individual retirement accounts under the Code (collectively, the Plans ) and persons who, with respect to a Plan, are fiduciaries or other parties in interest within the meaning of ERISA or disqualified persons within the meaning of the Code. All fiduciaries of Plans, in consultation with their advisors, should carefully consider the impact of ERISA and the Code on an investment in any Taxable Bonds. 42

49 UNDERWRITING The 2005 Bonds were purchased through negotiation by Morgan Stanley & Co. Incorporated, as representative of itself and Backstrom McCarley Berry & Co., LLC (collectively, the Underwriters ) at a price of $144,354,105 (which represents the principal amount of the 2005 Bonds less an underwriters discount in the amount of $595,895). The purchase contract pursuant to which the Underwriters are purchasing the 2005 Bonds provides that the Underwriters will purchase all of the 2005 Bonds if any are purchased. The obligation of the Underwriters to make such purchase is subject to certain terms and conditions set forth in such purchase contract. FINANCIAL ADVISOR Public Financial Management, Inc., San Francisco, California, has served as Financial Advisor to the Authority and the City with respect to the sale of the 2005 Bonds. The Financial Advisor has assisted in various matters relating to the planning, structuring and issuance of the 2005 Bonds and will receive compensation with respect to the 2005 Bonds which is contingent upon the sale and delivery of the 2005 Bonds. LITIGATION At the time of delivery of and payment for the 2005 Bonds, the Authority will certify that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court or regulatory authority, against the Authority affecting its existence or the titles of its officers or seeking to restrain or to enjoin the sale or delivery of the 2005 Bonds, the application of the proceeds thereof in accordance with the Trust Agreement, or in any way contesting or affecting the validity or enforceability of the 2005 Bonds, the Trust Agreement, the Lease, the Sublease or any action of the Authority contemplated by any of said documents, or in any way contesting the completeness or accuracy of this Official Statement or any amendment or supplement thereto, or contesting the powers of the Authority or its authority with respect to the 2005 Bonds or any action of the Authority contemplated by any of said documents, nor, to the knowledge of the Authority, is there any basis therefor. At the time of delivery of and payment for the 2005 Bonds, the City will certify that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court or regulatory authority, against the City affecting its existence or the titles of its officers or in any way contesting or affecting the validity or enforceability of the Lease, the Sublease or any action of the City contemplated by any of said documents, or in any way contesting the completeness or accuracy of the information in this Official Statement or any amendment or supplement thereto under the captions INTRODUCTION City of Oakland, THE CITY, LITIGATION, and APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND, APPENDIX B CITY OF OAKLAND AUDITED FINANCIAL STATEMENTS, JUNE 30, 2004, and APPENDIX E CITY OF OAKLAND INVESTMENT POLICY FISCAL YEAR 2004, or contesting the powers of the City or its authority with respect to any action of the City contemplated by any of said documents, nor, to the knowledge of the City, is there any basis therefor. RATINGS The 2005 Bonds have been rated Aaa by Moody s Investors Service, AAA by Standard & Poor s Ratings Group and AAA by Fitch Ratings with the understanding that upon delivery of the 2005 Bonds, a policy insuring the payment when due of the principal of and interest on the 2005 Bonds will be issued by the Bond Insurer. Any desired explanation of the significance of such ratings should be 43

50 obtained from the respective rating agencies. Generally, rating agencies base their ratings on the information and materials furnished to them and on their own investigations, studies and assumptions. There is no assurance that such ratings will continue for any given period of time or that they will not be lowered or withdrawn entirely if, in the judgment of the respective rating agency, circumstances so warrant. Any such change in or withdrawal of such ratings could have an adverse effect on the market price of the 2005 Bonds. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 44

51 MISCELLANEOUS References made herein to certain documents and reports are brief summaries thereof and do not purport to be complete or definitive and reference is hereby made to such documents and reports for a full and complete statement of the contents thereof. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Authority or the City and the purchasers or registered owners of any of the 2005 Bonds. The delivery and distribution of this Official Statement have been duly authorized by the Authority and the City. OAKLAND JOINT POWERS FINANCING AUTHORITY By: /s/ Deborah A. Edgerly Executive Director CITY OF OAKLAND By: /s/ Deborah A. Edgerly City Administrator 45

52 (THIS PAGE INTENTIONALLY LEFT BLANK)

53 APPENDIX A CERTAIN INFORMATION CONCERNING THE CITY OF OAKLAND General Information Overview. The City of Oakland (the City ) is located in the County of Alameda (the County ) on the east side of the San Francisco Bay, approximately seven miles from downtown San Francisco via the San Francisco-Oakland Bay Bridge. The City ranges from industrialized lands bordering the Bay on the west to suburban foothills in the east. Formerly the industrial heart of the San Francisco Bay Area, the City has developed into a diversified financial, commercial and governmental center. The City is also the hub of an extensive transportation network, which includes a freeway system and the western terminals of major railroads and trucking operations, as well as one of the largest container-ship ports in the United States. The City supports an expanding international airport and rapid-transit lines that connect it with most of the Bay Area. The City is the seat of government for the County and is the eighth most populous city in the State of California (the State ). City Government. The City was incorporated as a town in 1852 and as a city in In 1889, the City of Oakland became a charter city. The Charter provides for the election, organization, powers and duties of the legislative branch, known as the City Council; the powers and duties of the executive and administrative branches; fiscal and budgetary matters, personnel administration, franchises, licenses, permits, leases and sales; employees pension funds; and the creation and organization of the Port of Oakland (the Port ). An eight-member City Council, seven of whom are elected by district and one of whom is elected on a city-wide basis, governs the City. The Mayor is not a member of the City Council but is the City s chief elective officer. The current Mayor, Jerry Brown, is serving his second consecutive term, which expires in January No person can be elected Mayor for more than two consecutive terms. The Mayor and Council members serve four-year terms staggered at two-year intervals. The City Auditor, currently Roland E. Smith, is elected for a four-year term at the same time as the Mayor. The City Attorney is elected to a four-year term, two years following the election of the Mayor. The term of the current City Attorney, John Russo, expires in January The Mayor appoints a City Administrator who is subject to confirmation by the City Council. The City Administrator is responsible for daily administration of City affairs and preparation of the annual budget for the Mayor to submit to the City Council. Subject to civil service regulations, the City Administrator appoints all City employees who are not elected officers of the City. The City provides a full range of services contemplated by statute or charter, including those functions delegated to cities under State law. These services include public safety (police and fire), sanitation and environmental health enforcement, recreational and cultural activities, public improvements, planning, zoning and general administrative services. Additional Information. Additional information on the City, including financial information, can be found on the City s website at such information is not incorporated herein by reference. A-1

54 City Budget Process Financial Information The City s budget cycle is a two-year process that is intended to promote long-term decisionmaking, increase funding stability and allow for greater performance evaluation. The City s budget is developed on the Generally Accepted Accounting Principles ( GAAP ) basis (modified accrual for governmental funds and accrual for proprietary and pension trust funds). The City Charter requires that the City Council adopt a balanced budget by June 30, preceding the start of the fiscal year on July 1. In advance of each two-year cycle, the City Administrator and Agency heads conduct internal budget hearings to develop budget proposals for presentation to the Mayor. Within 60 to 90 days before the end of the prior two-year cycle, the Mayor submits the proposed two-year budget to the City Council and formal public budget hearings are scheduled. Upon conclusion of the public hearings, the City Council may make adjustments and/or revisions. The City Council adopts the City s operating budget on or before June 30. It contains appropriations for all funds and two-year appropriations for the five-year Capital Improvements Program. During the off-year of the two-year budget cycle, the City conducts a mid-cycle (end of year one) budget review limited to significant variances in estimated revenue and/or revised mandates arising from Federal, State or court actions. The City s Adopted Policy Budget for Fiscal Years was approved on June 19, 2003, and a mid-cycle review was conducted in June To preserve core programs and services and to minimize the necessity for employee layoffs or service reductions, the City has utilized strategies that reduce the cost of doing business and raise certain fees and fines. At the core of the budget is restructuring and streamlining of City government to maximize the efficient delivery of services while minimizing reductions in such services. Proposed Budget On May 6, 2005, the City Administrator released the City s FY Proposed Policy Budget. The two-year proposed budget recommended appropriations just under $2 billion, including $937 million for FY , and just over $1 billion for FY Appropriations for General Purpose Funds, representing the discretionary portion of the City s General Fund, were $441 million and $463 million, respectively. In preparing the budget, a $32 million funding shortfall was identified for the General Purpose Fund for FY , reflecting a number of factors including negotiated employee salary increases and higher retirement plan premiums. Among the measures recommended for achieving budget balance were the closure of the City s jail, the closure of the Kaiser Convention Center, and various revenue adjustments, recognizing various revenue increases including proceeds from the repayment of Vehicle License Fees (the VLF ) funds from the State and savings attributable to the refinancing of pension-related obligations. The FY Proposed Budget was balanced, addressed Council priorities, and followed the City s various adopted financial management policies. City Financial Statement The City Council employs an independent certified public accountant who examines books, records, inventories, and reports of all officers and employees who receive, control, handle or disburse public funds and those of any other employees or departments as the City Council directs. These duties are performed both annually and upon request. The City s independent auditor for Fiscal Year was Macias, Gini & Company, LLP, who is also serving as auditor for Fiscal Year Within a reasonable period following the fiscal year end, the accountant submits the final audit to the City Council. The City then publishes the financial statements as of the close of the fiscal year. A-2

55 State Budget Several of the City s revenue streams, including property tax, sales tax and the motor vehicle license fee, are collected or allocated in accordance with State law. In the past, the State has amended such laws, in part to address its own budgetary requirements. The following information concerning the State of California s budget has been obtained from publicly available information which the City believes to be reliable; however, the City takes no responsibility as to the accuracy or completeness thereof and has not independently verified such information. Information about the State Budget is regularly available at various State-maintained websites. Text of the budget may be found at the Department of Finance website, under the heading "California Budget." An impartial analysis of the budget is posted by the Office of the Legislative Analyst at In addition, various State of California official statements, many of which contain a summary of the current and past State budgets, may be found at the website of the State Treasurer, The information referred to is prepared by the respective State agency maintaining each website and not by the City and the City can take no responsibility for the continued accuracy of the internet addresses or for the accuracy or timeliness of information posted there, and such information is not incorporated herein by these references. State Budget for Fiscal Year On July 31, 2004, Governor Schwarzenegger signed the Budget Act into law. Certain of the features of the Budget Act affecting local governments include the following: 1. The VLF rate is lowered from 2.0% to 0.65% and the VLF backfill was eliminated. The State will provide increased property tax revenues to compensate for the reduction in revenues local governments previously received from VLF. 2. A diversion of $1.3 billion from local governments in Fiscal Years and , including $350 million from counties, $350 million from cities, $350 million from special districts and $250 from redevelopment agencies. Each city s reduction reflected its proportionate share of statewide county VLF revenues, property taxes and sales taxes. 3. The Budget Act proposed a constitutional amendment to protect certain local government revenues ("Proposition 1A"), which was approved by the voters in November Pursuant to Proposition 1A, the State may not reduce local governments share of the property tax below current levels, but may borrow up to 8% of local property tax revenues in the event of a fiscal emergency, provided the amount borrowed would be repaid within three years and certain other conditions are satisfied. Proposition 1A also prohibits the State from reallocating local sales taxes. See "CONSTITUTIONAL AND STATUTORY LIMITS ON TAXES AND APPROPRIATIONS Proposition 1A" herein. Governor s Proposed Budget for Fiscal Year On January 10, 2005, Governor Schwarzenegger released his proposed budget for Fiscal Year (the Proposed Budget ). The Proposed Budget identifies a budget shortfall of $9.1 billion without implementation of the policy changes proposed in the Proposed Budget. Certain of the features of the Proposed Budget affecting the City include the following: 1. The Proposed Budget includes funding in various budgets that support activities by local government agencies where the local agencies have significant discretion over the use of the funds. Such programs include law enforcement, realigned health and mental health services, public health, property tax administration, Williamson Act open space preservation contracts, libraries, recreational facilities, flood control, and housing. Funding for these programs will be approximately $5.6 billion in , which represents a reduction of $368 million from the amount expected to be received in Fiscal Year The Proposed Budget includes funding for local governments to make up the difference between the 0.65% rate of the VLF and the previous 2% rate through a reallocation of property A-3

56 tax from schools and community colleges to cities and counties. The General Fund expenditures for Proposition 98, which guarantees K-14 schools a minimum share of funding from General Fund revenues, are increased to offset the reduction in property taxes for schools. On May 13, 2005, the Governor released the May Revision to the Proposed Budget (the May Revision ). The May Revision includes approximately $6.6 billion in additional revenues for the current and budget years than was assumed in the Proposed Budget. The Governor proposes no new borrowing in the May Revision. Certain of the features of the May Revision affecting the City include the following: 1. The May Revision assumes the State will accelerate repayment by one year of approximately $593 million owed to cities and counties for VLF revenues withheld by the State in Fiscal Year The May Revision also proposes $108 million in increased funding for State mandate reimbursements. 2. The May Revision proposes to reinstate the transfer, eliminated in the Proposed Budget, of gasoline sales tax revenue from the General Fund to transportation purposes pursuant to Proposition 42, in the amount of $1.3 billion, with $254 million to be provided to cities and counties for local streets and roads. On May 17, 2005, the LAO released an analysis of the May Revision entitled Overview of the May Revision (the LAO Overview ). The LAO Overview indicates that the May Revision has eliminated some of the risky assumptions set forth in the Proposed Budget, but that the May Revision continues to include significant risks with respect to, among other things, employee compensation and retirement costs. The LAO concludes that, absent long-term solutions, the State would face a major budget problem in fiscal year and beyond. Future State Budgets. No prediction can be made by the City as to whether the State will continue to encounter budgetary problems in this or in any future Fiscal Years, and if it were to do so, it is not clear what measures would be taken by the State to balance its budget, as required by law. In addition, the City cannot predict the final outcome of future State budget negotiations, the impact that such budgets will have on its finances and operations or what actions will be taken in the future by the State Legislature and Governor to deal with changing State revenues and expenditures. Current and future State budgets will be affected by national and State economic conditions and other factors over which the City has no control. City Investment Policy The authority to invest the City s pooled moneys (the Pooled Operating Portfolio ) is derived from Council Resolution No , which delegates to the Treasurer/Director, Finance and Management Agency the authority to invest these funds within the guidelines of Section et seq. of the Government Code of the State of California (the Code ). The Code also directs the City to present an annual investment policy for confirmation to the City Council. The City expects to adopt an investment policy for fiscal year by the end of June The City Council adopted an investment policy for Fiscal Year on June 15, The investment policy may be revised by the City Council at any time. The objectives of the investment policy are to preserve capital, to provide adequate liquidity to meet cash disbursements of the City and to reduce overall portfolio risks while maintaining market rates of return. A-4

57 Current Investment Portfolio The City currently maintains approximately $327 million in operating funds, excluding certain restricted special revenue and pension trust funds. The Pooled Operating Portfolio is composed of different types of investment securities and is invested in accordance with the investment policy. The composition of the securities comprising the Pooled Operating Portfolio, including the average term and days to maturity, is provided below as of March 31, Fitch Inc. ( Fitch ) has assigned a managed fund credit rating of AAA and a market-risk rating of V-1+ to the City s Pooled Operating Portfolio. Fitch s managed-fund credit ratings are an assessment of the overall credit quality of a fund s portfolio. Ratings are based on an evaluation of several factors, including credit quality and diversification of assets in the portfolio, management strength and operational capabilities. Fitch s managed-funds market risk ratings are an assessment of relative market risks and total return stability in the portfolio. Market-risk ratings are based on, but not limited to, analysis of interest rate, derivative, liquidity, spread and leverage risk. Fitch s managed-fund credit and market risk ratings are based on information provided to Fitch by the City. Fitch does not verify the underlying accuracy of this information. These ratings do not constitute recommendations to purchase, sell or hold any security. Table 1 City of Oakland Pooled Operating Portfolio March 31, Yield to Maturity-- Percent of Days to 360-Day 365-Day Investments Market Value Book Value Portfolio Term Maturity Equivalent Equivalent Federal Agency Issues Coupon $174,941, $176,575, % 1, % 2.969% Federal Agency Issues Discount 5,946, ,938, LAIF Bond Proceeds 16,194, ,194, Medium Term Notes 12,088, ,061, Money Market 34,310, ,310, Local Agency Investment Funds 37,000, ,000, Certificates of Deposit 199, , Commercial Paper - Discount 44,909, ,906, Total $325,590, $327,186, % % 2.713% Source: City of Oakland, Finance and Management Agency. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-5

58 General Fund Revenues The City s General Fund receives revenues from a variety of sources, including local taxes, taxes imposed by the State, intergovernmental transfers and fees and charges for services. The major General Fund revenues are discussed below. Property Taxation Ad Valorem Property Taxes. Property taxes are assessed and collected by the County. Taxes arising from the general one percent levy are apportioned among local taxing agencies on the basis of a formula established by State law, which reflects the average tax rate levied by the taxing agency for the three years before Proposition 13 was adopted. Taxes relating to voter-approved indebtedness are allocated to the relevant taxing agency. The City levies taxes for two forms of voter-approved indebtedness, general obligation bonds and for pension obligations. The County is permitted under State law to pass on costs for certain services provided to local government agencies including the collection of property taxes. The County imposed a fee on the City of approximately 0.54% of taxes collected for tax collection services provided in Fiscal Year The State Budget has resulted in various reallocations affecting property tax revenues, including the triple flip involving property tax and sales tax, the replacement of VLF revenues, and the temporary ERAF transfers (see State Budget, and Other Taxes, herein). Assessed Valuations. All property is assessed using full cash value as defined by Article XIIIA of the State Constitution. State law provides exemptions from ad valorem property taxation for certain classes of property such as churches, colleges, nonprofit hospitals and charitable institutions. State law also allows exemptions from ad valorem property taxation at $7,000 of full value of owner-occupied dwellings and 100% of business inventories. Revenue losses to the City from the homeowner s exemption are replaced by the State. Future assessed valuation growth allowed under Article XIIIA (new construction, certain changes of ownership, 2% inflation) will be allocated on the basis of situs among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies and schools will share the growth of base revenues from the tax rate area. Each year s growth allocation becomes part of each agency s allocation in the following year. The availability to such entities of revenue from growth in tax bases may be affected by the establishment of redevelopment project areas which, under certain circumstances, may be entitled to revenues resulting from the increase in certain property values. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-6

59 The following table represents a five-year history of assessed valuations in the City: Table 2 City of Oakland Assessed Valuations (in $000s) Fiscal Year Local Secured (1) Utility Unsecured Total $18,453,636 $62,398 $2,574,565 $21,090, ,529,197 53,823 2,719,940 23,302, ,468,401 49,548 2,655,756 25,173, ,592,384 66,993 2,755,382 27,414, ,812,360 79,048 2,750,645 29,642,053 (1) Net of exemptions other than homeowners exemptions. Source: Alameda County Auditor-Controller. Tax Levies, Collections and Delinquencies Taxes are levied for each fiscal year on taxable real and personal property situated in the City as of the preceding January 1. A supplemental roll is developed when property changes hands or new construction is completed that produces additional revenue. Secured property taxes are due on November 1 and March 1 and become delinquent if not paid by December 10 and April 10, respectively. A 10% penalty attaches to any delinquent payment for secured roll taxes. In addition, property on the secured roll with respect to which taxes are delinquent becomes tax-defaulted. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus interest at 1.5% per month from the July 1 first following the default. If taxes are unpaid for a period of five years or more, the property is subject to auction sale by the County Tax Collector. In the case of unsecured property taxes, a 10% penalty attaches to delinquent taxes on property on the unsecured roll, and an additional penalty of 1.5% per month begins to accrue beginning November 1 of the fiscal year, and a lien is recorded against the assessee. The taxing authority has four ways of collecting unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a judgment lien on specific property of the taxpayer; (3) filing a certificate of delinquency for recordation in the County Recorder s Office in order to obtain a lien on specified property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-7

60 The following table represents a five-year history of the secured tax levy and of uncollected amounts in the City. Included in these collections are the City s share of the 1% tax rate and levies for voter-approved indebtedness. Table 3 City of Oakland Property Tax Levies and Collections (in $000s) Levy City s Share Voter- Total Percent Delinquent Fiscal Year of 1% Approved Total Collected Collected Collections $49,855 $45,245 $95,100 $91, % $3, ,376 42,225 95,601 91, , ,947 49, , , , ,164 48, , , , ,248 61, , , ,860 Source: Alameda County Auditor-Controller. Tax Rates The City is divided into 33 Tax Rate Areas ( TRAs ). TRA is the largest tax rate area in the City. TRA provides almost 50% of the City s ad valorem revenues and the distribution of its tax rates among the City, the County, and other taxing jurisdictions is typical for most of the City s TRAs. A five-year history of the property tax rates for TRA is shown below. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-8

61 Table 4 City of Oakland Property Tax Rates (TRA ) (1) Fiscal Year City of Alameda Ended June 30 Oakland County Others (2) Total % % % % (1) (2) Includes the allocation of the 1% basic property tax rate to various taxing entities pursuant to State law (AB 8), as adjusted for transfers to the Education Revenue Augmentation Fund (ERAF). Also includes local levies for voter approved indebtedness. Includes: Oakland Unified School District, Peralta Community College District, Bay Area Rapid Transit District, East Bay Regional Park District, East Bay Municipal Utility District, and the Oakland Knowland Park & Zoo. Also includes allocations to ERAF. Sources: Alameda County, Office of the Auditor-Controller and City of Oakland, Finance and Management Agency. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-9

62 Principal Property Taxpayers A summary of the City s Fiscal Year largest secured taxpayers is presented below: Table 5 City of Oakland Top Ten Taxpayers, (1) Percentage of Total Local Assessed Secured Property Owner Type of Business Valuation Valuation 1. OCC (Oakland City Ctr.) Venture LLC Office Building $ 197,942, % 2. Prentiss Properties Acquisition Partners/Prentiss Properties Office Building 131,109, Lake Merritt LLC 3. Kaiser Foundation Health Plan Office Building 124,064, Kaiser Center Office Building 114,481, Harrison Foundation Office Building 110,439, KSL Claremont Resort Inc. Hotel 105,439, LMP I LLC Office Building 101,636, Twelfth Street, Venture LLC Office Building 101,276, Clorox Company Office Building 90,520, Webster Street Partners Office Building 75,329, Subtotal Top Ten $ 1,152,451, % All Others 25,659,908, TOTAL $26,812,360,088 (2) % (1) (2) Net of Exemptions. Represents Local Secured Assessed Valuation (net of exemptions other than homeowners exemptions). Source: California Municipal Statistics, Inc. Other Taxes The City s General Fund has eight other sources of taxes, in addition to property taxes. They are sales and use, utility consumption, business license, real estate transfer, transient occupancy, motor vehicle in lieu, and parking taxes. Sales & Use Taxes. The current Sales Tax rate in Alameda County is 8.75%. The City s General Fund traditionally receives one percent of the 8.75% under State Bradley-Burns law, which is allocated on the basis of the point of sale. Effective July 1, 2004, the traditional Bradley-Burns 1% city sales tax was modified by a State budgetary change known as the triple flip. The triple flip puts in place a complex revenue swap to fund the State s deficit bonds approved by the electorate in March 2004 to balance the State budget. The triple flip trades 0.25% of the 1% city share of the Bradley-Burns sales tax for an equal share of property taxes from the countywide Education Revenue Augmentation Fund (ERAF) until the State s deficit bonds are retired. See State Budget herein. The City s General Fund also receives as a portion of the 0.50% sales tax for public safety authorized by Proposition 172 in 1993 for public safety. The City also receives a portion of the 0.50% countywide transportation sales tax, which are deposited in a special revenue fund. Utility Consumption. The City s Utility Consumption Tax is a surcharge on the use of electricity, gas (including alternative fuels), telephone and cable television. The tax rate is 7.5%. Lowincome ratepayers have been exempted from certain rate increases on gas and electric bills and pay 5.5%. A-10

63 Business License. The City s Business License Tax is charged annually to businesses based in the City, and is applied to gross receipts or payroll, depending on the type of business. The Business License Tax rate ranges from 0.06% for grocers to 2.40% for firearm dealers when applied to gross receipts, and is 0.048% when applied to payroll. Real Estate Transfer. Real Estate Transfer Tax revenues are generated by the transfer of ownership of existing properties. The tax is applied to the sale price of the property, and the cost is split between the buyer and seller. The tax rate is 1.61%, and is comprised of a City and a county portion: 0.11% is allocated to Alameda County and the remaining 1.50% is allocated to the City. Historically, this revenue has been the City s most volatile as it is directly dependent on the number and value of real estate sales. Recently, Real Estate Transfer Tax revenues have exceeded budgeted expectations, but it is unlikely that such revenues will be sustained at current levels. Transient Occupancy. The Transient Occupancy Tax ( TOT ) represents a surcharge on room rates imposed by hotels and motels operating within the City. The tax is levied on persons staying 30 days or less in a hotel, motel, inn or other lodging facility, and is collected by the lodging facility operator, who then remits the collected tax to the City. The City s TOT rate is 11%. Motor Vehicle In-Lieu Fee. Motor vehicle license fees are collected by the State in lieu of property taxes on vehicles and apportioned to cities and counties based on their population. The fee applies to all vehicles subject to registration in the State. In 1999, the State started implementing a gradual, multi-phase reduction in the VLF fee, backfilling lost local receipts out of its general fund. As part of the State s Fiscal Year Budget, the VLF rate was permanently reduced to 0.65%, with the lost revenue replaced by an incremental allocation of property tax. The City is considering assigning a $6.99 million VLF receivable from the State to a joint powers authority in exchange for proceeds of a bond issue. Parking. The Parking Tax is imposed on the occupant of an off-street parking space for the privilege of renting the space within the City. The tax is collected by the parking facility operators who then remit the collected tax to the City. The current parking tax rate is 10 % and is applied to the gross receipts of parking facility operators. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-11

64 General Fund Revenues and Expenditures The following table describes revenues and expenditures for the General Fund Group for five fiscal years. The City s fiscal year ends on June 30. Table 6 City of Oakland Revenues and Expenditures General Fund (in $000s) Fiscal Years Revenues Taxes Property (1) $85,872 $95,440 $94,306 $114,742 $109,927 Sales and Use 38,470 42,256 38,447 38,162 36,464 Motor Vehicle In-Lieu 19,314 21,361 22,854 24,259 18,178 Business License 35,845 38,738 42,094 42,020 44,243 Utility Consumption 41,592 48,703 49,547 46,581 48,056 Real Estate Transfer 34,359 38,309 37,272 42,088 55,665 Transient Occupancy 12,100 12,766 10,530 10,863 9,857 Parking 5,686 6,762 7,525 8,242 9,799 Franchise 9,086 10,396 10,944 10,824 11,592 Total Taxes 282, , , , ,761 Licenses and Permits 9,088 11,418 11,738 13,074 13,453 Traffic Fines and Various 14,129 16,150 12,277 18,543 26,817 Interest Income (Loss) (2) 10,019 6,530 11,442 16,996 (5,100) Revenue from Current Services 36,506 40,962 48,442 51,708 56,883 Grant Revenue 7,265 5,385 2,842 1,794 2,147 Other Revenue, incl. Transfers 8,813 11,056 14,025 17,927 23,276 Annuity Income ,568 15, Total Revenues $368,142 $406,232 $434,899 $473,674 $461,237 Expenditures General Government (3) $41,245 $44,110 $47,219 $44,251 $51,673 Public Safety (4) 190, , , , ,630 Public Works (5) 25,050 24,185 26,052 23,261 27,475 Life Enrichment (6) 31,749 37,149 36,320 37,526 41,359 Economic and Community Development (7) 18,954 20,288 22,512 26,701 20,152 Other (8) 23,462 33,112 28,889 21,353 24,902 Transfers/other sources and uses Total Expenditures $331,823 $366,600 $386,399 $391,660 $413,191 Excess of Revenues and Other Sources over Expenditures and Other Uses $ 36,319 $ 39,362 $ 48,500 $ 82,014 $ 48,046 (1) (2) (3) (4) (5) (6) (7) (8) Includes voter-approved tax override for pension obligation, but excludes tax levy for general obligation bonds. Loss relates to mark-to-market accounting. Includes elected and appointed officials, general governmental agencies and administrative services. Includes police and fire services. Includes Design and Construction Services, Infrastructure and Operations, Facilities and Environment. Includes Parks and Recreation, Library, Museum, Aging and Health, and Human Services. Includes Planning and Building, Housing and Neighborhood Development, and Economic Development and Employment. Includes capital outlays and certain debt service charges. Source: Comprehensive Annual Financial Reports, Fiscal Year Ended June 30. A-12

65 Table 7 City of Oakland Balance Sheet General Fund (in $000s) Fiscal Years ASSETS Cash and investments $ 19,613 $ 8,073 $ 16,837 $ 38,566 $ 51,902 Receivables Accrued interest Property taxes 2,348 17,411 10,391 7,125 3,161 Accounts receivable 43,660 58,739 53,367 51,391 49,669 Due from component unit 10,263 12,172 19,573 11,377 24,527 Due from other funds 82,415 89,147 87,652 67,378 Notes and loans receivable 13,709 28,295 14,826 15,034 37,059 Restricted cash and investments (1) , , ,468 Other 1,509 1, TOTAL ASSETS 173, , , , ,628 LIABILITIES AND FUND BALANCES Liabilities Accounts payable and other accrued liabilities 77, ,479 84,027 92, ,151 Due to other funds 12,124 1,474 1, ,571 Deferred revenue 50,562 83,971 73,463 57,483 31,633 Other ,084 3,817 3,965 TOTAL LIABILITIES 141, , , , ,320 Fund Balances Reserved: Encumbrances ,744 3,227 4,779 Long term receivables ,000 Debt service (1) , , Capital project ,644 13, Total Reserved 3,708 1, , ,317 10,799 Unreserved (1) 28,526 21,132 29,666 38, ,529 TOTAL FUND BALANCES $32,234 $ 22,796 $225,733 $253,118 $233,328 TOTAL LIABILITIES AND FUND BALANCES $ 173,711 $210,063 $385,574 $407,302 $406,628 (1) The large increase in restricted cash in FY 2002, and corresponding increases in reservation for debt service for FY 2002 and FY 2003 and for unreserved fund balance for FY 2004 represent changes in accounting recording. The unreserved fund balance for FY 2004 includes $ million retirement annuity and debt service, $39.80 million in undesignated fund balance, and $8.26 million in designations for capital projects. Source: Comprehensive Annual Financial Reports, Fiscal Year Ended June 30. A-13

66 Debt Obligations The City has never defaulted on the payment of principal of or interest on any of its indebtedness or lease obligations. General Obligation Debt. As of June 30, 2004, the City had outstanding a total of $232,045,000 aggregate principal amount of general obligation bonds. The bonds are general obligations of the City, approved by at least two-thirds of the voters. The City has the power and is obligated to levy ad valorem taxes upon all property within the City subject to taxation without limitation as to the rate or the amount (except certain property taxable at limited rates) for the payment of principal and interest on these bonds. Table 8 City of Oakland General Obligation Bonds As of June 30, 2004 (in $000 s) Issuance Final Original Par Issue Name Date Maturity Par Outstanding General Obligation Bonds, Series 1992 (Measure I) * 8/4/ $50,000 $36,195 General Obligation Bonds, Series 1995B (Measure K) * 3/16/ ,000 11,835 General Obligation Bonds, Series 1997 (Measure I) * 4/9/ ,420 39,230 General Obligation Bonds, Series 1997C (Measure K) * 4/30/ ,250 19,360 General Obligation Bonds, Series 2000D (Measure K) * 7/25/ ,750 10,075 General Obligation Bonds, Series 2000E (Measure K) * 7/25/ ,000 8,510 General Obligation Bonds, Series 2002A (Measure G) 11/6/ ,000 37,975 General Obligation Bonds, Series 2003A (Measure DD) 8/6/ ,450 68,865 Total $232,045 * To be refunded by the GO Refunding Bonds. All of the City s general obligation debt is authorized by voter approval of certain measures. The table below summarizes all of the voter-approved measures that have outstanding general obligation debt. The City has a total of $147,800,000 remaining in bond authorizations under Measures G and DD. Table 9 City of Oakland General Obligation Bond Remaining Authorization As of June 30, 2004 (in $000 s) Bond Authorization Authorization Date Passed Use Total Remaining Measure K 11/6/1990 Park and recreation facilities $ 60,000 $ 0 Measure I 7/15/1992 Emergency response and seismic retrofitting 50,000 0 Measure I 11/5/1996 Life enrichment improvements 45,420 0 Measure G 3/5/2002 Museum and zoo facilities 59,000 21,000 Measure DD 11/5/2002 Recreational and aquatic facilities 198, ,800 Total $147,800 A-14

67 Short-Term Obligations. The City has issued short-term notes to finance general fund temporary cash flow deficits during the fiscal year (July 1 through June 30) for each of the last 12 fiscal years, including the issuance of $65,000,000 Tax and Revenue Anticipation Notes for the fiscal year ending June 30, The City anticipates issuing Tax and Revenue Anticipation Notes in the fiscal year ending June 30, The City has never defaulted on the payment of any of these notes. The following table shows a five-year history of the par amount of tax and revenue anticipation notes issued each year. Table 10 City of Oakland Tax and Revenue Anticipation Notes (in $000 s) Fiscal Year Par Amount $65, , , , ,000 Lease Obligations. The City has entered into various long-term lease arrangements that secure lease revenue bonds or certificates of participation, under which the City must make annual payments, payable by the City from its General Fund, to occupy public buildings or use equipment. The table below summarizes the City s outstanding long-term lease obligations. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-15

68 Table 11 City of Oakland Lease Obligations As of June 30, 2004 (in $000s) Issuance Final Original Par Issue Name Date Maturity Par Outstanding Leased Asset Civic Improvement Corporation Variable Rate 1/13/ $ 52,300 $ 35,900 Portion of sewer system Demand COPs, 1985 City of Oakland Refunding COP, (Oakland Museum), 6/9/ ,408 4,788 Oakland Museum Series 1992 Oakland Alameda County Coliseum Authority 8/2/ ,000 63,050 Coliseum Arena Lease Revenue Bonds (Arena Project), Series 1996 (1) Oakland Joint Powers Financing Authority Lease 7/16/ , ,400 Portion of sewer system Revenue Bonds, Series 1998 (2) (3) Oakland Alameda County Coliseum Authority 5/25/ ,050 93,950 Coliseum Stadium Lease Revenue Bonds, Series 2000 C-1, C-2, & D (1) Oakland Joint Powers Financing Authority Lease Revenue Bonds, Series /14/ , ,900 Oakland Convention Center City of Oakland Refunding Certificates of 3/21/ ,295 16,295 Oakland Museum Participation, Series 2002 Oakland Joint Powers Financing Authority Lease Revenue Bonds, (Oakland Administration Buildings), Series 2004 (2) 6/10/ , ,200 Oakland Administration Buildings Total $600,483 (1) (2) (3) The lease payments securing these bonds are joint and several obligations of both the City and the County of Alameda. Each entity has covenanted to budget and appropriate one-half of the annual lease payments, and to take supplemental budget action if required to cure any deficiency. Principal amounts shown represent half of total original and outstanding par, representing the amount that is directly attributable to the City. The City entered into a floating-to-fixed swap in conjunction with this bond issue to create a synthetic-fixed-rate obligation. Please see Swaps section for additional detail. The City expects to use the proceeds from the sale of the Oakland Joint Powers Financing Authority Refunding Revenue Bonds, 2005 Series A-1 and A-2 to refund these bonds on a current basis on or about June 21, (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-16

69 In addition, the City executed a note with GE Capital in the amount of $3.9 million to fund the acquisition of a computer server. The final payment will be made in The table below summarizes the City s payments for lease revenue bonds and certificates of participation for the next five years. Payments for the Coliseum assume that the City will only pay its one-half share, although the obligations relating to the Coliseum are the joint and several obligations of the City and Alameda County. Payments for lease obligations for which there is a corresponding swap reflect the expected all-in payments. Table 12 City of Oakland Annual Payments for Lease Revenue Bonds and Certificates of Participation Fiscal Year Annual Payment $55,091, ,203, ,592, ,115, ,648,332 Swaps. The City has entered into several swap agreements in conjunction with variable-rate bond issues to create synthetic-fixed-rate obligations. The City entered into a $170,000,000 forward-starting, floating-to-fixed-rate swap with Goldman Sachs in conjunction with the $187,500,000 Oakland Joint Powers Financing Authority, 1998 Series A-1/A-2 bonds, which were issued in variable-rate mode. The agreement commenced on July 31, 1998 and terminates on July 31, On March 27, 2003, the City entered into an Amended and Revised Confirmation with GS Financing Products, U.S., L.P., which changed the index on which the swap is based. The City now receives 65% of the one-month London Interbank Offer Rate ( LIBOR ) and still pays the fixed rate of %. As a result of the change in the index, the City received an up-front payment, which partially compensates the City for assuming a potentially greater basis risk. Although the City expects to refund the underlying bonds with proceeds from the sale of the Oakland Joint Powers Financing Authority Refunding Revenue Bonds, 2005 Series A-1 and A-2, the City has no current plans to terminate the swap. The City has entered into two interest rate swap agreements in conjunction with the $117,200,000 Series A-1/A-2 Oakland Joint Powers Financing Authority Lease Revenue Refunding Bonds, Series 2004 which were sold as auction rate securities. The swap agreements are with Bank of America, N.A. and UBS AG relating to the 2004 Series A-1 Bonds and the 2004 Series A-2 Bonds, respectively, to create a synthetic fixed interest rate until August 1, 2026, for Base Rental Payments corresponding to the $117,600,000 initial principal amounts of each Series of the 2004 A Bonds. The City pays each of the counterparties a fixed rate of 3.533% and receives 58% of the one-month LIBOR rate plus 35 basis points. For further discussion of the structure and risks associated with these swaps, please see the City s Comprehensive Annual Financial Report for the Year Ended June 30, Pension Obligation Bonds. The City has issued two series of pension obligation bonds to fund a portion of the current balance of the City s Unfunded Actuarial Accrued Liability ( UAAL ) for retirement benefits to members of the Oakland Police and Fire Retirement System ( PFRS ). The second series, issued in 2001, was part of a plan of finance undertaken by the City to extend the maturity of the 1997 pension obligation bonds and to reduce the annual debt service on the bonds and so minimize the need for the City to use general fund revenues other than property tax override funds to pay such debt A-17

70 service on the 1997 and 2001 Bonds. The 1997 and 2001 Bonds are secured by a senior pledge of certain tax override revenues. The Oakland Joint Powers Financing Authority Refunding Revenue Bonds, 2005 Series A-1 and A-2 will be secured, in part, by a subordinate pledge of such tax override revenues. The table below summarizes the two currently outstanding pension obligation bond issues. Table 13 City of Oakland Pension Obligation Bonds As of June 30, 2004 (in $000s) Issuance Final Original Par Issue Name Date Maturity Par Outstanding City of Oakland Taxable Pension Obligation Bonds, Series 1997 A&B 2/25/ $436,289 $218,625 City of Oakland Taxable Pension Obligation Bonds, Series /17/ $195, ,636 Total $414,261 The table below summarizes the City s payments for pension obligation bonds for the next five years. The maximum debt service payment for these bonds is $53,130,000 in Fiscal Year Table 14 City of Oakland Annual Payments for Pension Obligation Bonds Fiscal Year Annual Payment $34,947, ,967, ,011, ,082, ,181,314 In addition, the City undertook a lease revenue bond financing in 1998 (the Oakland Joint Powers Financing Authority Lease Revenue Bonds, Series 1998, dated 7/16/1998) to refund the City of Oakland Special Refunding Revenue Bonds (Pension Financing) 1988 Series A. The City expects to refund on a current basis the 1998 bonds with proceeds from the sale of the Oakland Joint Powers Financing Authority Refunding Revenue Bonds, Series A, on or about June 21, See Lease Obligations section herein. For additional information on the City s pension systems, please see section entitled Retirement Programs. Limited Obligations. The City has incurred other obligations that are neither general obligations nor payable from the General Fund of the City. These obligations are summarized below. Redevelopment Agency of the City of Oakland. The City s Redevelopment Agency has issued several series of tax allocation bonds to provide funding for blight alleviation and economic development in parts of the City, or for the construction of low-income housing. The bonds are payable from the tax increment received from the specific redevelopment project areas which they support. Existing tax allocation bonds have been issued for the Acorn Redevelopment Project Area, the Central District Redevelopment Project Area and the Coliseum Area Redevelopment Project Area. The following table summarizes the City s outstanding tax allocation bonds. A-18

71 Table 15 City of Oakland Redevelopment Agency As of June 30, 2004 (in $000s) Issuance Final Original Par Issue Name Date Maturity Par Outstanding Redevelopment Agency of the City of Oakland, Acorn Redevelopment Project,1988 Tax Allocation Refunding Bonds 11/16/ $ 3,375 $ 1,030 Redevelopment Agency of the City of Oakland, Central District Project, Senior Tax Allocation Refunding Bonds, Series /17/ ,655 57,235 Redevelopment Agency of the City of Oakland, Central District Project, Subordinated Tax Allocation Bonds, Series /9/ , ,745 Redevelopment Agency of the City of Oakland, Coliseum Area Project Tax Allocation Bonds, Series /9/ ,085 23,085 Redevelopment Agency of the City of Oakland, Subordinated Housing Set Aside Revenue Bonds, Series 2000T 5/16/ ,395 38,070 Total $235,165 Special Assessments. The City has debt outstanding for three bond issues supported by assessment districts. Debt service on each of these assessment and reassessment bond issues is paid solely from assessments levied on real property within the respective districts. The City is not responsible for debt service on the bonds in the event that assessment collections are not sufficient. The table below summarizes the City s outstanding assessment bonds. Table 16 City of Oakland Special Assessments As of June 30, 2004 (in $000s) Issuance Final Original Par Issue Name Date Maturity Par Outstanding Oakland Joint Powers Financing Authority Special Assessment Pooled Revenue Bonds, Series 1996 A 8/22/ $ 465 $ 265 Oakland Joint Powers Financing Authority Special Assessment Pooled Revenue Bonds, Series /3/ , Oakland Joint Powers Financing Authority Reassessment Revenue Bonds, Series /27/ ,255 6,550 Total $7,605 (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-19

72 Enterprise Revenue Bonds. The City has also issued bonds secured by revenues of its sewer system. These bonds, issued on December 14, 2004 in the par amount of $62,330,000, mature in June Estimated Direct and Overlapping Debt Located within the City are numerous overlapping local agencies providing public services. These local agencies have outstanding bonds issued in the form of general obligation, lease revenue, certificates of participation, and special assessment bonds. The direct and overlapping debt of the City as of January 1, 2005, according to California Municipal Statistics, Inc., is shown below. The City makes no representations as to the accuracy of the following table; inquiries concerning the scope and methodology of procedures carried out to complete the information presented should be directed to California Municipal Statistics, Inc. Self-supporting revenue bonds, tax allocation bonds and non-bonded capital lease obligations are excluded from this debt statement. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-20

73 Table 17 City of Oakland Statement of Direct and Overlapping Debt, as of January 1, /05 Assessed Valuation: $29,642,053,558 Redevelopment Incremental Valuation: 5,248,555,311 Adjusted Assessed Valuation: $24,393,498,247 Percent DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: Applicable Debt 1/1/05 East Bay Municipal Utility District % $ 813,846 East Bay Municipal Utility District, Special District No ,159,533 East Bay Regional Park District ,738,329 Chabot-Las Positas Community College District ,415,000 Peralta Community College District ,517,406 Berkeley and Castro Valley Unified School Districts & ,491 Oakland Unified School District ,956,540 San Leandro Unified School District ,426,818 City of Oakland ,500,000 (1) City of Oakland 1915 Act Bonds ,330,000 City of Emeryville 1915 Act Bonds ,542 TOTAL GROSS DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $674,430,505 DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT: Alameda County and Coliseum Authority General Fund Obligations % $ 119,262,815 Alameda County Pension Obligations ,109,934 Alameda County Board of Education Public Facilities Corporation ,641 Alameda-Contra Costa Transit District Certificates of Participation ,521,059 Chabot-Las Positas Community College District General Fund Obligations ,789 Oakland Unified School District Certificates of Participation ,033,919 San Leandro Unified School District Certificates of Participation ,561 Castro Valley Unified School District Certificates of Participation ,470 City of Oakland and Coliseum Authority General Fund Obligations ,178,025 City of Oakland Pension Obligations ,494,842 TOTAL DIRECT OVERLAPPING GENERAL FUND OBLIGATION DEBT $1,150,401,055 GROSS COMBINED TOTAL DEBT $1,824,831,560 (2) NET COMBINED TOTAL DEBT $1,824,017,714 (1) (2) Excludes bonds to be sold. Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease obligations. Ratios to 2004/05 Assessed Valuation: Direct Debt ($229,500,000) % Total Gross Direct and Overlapping Tax and Assessment Debt % Total Net Direct and Overlapping Tax and Assessment Debt % Ratios to Adjusted Assessed Valuation: Combined Direct Debt( $1,172,172,867) % Gross Combined Debt % Net Combined Total Debt % STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/04: $187,276 Source: California Municipal Statistics, Inc. A-21

74 Insurance and Risk Management OTHER FISCAL INFORMATION The City is insured up to $20,000,000 after a $2,000,000 per occurrence self-insured retention for the risks of general liability, malpractice liability, and auto liability. All properties are insured at full replacement value after a $25,000 deductible to be paid by the City. As of June 30, 2004, the amount of all general liability exposure is valued at approximately $48,716,000. Of this amount, approximately $17,196,000 is estimated to be due within one year. The City is self-insured for its Workers Compensation liabilities. Payment of Worker s Compensation claims is provided through annual appropriations. As of June 30, 2004, the amount of Workers Compensation liability determined to be probable is approximately $94,847,000. Of this amount, $24,384,000 is estimated to be due within one year. Labor Relations City employees are represented by seven labor unions and associations, identified in the table below, the largest one being the Service Employees International Union (Local 790), which represents approximately 57% of all City employees. Approximately 95% of all City employees are covered by negotiated agreements, as detailed below. Memoranda of Understanding effective July 1, 2002, were entered into with all non-sworn employee organizations. The City has never experienced an employee work stoppage. Pursuant to the Meyers-Milias-Brown Act (California Government Code Section 3500 et seq.), the City continues to meet and confer with the exclusive bargaining representatives of the City employees. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-22

75 Table 18 City of Oakland Labor Relations As of April 29, 2005 Number of Contract Employee Organization/Bargaining Unit * Employees Termination International Association of Firefighters (Local 55) 466 6/30/07 International Brotherhood of Electrical Workers (Local 1245) 24 6/30/08 International Federation of Professional and Technical Engineers (Local 21)/Units A, W, and F 495 6/30/08 IFPTE, Local 21 Units H (Supervisors) & M (Managers) 385 6/30/08 IFPTE, Local 21 (Deputy City Attorneys) 27 6/30/08 Oakland Police Officers Association 718 6/30/06 Service Employees International Union (Local 790)/full-time 1,414 6/30/08 Service Employees International Union (Local 790)/part-time 1,254 6/30/08 Oakland Park Rangers Association 10 6/30/06 Deputy City Attorney V & Special Counsel Association 9 6/30/05 4,802 * The City has negotiated the following cost of living adjustments with employee organizations: - Local 55, based on CPI; - Locals 1245, 21 & 790, increases of 4% each year until contact termination; - Oakland Police Officers Association, increase of 5% on 1/1/06; and, - Oakland Park Rangers Association, increase of 4% on 7/2/05. Source: City of Oakland Office of Personnel and Resource Management Retirement Programs The City maintains two closed pensions systems, the Police and Fire Retirement System ( PFRS ) and the Oakland Municipal Employees Retirement System. In addition, the City is a member of the California Public Employees Retirement System ( PERS ), a multiple-employer pension system that provides a contributory defined-benefit pension for most current employees. Police and Fire Retirement System. PFRS is a defined benefit plan administered by a sevenmember Board of Trustees (the Retirement Board ). The PFRS is a closed plan and covers uniformed employees hired prior to July 1, As of June 30, 2004, PFRS covered three current employees and 1,395 retired employees. In November 2000, the voters of the City amended the City Charter to give active members of the Retirement System the option to terminate their membership and transfer to PERS upon certain conditions. As a result, 104 former members transferred to PERS. In accordance with voter-approved measures adopting the City Charter provisions that govern PFRS, the City annually levies an ad valorem tax (the Tax Override ) on all property within the City subject to taxation by the City to help fund its pension obligations. State law limits the City s tax rate for this purpose at the rate of %, the level at which the City has levied the tax since The City is allowed to levy the Tax Override through A-23

76 In 1997, the City of Oakland issued $436.3 million in Pension Obligation Bonds, sized to represent the actuarial present value of the City's expected contributions to PFRS from March of 1997 through June of PFRS received a deposit of $417 million from the bond proceeds. In return for this payment, PFRS agreed in a Funding Agreement, dated as of June 1, 1996, between the City and PFRS, that the City will not be required to make any further payments to PFRS for UAAL through June 30, The next City contribution to PFRS will be in July of 2011, if necessary, as determined by the actuarial valuation as of July 1, The City pays debt service on the Pension Obligation Bonds from proceeds of the Tax Override. On October 3, 2001, the City issued $195.6 million in Pension Obligation Bonds, the proceeds of which were primarily used to purchase at tender for cancellation and to defease a portion of the outstanding 1997 Pension Obligation Bonds. As a result of this purchase and defeasance, annual debt service through 2010 on the City s Pension Obligation Bonds was reduced, but total debt service on the bonds was increased because the final maturity date was extended from 2010 to An actuarial valuation on the PFRS benefit plan is conducted every two years; the most recent complete valuation was for the period ended June 30, PFRS utilizes the aggregate actuarial cost method for its actuarial calculations. Under this method, the excess of the actuarial present value of projected benefits of the group included in an actuarial valuation over the actuarial value of assets is allocated on a level basis over the earnings of the group between the valuation date and assumed exit. The allocation is performed for the group as a whole, not as a sum of individual allocations. The City s actuaries do not make an allocation of the contribution amount between normal cost and the UAAL because the PFRS plan is closed. Significant actuarial assumptions used to compute the contribution requirement include an 8% investment rate of return, average salary increases of 4.5%, and a general inflation rate of 3.5%. The following schedule shows PFRS s recent funding progress. Table 19 Schedule of Funding Progress Police and Fire Retirement System ($millions) Actuarial Actuarial Annual Valuation Date Accrued Value of Unfunded Funded Covered July 1 Liability Assets Liability Status Payroll (1) 2002 $875.5 $674.7 $ % $ % % 0.3 (1) Because this is a closed system with few employees, UAAL as a % of payroll is not presented Source: Actuary s Report as of June 30, (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-24

77 In light of the contribution holiday funded by bond proceeds, the purpose of the actuarial valuations prior to 2010 is primarily to track the relationship between the available assets and the estimated liabilities so that the City will be prepared for the necessary contributions, if any, in July of The Actuary s Report, as of June 30, 2004, contains a projection of the annual contributions necessary beginning in 2011 based on the valuation assumptions. The results of that projection are in the table below. Table 20 Police and Fire Retirement System Projection of Future Contributions Valuation Assumptions Unfavorable Experience Favorable Experience Investment Return 8.00% 8.00% 8.00% Wage Growth 4.50% 5.00% 4.00% Annual City Contribution Amount $41 million $50 million $39 million Source: Actuary s Report as of June 30, Oakland Municipal Employees Retirement System. The Oakland Municipal Employees Retirement System ( OMERS ) is a second closed system, which covers active non-uniformed employees hired prior to September 1, 1970 who have not transferred to PERS. The program covers no active employees and 96 retired employees. OMERS is administered by a seven-member Board of Administration. An actuarial valuation of OMERS is conducted every two years; the most recent complete valuation was for the period ended June 30, OMERS utilizes the aggregate actuarial cost method for its actuarial calculations. Significant actuarial assumptions used to compute the contribution requirement include an 8% investment rate of return, average salary increases of 3.0%, and a general inflation rate of 3.5%. As of June 30, 2003, the actuarially determined surplus was $4.95 million. For the fiscal year ended June 30, 2004, the City, in accordance with actuarially determined contribution requirements, did not contribute to OMERS as the plan is fully funded. California Public Employees Retirement System. PERS is a defined benefit plan administered by the State and covers all uniformed employees hired after June 30, 1976 and all non-uniformed employees hired after September 1, 1970, as well as former members of PFRS and OMERS except those who have not elected to transfer from OMERS. PERS acts as a common investment and administrative agent for public entities participating with the state of California. PERS is a contributory plan deriving funds from employee contributions as well as from employer contributions and earnings from investments. A menu of benefit provisions is established by State statutes within the Public Employees Retirement Law. The City selects its optional benefit provisions from the benefit menu by contract with PERS. For accounting purposes, employees covered under PERS are classified as either miscellaneous employees or safety employees. City miscellaneous employees and City safety employees are required to contribute 8% and 9%, respectively, of their annual salary to PERS. The contribution requirements of the plan members are established by State statute and the employer contribution rate is established and may be amended by PERS. Historically, the City had paid the entire amount of its employees contributions for miscellaneous and safety employees. However, under current bargaining agreements, sworn fire personnel contribute at a 4% rate and all non-sworn personnel make a 3% contribution since July A-25

78 In FY 2002, the City increased its benefits for public safety employees to provide 3.0% of highest salary per year of employment at age 55. In FY 2004, benefits were further increased for safety members to provide 3.0% of highest salary at age 50. In FY 2004, the City increased its benefits for miscellaneous employees, increasing retirement benefits to 2.75% of highest salary at age 55. The following represents the City of Oakland s employer contribution rates as determined by PERS for the past four years, as well as PERS projection for FY Table 21 Contribution Rates Public Employees Retirement System City of Oakland (Projected) Miscellaneous Plan 0.00% 0.00% 15.04% 18.55% 18.40% Safety Plan 15.17% 25.29% 29.83% 29.71% 29.80% Source: California Public Employees Retirement System. PERS uses an actuarial method that takes into account those benefits that are expected to be earned in the future as well as those already accrued. PERS also uses the level percentage of payroll method to amortize any unfunded actuarial liabilities. Major actuarial assumptions include a 3% inflation rate and a 7.75% investment return. The schedules of funding progress below show the recent funding progress of both the public safety and miscellaneous employees. The increases in unfunded liability are due to increases in benefits, and prior asset losses in PERS investments recognized on an actuarial basis over a three-year smoothing period. Table 22 Schedule of Funding Progress Public Employees Retirement System Public Safety Employees ($millions) Valuation Actuarial Actuarial Annual UAAL as Date Accrued Value of Unfunded Funded Covered % of July 1 Liability Assets Liability Status Payroll Payroll 2001 $432.1 $363.7 $ % $ % Source: Comprehensive Annual Financial Report for the fiscal year ending June 30, A-26

79 Table 23 Schedule of Funding Progress Public Employees Retirement System Miscellaneous Employees ($millions) Valuation Actuarial Actuarial Annual UAAL as Date Accrued Value of Unfunded Funded Covered % of July 1 Liability Assets Liability Status Payroll Payroll 2001 $ $1,059.6 $(176.3) 120.0% $171.9 (102.6%) ,003.3 (50.9) (25.8) , , Source: Comprehensive Annual Financial Report for the fiscal year ending June 30, The following table represents the City s annual contribution to PERS over the past five years: Table 24 Annual Pension Cost Public Employees Retirement System ($millions) Fiscal Year Ended Annual Cost July $ $ $ $ $48.4 Source: Comprehensive Annual Financial Reports for the fiscal years ending June 30, 2002, 2003 and Post-Retirement Health Benefits The City has been paying part of the health insurance premiums for all retirees from City employment who receive a pension annuity earned through City service and who participate in a Citysponsored PERS health benefit plan. These benefits are funded on a pay-as-you-go basis. Approximately $2.4 million was paid on behalf of 936 retirees under this program for the year ended June 30, Currently, there is no accounting rule that requires governmental agencies that are on a pay-asyou-go basis, such as the City, to accrue for post-employment health care benefits in the same manner as they accrue for pension benefits. The Governmental Accounting Standards Board recently published Statement No. 45, requiring that beginning with the fiscal year ending June 30, 2008, governmental agencies that are on a pay-as-you-go basis, such as the City, account for and report the outstanding obligations and commitments related to such post-employment benefits in essentially the same manner as they currently do for pensions. A-27

80 Natural Hazard Risks The City is in a seismically active area, located near or on three major active earthquake faults (the Hayward, Calaveras and San Andreas faults). During the past 150 years, the San Francisco Bay Area has experienced several major and numerous minor earthquakes. The largest was the 1906 San Francisco earthquake along the San Andreas Fault, which passes though the San Francisco Peninsula west of Oakland, with an estimated magnitude of 8.3 on the Richter scale. The most recent major earthquake was the October 17, 1989 Loma Prieta Earthquake, also on the San Andreas Fault, with a magnitude of 7.1 on the Richter scale and an epicenter near Santa Cruz, approximately 60 miles south of Oakland. Both the San Francisco and Oakland areas sustained significant damage. The City experienced significant damage to the elevated Cypress freeway and to several buildings within the City, especially unreinforced masonry buildings constructed prior to 1970 and prior to current building code requirements. Much of the damage resulting from the Loma Prieta earthquake was due to soil liquefaction, a phenomenon during which loose, saturated, non-cohesive soils temporarily lose shear strength during ground shaking induced by severe earthquakes. A substantial portion of the City is built in partly-wooded hillside areas, which are naturally prone to wildfire. In October, 1991 a fire in the Oakland/Berkeley Hills damaged 1,990 acres of forest and residential property, destroying 2,354 homes and 456 apartment units, most of which were in Oakland. The City has established a wildfire prevention assessment district covering portions of the City, which was approved by voters in January 2004, and which finances fire hazard inspections, brush and debris removal, wood chipping and public education. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-28

81 Constitutional and Statutory Limitations on Taxes and Appropriations Article XIIIA of the California Constitution Section 1(a) of Article XIIIA of the State Constitution limits the maximum ad valorem tax on real property to 1% of full cash value (as defined in Section 2 of Article XIIIA), to be collected by counties and apportioned according to law. Section 1(b) of Article XIIIA provides that the 1% limitation does not apply to (1) ad valorem taxes to pay interest or redemption charges on indebtedness approved by the voters prior to July 1, 1978, or (2) any bond indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978 by two-thirds of the votes cast by the voters voting on the proposition or (3) bonded indebtedness incurred by a school district, community college district or county office of education for the construction, reconstruction, acquisition, equipping or leasing of school facilities approved by 55% of the voters voting on the proposition. Section 2 of Article XIIIA defines full cash value to mean the county assessor s valuation of real property as shown on the tax bill under full cash value or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment ( Full Cash Value ). The Full Cash Value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the area under the taxing jurisdiction, or may be reduced in the event of declining property value caused by substantial damage, destruction or other factors. Legislation enacted by the State Legislature to implement Article XIIIA provides that, notwithstanding any other law, local agencies may not levy any additional ad valorem property tax except to pay debt service on indebtedness approved by the voters as described above. The voters of the State subsequently approved various measures which further amended Article XIIIA. Many of these have provided for the transfer of property or the construction of improvements under certain limited circumstances without reassessment. Section 4 of Article XIIIA provides that cities, counties and special districts cannot impose special taxes without a two-thirds vote of the qualified electors, which has been interpreted by the Courts to include special fees in excess of the cost of providing the services or facility for which the fee is charged, or fees levied for general revenue purposes. Article XIIIB of the California Constitution State and local government agencies in California are each subject to annual appropriations limits imposed by Article XIIIB of the Constitution of the State of California ( Article XIIIB ). Article XIIIB prohibits government agencies and the State from spending appropriations subject to limitation in excess of the appropriations limit imposed. Appropriations subject to limitation are generally authorizations to spend proceeds of taxes, which include all, but are not limited to, tax revenues, and the proceeds from (i) regulatory licenses, user charges or other user fees to the extent that such proceeds exceed the cost reasonably borne by that entity in providing the regulation, product, or service (ii) the investment of tax revenues, and (iii) certain subventions received from the State. No limit is imposed on appropriations of funds which are not proceeds of taxes, appropriated for debt service on indebtedness existing prior to the passage of Article XIIIB or authorized by the voters or appropriations required to comply with certain mandates of courts or the federal government. As amended at the June 5, 1990 election by Proposition 111, Article XIIIB provides that, in general terms, a county s appropriations limit is based on the limit for the prior year adjusted annually to reflect changes in costs of living, population and, when appropriate, transfer of financial responsibility of providing services from one governmental unit to another. Proposition 111 liberalized the aforementioned adjustment factors as compared to the original provisions of Article XIIIB. If county revenues during any two consecutive fiscal years exceed the combined appropriations limit for those two A-29

82 years, the excess must be returned by a revision of tax rates or fee schedules within the two subsequent fiscal years. Section 7900, et seq. of the California Government Code defines certain terms used in Article XIIIB and sets forth the methods for determining the appropriations limit for local jurisdictions. Relying on these definitions, and Chapter 60, Statutes of 1990 effective August 1, 1990, which implemented Proposition 111, the City has determined that its appropriations limit for proceeds of taxes for Fiscal Year is $ million. Appropriations for Fiscal Year that are subject to the limitation total $ million. Articles XIIIC and XIIID of the California Constitution (Proposition 218) On November 5, 1996, the voters of the State approved Proposition 218, the Right to Vote on Taxes Act. Proposition 218 added Articles XIII C and XIII D to the State Constitution, which contain a number of provisions affecting the ability of the City to levy and collect both existing and future taxes, assessments, fees and charges. Article XIIIC requires that all new local taxes be submitted to the electorate before they become effective. Taxes for general governmental purposes of the City require a majority vote and taxes for specific purposes, even if deposited in the City s General Fund, require a two-thirds vote. The voter approval requirements of Article XIIIC reduce the City s flexibility to deal with fiscal problems by raising revenue through new or extended or increased taxes and no assurances can be given that the City will be able to raise taxes in the future to meet increased expenditure requirements. Article XIIID contains several new provisions making it generally more difficult for local agencies to levy and maintain assessments for municipal services and programs. Assessment is defined to mean any levy or charge upon real property for a special benefit conferred upon the real property. Article XIIID also contains several new provisions affecting fees and charges, defined for purposes of Article XIIID to mean any levy other than an ad valorem tax, a special tax, or an assessment, imposed by a local government upon a parcel or upon a person as an incident of property ownership, including a user fee or a charge for a property related service. All new and existing property related fees and charges must conform to requirements prohibiting, among other things, fees and charges which (i) generate revenues exceeding the funds required to provide the property related service, (ii) are used for any purpose other than those for which the fees and charges are imposed, (iii) with respect to any parcel or person exceed the proportional costs of the service attributable to the parcel, (iv) are for a service not actually used by, or immediately available to, the owner of the property in question, or (v) are used for general governmental services, including police, fire or library services, where the service is available to the public at large in substantially the same manner as it is to property owners. Further, before any property related fee or charge may be imposed or increased, written notice must be given to the record owner of each parcel of land affected by such fee or charge. The City must then hold a hearing upon the proposed imposition or increase, and if written protests against the proposal are presented by a majority of the owners of the identified parcels, the City may not impose or increase the fee or charge. Moreover, except for fees and charges for sewer, water and refuse collection services (or fees for electrical and gas service, which are not treated as property related for purposes of Article XIIID), no property related fee or charge may be imposed or increased without majority approval by the property owners subject to the fee or charge or, at the option of the local agency, two-thirds voter approval by the electorate residing in the affected area. In addition to the provisions described above, Article XIIIC removes limitations on the initiative power in matters of local taxes, assessments, fees and charges. Consequently, the voters of the City could, by future initiative, repeal, reduce or prohibit the future imposition or increase of any local tax, assessment, fee or charge. Assessment, fee and charge, are not defined in Article XIIIC and it is not clear whether the definitions of these terms in Article XIIID (which are generally property-related as A-30

83 described above) would be applied to Article XIIIC. If the Article XIIID definitions are not held to apply to Article XIIIC, the initiative power could potentially apply to revenue sources which currently constitute a substantial portion of general fund revenues. No assurances can be given the voters of the City will not, in the future, approve initiatives that repeal, reduce or prohibit the future imposition or increase of local taxes, assessments, fees or charges. The interpretation and application of Proposition 218 will ultimately be determined by the courts with respect to a number of the matters discussed above. It is not possible to predict the outcome of such determinations or their effect on City revenues. Proposition 1A Proposition 1A, proposed by the Legislature in connection with the Budget Act and approved by the voters in November 2004, provides that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject to certain exceptions. Proposition 1A generally prohibits the State from shifting to schools or community colleges any share of property tax revenues allocated to local governments for any fiscal year, as set forth under the laws in effect as of November 3, Any change in the allocation of property tax revenues among local governments within a county must be approved by two-thirds of both houses of the Legislature. Proposition 1A provides, however, that beginning in fiscal year , the State may shift to schools and community colleges up to 8% of local government property tax revenues, which amount must be repaid, with interest, within three years, if the Governor proclaims that the shift is needed due to a severe state financial hardship, the shift is approved by two-thirds of both houses and certain other conditions are met. The State may also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A also provides that if the State reduces the VLF rate currently in effect, 0.65% of vehicle value, the State must provide local governments with equal replacement revenues. Further, Proposition 1A requires the State, beginning July 1, 2005, to suspend State mandates affecting cities, counties and special districts, excepting mandates relating to employee rights, schools or community colleges, in any year that the State does not fully reimburse local governments for their costs to comply with such mandates. Proposition 1A may result in increased and more stable City revenues. The magnitude of such increase and stability is unknown and would depend on future actions by the State. However, Proposition 1A could also result in decreased resources being available for State programs. This reduction, in turn, could affect actions taken by the State to resolve budget difficulties. Such actions could include increasing State taxes, decreasing spending on other State programs or other action, some of which could be adverse to the City. Future Initiatives The various provisions of Article XIIIA and Proposition 1A were each adopted as measures that qualified for the ballot pursuant to the State s initiative process. From time to time other initiative measures could be adopted, further affecting City General Fund revenues or the City s ability to expend revenues. The nature and impact of these measures cannot be anticipated by the City. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-31

84 Economic Highlights The City, located immediately east of San Francisco, across the San Francisco Oakland Bay Bridge, lies at the heart of the East Bay. The City occupies approximately 53.8 square miles, is served by both Interstate 80 and Interstate 880, and boasts a world-class seaport and an international airport. Oakland is a strategic location for companies seeking to move goods and ideas through air, water, land or cyberspace. In 2002, the City was rated by Forbes as the 8th best city for business in the nation. 1 As the 19th largest metropolitan economy in the United States 2, the Oakland metropolitan area has a diverse mix of traditional and new economy companies. Companies are attracted to the City s quality of life, comparatively low business costs, extensive fiber-optic infrastructure, vast inter-modal network, and a highly skilled labor pool, ranked the 8th most educated in the nation. 3 Housing Development. The 10K Initiative is a multi-phase program to develop housing for 10,000 new residents in downtown Oakland by This goal translates to a target of developing 6,000 new residential units. As of April 2005, including the five Agency projects (Uptown, City Center T-10, Landmark Place, Franklin 88, Market Square and Swan s Market), there were 1,660 units completed, 737 under construction, and 3,163 units with planning approval or in planning. These projects would provide 5,560 units or 92% of the 10K target. Mandela Gateway is an affordable housing community in West Oakland completed in June The project consists of 168 residential rental units, 14 for-sale townhomes, and 6500 sq. ft. of retail space. The retail space is situated with 7 th Street frontage facing the West Oakland BART station, which serves approximately 4,500 daily users. Nearby, West End Commons will offer 91 live-work units, including several retail spaces. The construction of these units will be completed in summer 2005, with full occupancy scheduled for January Economic Development. The Fruitvale BART Transit Village is a mixed-use development which opened in May The project offers 38,000 square feet of retail space, 47 residential units including 10 affordable units, a child development facility, a new public library, a new medical clinic, a multipurpose senior center, and 114,500 square feet of office lease space. The Fruitvale Village project is one of the most unique mixed-use developments in the nation and is nationally recognized as a leading smart-growth initiative and as one of the leading neighborhoods in the National Main Street Program. The project has won several awards, including the 2003 San Francisco Business Times Award and the 2004 Best in American Living Award in the Best Urban Smart Growth Neighborhood/Community category. The Hegenberger Gateway Shopping Center located at the intersection of Hegenberger Road, Edgewater Drive and Interstate 880 will feature 245,000 square feet of retail and restaurant space. The anchor tenant is a Wal-Mart store, which is scheduled to open in the summer/fall of This key retail development is strategically located along the busy stretch of road that connects I-880 with the Oakland International Airport. The Oakland Coliseum Intercity Amtrak Station Project consists of the construction of a passenger platform along the existing Amtrak/Capitol Corridor passenger rail route located between the Coliseum Stadium and the Coliseum BART station. The new pedestrian ramp connects the passenger platform to the existing Coliseum-BART pedestrian bridge. Total project cost is approximately $6.6 million. Construction was completed in June The Infiniti of Oakland dealership opened in May Infiniti of Oakland was developed by Hendrick Automotive Group and consists of about 26,000 square feet with 12 service bays and a modern showroom facing the Oakland Arena and the McAfee Coliseum. The $7.5 million dollar facility employs 1 Forbes/Milken Institute List of Best Places for Business and Careers, Forbes, May 27, U.S. Metro Economies: The Engines of America s Growth, DRI-WEFA, June U.S. Census A-32

85 about 50 people. The locating of Infiniti of Oakland adjacent to the Coliseum Lexus dealership, which opened in November 2002, assists in the creation of a cluster of Oakland s luxury automotive dealers. Commerce/Transportation Oakland International Airport (the Airport ) plans to spend approximately $500 million over the next three years on the first phase of its terminal development program, including a five-gate expansion of Terminal 2 with a new concourse, concessions and waiting areas, a 6,000-space parking garage, and new utilities. The Terminal 2 expansion is expected to be complete by fall The second phase of the total $1.6 billion program, which will include a new two-level consolidated terminal building with a central concessions court and a two-tiered roadway system, will be implemented as the Port evaluates its financial capability. In June 2004, the Airport completed the 98th Avenue/Doolittle Road intersection reconstruction, including a new underpass into the airport. This project was part of the Airport's expansion program that widened the 98th Avenue/Airport Access Road into a six-lane parkway between the Airport, the rest of Bay Farm Island (City of Alameda) and Interstate 880. Oakland International Airport is one of the few airports in the country and the only one in the Bay Area whose utilization has grown in the post-9/11 environment. Originally designed for approximately eight million passengers annually, the Airport served approximately 14 million passengers in The Airport is served by 16 airlines with more than 200 daily nonstop flights to 38 domestic and international destinations, including Atlanta, New York, Washington D.C., Hawaii and Mexico. It serves as the northern California hub for Southwest Airlines. The Port of Oakland proudly welcomed the arrival of one of the world s largest container ships and the first 8,000-plus TEU (twenty-foot-equivalent unit) ship to enter the San Francisco Bay. The 8,200 TEU Hugo made its maiden voyage to the Port of Oakland on August 21, In September 2004, the Port completed and opened to the public its 37-acre Middle Harbor Shoreline Park and a 180-acre shallow water habitat restoration. These projects expand waterfront access for residents of Oakland and the Bay Area. In April 2005, Oakland became the first port in the nation where radiation portal monitors are completely installed and operable. The twenty-five portals will screen all international container traffic passing through the Port of Oakland for sources of radiation. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-33

86 Population The Demographic Research Unit of the California Department of Finance estimated the City s population on January 1, 2004, at 411,600. This figure represents 27.48% of the corresponding County figure and 1.14% of the corresponding State figure. The City s population has grown over 20% in the twenty-four years since The following table illustrates the City s population relative to the population of Alameda County and the State of California. Table 25 City of Oakland, County of Alameda and State of California Population Year City of Oakland County of Alameda State of California ,337 1,109,500 23,782, ,242 1,276,702 29,758, ,566 1,443,939 33,873, ,700 1,465,000 34,431, ,800 1,481,900 35,049, ,500 1,487,700 35,612, ,600 1,498,000 36,144,000 Source: The 1980, 1990 and 2000 totals are U.S. Census figures. The figures for the years 2001 through 2004 are based upon adjusted January 1 estimates provided by the California State Department of Finance. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-34

87 Employment The following table shows the labor patterns in the City, the State of California, and the United States for the past five years. Table 26 City of Oakland, State of California and United States Civilian Labor Force, Employment, and Unemployment (1) June 2000 through March 2005 Unemployment Year and Area Labor Force Employment Unemployment Rate June 2000 City 192, ,100 10, % State 16,958,600 16,083, , United States 140,757, ,183,000 5,574, June 2001 City 196, ,340 14, State 17,181,800 16,275, , United States 141,354, ,932,000 6,422, June 2002 City 202, ,780 22, State 17,397,200 16,216,700 1,180, United States 142,476, ,053,000 8,423, June 2003 City 200, ,930 22, State 17,486,500 16,288,300 1,198, United States 148,117, ,468,000 9,649, June 2004 City 199, ,220 18, State 17,683,000 16,555,400 1,127, United States 148,478, ,861,000 8,616, March City 195, ,800 15, State 17,625,800 16,629, , United States 148,157, ,501,000 7,656, (1) (2) Civilian labor force data are by place of residence; include self-employed individuals, unpaid family workers, household domestic workers, and workers on strike. Preliminary. Source: California State Employment Development Department and U.S. Department of Labor, Bureau of Labor Statistics. United States figures as of December of each year. (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-35

88 Major Employers. As an integral part of the Bay Area, the City of Oakland benefits from the wide variety of job opportunities available throughout the area. Summarized below are the City s largest private and public employers as of June 30, Table 27 City of Oakland Top Ten Public Employers (as of June 30, 2004) Employer Type of Organization Number of Employees (1) U.S. Federal Government (Civilian) Government Operations 10,300 Oakland Unified School District Education 7,000 County of Alameda Government Operations 6,360 City of Oakland Government Operations 4,600 California State Agencies (1515 Clay Street) Government Operations 3,000 Highland Hospital Hospital Services 2,200 California Department of Transportation Public Transportation 2,100 University of California (Office of the President) Education 2,000 East Bay Municipal Utility District Utility/Water/Wastewater 1,900 United States Post Office Mail Services 950 (1) Approximate figures Sources: Alameda County, Economic Development Alliance for Business; Dun & Bradstreet; State of California, Employment Development Department; City of Oakland, Finance and Management Agency. Table 28 City of Oakland Top Ten Private Employers (as of June 30, 2004) Employer Type of Organization Number of Employees (1) Kaiser Permanente Health Services 6,610 Southwest Airlines Air Transportation 2,410 Alta-Bates Summit Medical Center Health Services 2,400 Oakland Children s Hospital Medical Center General Medical Surgical Hospital 2,340 Federal Express Corporation Air Courier Services 2,210 United Parcel Service Courier Services 1,550 Clorox Company Household Products 1,340 SBC Pacific Bell Utility 1,540 Mills College Education 840 Safeway Grocers Food Service 730 (1) Approximate figures Sources: Alameda County, Economic Development Alliance for Business; Dun & Bradstreet; State of California, Employment Development Department; City of Oakland, Finance and Management Agency. A-36

89 Commercial Activity A five-year history of total taxable transactions for the City is shown in the following table. Table 29 City of Oakland Taxable Transactions, (Taxable Transactions in $000s) Source: State Board of Equalization. Year Outlets Taxable Transactions ,581 $3,085, ,443 3,453, ,532 3,287, ,635 3,226, ,103 3,402,977 Construction Activity A five-year history of building permits and valuation (including electrical, plumbing, and mechanical permits) appears in the following table. Table 30 City of Oakland Building Permits and Valuations, Fiscal Years Nonresidential Fiscal Number Authorized New Residential Valuation Valuation Year Issued Dwelling Units (in $000s) (in $000s) 1999/00 16, $272,170 $195, /01 16, , , /02 15, , , /03 15, , , /04 16, , ,699 Source: Comprehensive Annual Financial Report, Fiscal Year Ended June 30, (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) A-37

90 Median Household Income Effective Buying Income ( EBI ) is defined as personal income less personal income tax and non-tax payments, such as fines, fees, or penalties. Median household EBI for the City is shown in the table below. Table 31 CITY OF OAKLAND, ALAMEDA COUNTY, STATE OF CALIFORNIA AND UNITED STATES OF AMERICA Median Household Effective Buying Income (a) (b) Year (a) City of Oakland Alameda County State of California United States of America 1999 (b) $32,751 $44,730 $39,492 $37, ,602 50,631 44,464 39, ,567 54,076 43,532 38, ,095 49,574 42,484 38, ,558 50,431 42,924 38,201 As of January 1. Changes in market rankings, retail sales, total retail sales, merchandise line sales and metro markets make it impossible to trend the 1999 and 2000 Survey of Buying Power numbers. The changes are so significant that any attempt at trending will produce misleading results. Source: "Survey of Buying Power", Sales and Marketing Management Magazine. Litigation The City is involved in certain litigation and disputes relating to its various operations. Upon the basis of information presently available, the City Attorney believes that there are substantial defenses to such litigation. Oakland Raider Litigation. On September 29, 1997, the City, the County of Alameda and the Oakland Alameda County Coliseum Authority (the Authority ), collectively known as the East Bay Entities, filed suit against the Oakland Raiders and A.D. Football, Inc. (collectively Raider Management ) for breach of contract, declaratory relief and interference with prospective economic advantage. Raider Management filed a cross-complaint seeking the right to rescind the Master Agreement and seeking damages for breaches of the Master Agreement and for fraudulent inducement. The Authority prevailed on its declaratory relief claims that the Raiders were contractually obligated to remain in Oakland for the term of the contract. In a series of decisions, the court has ruled that (1) Raider Management cannot rescind or terminate the lease; (2) the East Bay Entities do not have claims for damages and (3) Raider Management does not have claims for damages against the City, the County or the Authority. The court later dismissed the City and the County of Alameda from the case on the basis that Raider Management failed to comply with the California Torts Claims Act. On March 24, 2003, trial began on Raider Management s claims for damages of $1.1 billion for fraudulent inducement against the Oakland-Alameda County Coliseum Authority and one of its former directors. The trial resulted in a $34,000,000 verdict in favor of Raider Management and against the Authority. The former Authority Director, who the City had agreed to indemnify, was not found liable. The Authority s motion for a judgment notwithstanding the verdict was denied on November 18, The Authority has appealed the judgment against it and the Raiders have appealed the verdicts against it. The trial court stayed the judgments pending appeal and the Raiders filed a motion to set aside the stay. In May 2004, the Court of Appeals denied the Raiders motion to set aside the stay of the action. Appellate briefs have been filed and the parties are awaiting hearing dates. It is too early to assess A-38

91 whether the City will have to contribute funds to the Authority if the Court of Appeals upholds the trial court verdicts. A-39

92 (THIS PAGE INTENTIONALLY LEFT BLANK)

93 APPENDIX B CITY OF OAKLAND AUDITED FINANCIAL STATEMENTS, JUNE 30, 2004

94 (THIS PAGE INTENTIONALLY LEFT BLANK)

95

96 (THIS PAGE INTENTIONALLY LEFT BLANK)

97

98

99

100

101

102

103

104

105

106

107 Honorable Mayor and Members of the City Council City of Oakland, California Independent Auditor s Report We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Oakland, California (City), as of and for the year ended June 30, 2004, which collectively comprise the City s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City s management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the Oakland Base Reuse Authority (OBRA), which represent 4%, 11%, and 22%, respectively, of the assets, net assets and revenues of the aggregate discretely presented component units. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for OBRA, is based on the report of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of other auditors provide a reasonable basis for our opinions. In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the City, as of June 30, 2004, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. 1

108 In accordance with Government Auditing Standards, we have also issued our report dated February 4, 2005, on our consideration of the City s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The management s discussion and analysis, the schedules of funding progress and the budgetary comparison information listed in the table of contents are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City s basic financial statements. The accompanying schedule of expenditures of federal awards, supplemental schedule of expenditures of Alameda County Awards and supplemental schedules of revenue and expenditures prepared by the City s Community Services Department are presented for purposes of additional analysis as required by U.S. Office of Management and Budget (OMB) Circular A- 133, the County of Alameda and the State Department of Community Services and Development, respectively, and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. Certified Public Accountants Walnut Creek, California February 4,

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206 (THIS PAGE INTENTIONALLY LEFT BLANK)

207 APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS The following is a brief summary of certain provisions of the Trust Agreement and the Sublease. The summary does not purport to be comprehensive or definitive and is qualified in its entirety by reference to the full terms of the Trust Agreement and the Sublease, and all capitalized terms not previously defined in the Official Statement or defined in this appendix have the meaning specified in the Trust Agreement or the Sublease. DEFINITIONS OF CERTAIN TERMS Act means the Joint Exercise of Powers Act (being Chapter 5 of Division 7 of Title 1 of the Government Code of the State, as amended) and all laws amendatory thereof or supplemental thereto. Additional Payments means all amounts payable to the Authority or the Trustee or any other Person by the City as Additional Payments pursuant to the provisions of the Sublease. Applicable ARB Rate means, while the Bonds are in an ARB Interest Rate Period, the rate per annum at which interest accrues on the Bonds for any Auction Period. ARB Beneficial Owner means the Person who is the beneficial owner of an ARB according to the records of (i) the Depository or its participants while such ARB is a Book-Entry Bond or (ii) the Trustee while the ARBs are not Book-Entry Bonds. ARB Default Rate means the ARB Maximum Rate. ARB Interest Rate means, for ARBs for each Auction Period, the rate of interest to be borne by the ARBs during that Auction Period, which ARB Interest Rate shall be determined in accordance with the Auction Procedures, and if Sufficient Clearing Bids exist, the ARB Interest Rate shall be the Winning Bid Rate; provided, that if all of the ARBs are the subject of Submitted Hold Orders, the ARB Interest Rate shall be the All-Hold Rate with regard to such ARBs, and if Sufficient Clearing Bids do not exist, the ARB Interest Rate shall be the ARB Maximum Rate. ARB Interest Rate Period means each Interest Rate Period during which the Bonds are ARBs. ARB Maximum Rate means twelve percent (12%) per annum. ARB Payment Default means (i) a default in the due and punctual payment of any installment of interest on ARBs or (ii) a default in the due and punctual payment of any principal of or premium, if any, on ARBs at stated maturity or pursuant to a mandatory redemption. Base Rental Due Date means the Business Day which is not less than four (4) Business Days prior to each Interest Payment Date or Redemption Date, or any other date scheduled for the payment of principal of the Bonds. Base Rental Payments or Base Rental means all amounts payable to the Authority by the City pursuant to the provisions of the Sublease. C-1

208 Beneficial Owner means any Person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any of the Bonds (including any Person holding Bonds through nominees, depositories or other intermediaries). BMA Index means the BMA Municipal Swap Index (such index previously known as the PSA Municipal Swap Index ) announced by Municipal Market Data on a weekly basis and based upon the weekly interest rate resets of Tax-Exempt variable rate issues included in a database maintained by Municipal Market Data which meets specified criteria established by the Bond Market Association. The BMA Index shall be based upon current yields of high-quality weekly adjustable variable rate demand bonds which are subject to tender upon seven days notice, the interest on which is Tax-Exempt and not subject to any personal alternative minimum tax or similar tax under the Code unless all Tax-Exempt securities are subject to such tax. Bond Year means the twelve (12)-month period ending on January 2 of each year to which reference is made. Business Day means any day of the year other than: (i) a Saturday or a Sunday, (ii) any day which shall be in Los Angeles, California, or New York, New York, a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close, and (iii) any day the city or cities in which the principal or other designated corporate office of the Trustee, the Tender Agent, the Remarketing Agent or the 2005 Liquidity Provider (if any) is located are required or authorized to close. Charter means the Charter of the City, as the same may be amended and supplemented. Calendar Week means, with respect to the Bonds in a Weekly Interest Rate Period, the period during which interest accrues with respect to the Bonds at a particular Weekly Interest Rate and will be the period from Thursday of one week (whether or not a Business Day) to and including the Wednesday of the following week (whether or not a Business Day); provided that the initial Calendar Week for each Weekly Interest Rate Period shall be the period from the first (1st) day of such Weekly Interest Rate Period to the next succeeding Wednesday (whether or not a Business Day); and provided further that the final Calendar Week for a Weekly Interest Rate Period which ends on a day other than a Wednesday shall be the period from the Thursday (whether or not a Business Day) preceding the last day of such Weekly Interest Rate Period to the last day of such Weekly Interest Rate Period. Code means the Internal Revenue Code of 1986, as amended. Debt Service means, for any Fiscal Year or other period, the sum of: (i) the interest accruing during such Fiscal Year or other period on all Outstanding Bonds and any net payment owed on any Swaps, assuming that all Outstanding Serial Bonds are retired as scheduled and that all Outstanding Term Bonds are redeemed or paid from sinking fund payments as scheduled (except to the extent that such interest is to be paid from the proceeds of sale of any Bonds so long as such funded interest is in an amount equal to the gross amount necessary to pay such interest on the Bonds and is invested in Government Securities which mature no later than the related Interest Payment Date), C-2

209 (ii) the principal amount of all Outstanding Serial Bonds maturing during such Fiscal Year or other period, and (iii) the principal amount of all Outstanding Term Bonds required to be redeemed or paid (together with the redemption premiums, if any, thereon) during such Fiscal Year or other period; provided that the foregoing shall be subject to adjustment and recalculation as follows: (A) with respect to Bonds other than Bonds bearing interest at a Long-Term Interest Rate, the interest payments shall be calculated at a rate equal to (1) as to the 2005 Series A Bonds, (I) if such Bonds have borne interest at a rate other than a Long-Term Interest Rate for the preceding twelve (12)-month period, then the lesser of (w) the weighted average interest rate borne by such Bonds during such period or (x) the 25 Bond Revenue Bond Index most recently published in The Bond Buyer preceding the applicable date of calculation, or (II) if such Bonds have borne interest at a Long-Term Interest Rate for the preceding twelve (12)-month period, then said 25 Bond Revenue Bond Index most recently published in The Bond Buyer preceding the applicable date of calculation; and (2) as to the 2005 Series B Bonds (III) if such Bonds have borne interest at a rate other than a Long-Term Interest Rate for the preceding twelve (12)-month period, then the lesser of (y) the weighted average interest rate borne by such Bonds during such period or (z) the then applicable LIBOR swap rate for the remaining average life of such Bonds, or (IV) if such Bonds have borne interest at a Long-Term Interest Rate for the preceding twelve (12)-month period, then the then applicable LIBOR swap rate for the remaining average life of such Bonds, and (B) with respect to Swaps and Swapped Bonds, the payments shall be adjusted to give effect to the Swap in such manner and to such extent (1) as may be required under generally accepted accounting principles, consistently applied or (2) in the absence of requirements imposed by generally accepted accounting principles, as shall be stated in a Certificate of the Authority (which Certificate shall be delivered to the Trustee and the Bond Insurer concurrently with the later to occur of (I) the issuance of the Swapped Bonds or (II) the execution of the Swap) in such manner as shall present fairly the reasonable expected Debt Service on the Swap and Swapped Bonds after the execution of the Swap. Existing Owner means: (i) with respect to and for the purpose of dealing with the Auction Agent in connection with an Auction, a Person who is a Broker-Dealer listed in the Existing Owner registry at the close of business on the Business Day immediately preceding the Auction Date for such Auction and (ii) with respect to and for the purpose of dealing with a Broker-Dealer in connection with an Auction, a Person who is a Beneficial Owner of the Bonds. Fiscal Year means the twelve (12)-month period terminating on June 30 of each year, or any other annual accounting period selected and designated by the Authority as its Fiscal Year in accordance with applicable law. First Supplemental Annuity Deposit Agreement means the agreement so named, dated as of November 1, 1988, by and between the System and the City. First Supplemental PFRS Trust Agreement means the agreement so named, dated as of February 1, 1997, by and between the City and the Master PFRS Trustee. C-3

210 Government Securities means direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America. Independent Certified Public Accountant means any certified public accountant or firm of such accountants duly licensed and entitled to practice and practicing as such under the laws of the State or a comparable successor, appointed and paid by the Authority, and who, or each of whom: (i) is in fact independent according to the Statement of Auditing Standards No. 1 and not under the domination of the Authority or the City; (ii) does not have a substantial financial interest, direct or indirect, in the operations of the Authority or the City; and (iii) is not connected with the Authority or the City as a member, officer or employee of the Authority or the City, but who may be regularly retained to audit the accounting records of and make reports thereon to the Authority or the City. Information Services means Financial Information, Incorporated Daily Called Bond Service, 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services, Called Bond Service, 55 Broad Street, 28th Floor, New York, New York 10004; Moody s Municipal and Government, Center Drive, Suite 150, Charlotte, NC 28217, Attention: Called Bonds Department; and Standard & Poor s Corporation s Called Bond Record, 25 Broadway, 3rd Floor, New York, New York 10004; or in accordance with then-current guidelines of the Securities and Exchange Commission, to such other addresses and/or such other services providing information with respect to called bonds as the Authority may designate in a Certificate of the Authority delivered to the Trustee. Interest Rate Period means a Daily Interest Rate Period, a Weekly Interest Rate Period, a Long-Term Interest Rate Period or an ARB Interest Rate Period. Master PFRS Trust Agreement means the Master Trust Agreement, dated as of February 1, 1997, by and between the City and Texas Commerce Bank National Association, as trustee, as it may from time to time be amended or supplemented pursuant to the provisions of the Sublease and such Trust Agreement. Master PFRS Trustee means the trustee appointed and acting under the Master PFRS Trust Agreement. Outstanding, when used as of any particular time with reference to Bonds, means (subject to the provisions of the Trust Agreement) all Bonds except: (i) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (ii) Bonds paid or deemed to have been paid within the meaning of the Trust Agreement; (iii) Bonds deemed tendered but not yet presented for purchase; and C-4

211 (iv) Bonds in lieu of or in substitution for which other Bonds shall have been executed, issued and delivered by the Authority pursuant to the Trust Agreement. Permitted Encumbrances means: (i) the Lease, as it may be amended from time to time; (ii) the Sublease, as it may be amended from time to time; (iii) the Trust Agreement, as it may be amended from time to time; (iv) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law; (v) rights, reservations, covenants, condition or restrictions to which the Authority and the City consent in writing and certify to the Trustee will not impair the leasehold interests of the Authority in the Leased Property; and (vi) subleases of the City. Permitted Investments means any of the following (but not including any obligation issued by the Authority or the City) to the extent then permitted by law (the Trustee being entitled to rely upon any investment direction received by it as a conclusive certification that such investment is a Permitted Investment ): (i) Government Securities; (ii) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are permitted only if they have been stripped by the agency itself): (A) U.S. Export-Import Bank (Eximbank): Direct obligations or fully guaranteed certificates of beneficial ownership (B) Farmers Home Administration (FmHA): Certificates of Beneficial Ownership (C) Federal Financing Bank (D) Federal Housing Administration Debentures (FHA) (E) General Services Administration: Participation Certificates (F) Government National Mortgage Association (GNMA or Ginnie Mae): GNMA-guaranteed mortgage-backed bonds or GNMA-guaranteed pass-through obligations (G) U.S. Maritime Administration: Guaranteed Title XI financing C-5

212 (H) U.S. Department of Housing and Urban Development (HUD): Project Notes, Local Authority Bonds, New Communities Debentures U.S. governmentguaranteed debentures, or U.S. Public Housing Notes and Bonds U.S. government guaranteed public housing notes and bonds; (iii) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies which are not backed by the full faith and credit of the United States of America (stripped securities are permitted only if they have been stripped by the agency itself): (A) Federal Home Loan Bank System: Senior debt obligations (B) Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac): Participation Certificates or Senior debt obligations (C) Federal National Mortgage Association (FNMA or Fannie Mae): Mortgagebacked securities and senior debt obligations (D) Student Loan Marketing Association (SLMA or Sallie Mae): Senior debt obligations (E) Resolution Funding Corp. (REFCORP) obligations (F) Farm Credit System: Consolidated systemwide bonds and notes; (iv) Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of AAAm-G; AAA-m; or AA-m and if rated by Moody s rated Aaa, Aa1 or Aa2, including funds for which the Trustee or its affiliates provide investment advisory or other management services; (v) Certificates of deposit secured at all times by collateral described in (i) and/or (ii) above; such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks; the collateral must be held by a third party and the Bondowners must have a perfected first security interest in the collateral; (vi) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF, including those of the Trustee and its affiliates; (vii) Investment agreements, including guaranteed investment contracts, forward purchase agreements and reserve fund put agreements acceptable to the Bond Insurer; (viii) Commercial paper rated, at the time of purchase, Prime-1 by Moody s and A-1 or better by S&P; (ix) Bonds or notes issued by any state or municipality which are rated by Moody s and S&P in one of the two highest rating categories assigned by such rating agencies; (x) Federal funds or bankers acceptances with a maximum term of one (1) year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of Prime-1 or A3 or better by Moody s and A-1 or A or better by S&P; and C-6

213 (xi) the California Local Agency Investment Fund; and (xii) Any other investment approved in writing by the Authority and the Bond Insurer. PFRS Pension Obligation Bond Law means Chapter 4.44 of the Oakland Municipal Code, as amended from time to time, as adopted pursuant to the provisions of the Retirement Law. Pledged Revenues means Tax Override Revenues deposited with the Trustee from time to time by or on behalf of the Master PFRS Trustee or the City, or held by the City and legally available for the payment of Base Rental Payments and Additional Payments under the Sublease and in accordance with the provisions of the Master PFRS Trust Agreement and any supplements thereto or amendments thereof. Program means the program of the City established pursuant to the provisions of the PFRS Pension Obligation Bond Law to finance the obligations of the City pursuant to the Retirement Law. Rating Agency, as to the Bonds, means Fitch, Moody s or S&P to the extent they then are providing or maintaining a rating on the Bonds at the request of the Authority, or in the event that Fitch, Moody s or S&P no longer maintains a rating on the Bonds, any other nationally recognized rating agency then providing or maintaining a rating on the Bonds at the request of the Authority. Rating Category means one of the general long-term (or short-term, if so specifically provided) rating categories of Fitch, Moody s or S&P, without regard to any refinement or gradation of such rating category by a numerical modifier or otherwise. Rating Confirmation means written confirmation from each Rating Agency that any proposed action will not, in and of itself, cause the Rating Agency to lower, suspend or withdraw the rating then assigned by such Rating Agency to any Outstanding Bonds. Related Obligations means all obligations of the Authority under the 2005 Liquidity Support Agreement, and any hedge agreement bond insurance, reserve insurance, credit agreement or similar agreement entered into in connection with or related to any Series of the Bonds, which obligations include, but are not limited to, obligations relating to the payment of fees, expenses and indemnities. The term Related Obligations does not include the Rate Swap Transaction between the City and GS Financial Products, U.S., L.P., dated January 9, Rental Payment Period means the twelve (12)-month period commencing July 1 of each year and ending the following June 30; provided, however, that the initial Rental Payment Period shall commence on the Delivery Date and end on June 30, Reserve Fund Requirement means: (i) the least of the following items (A), (B) or (C): (A) maximum annual Debt Service on all Bonds Outstanding (Debt Service being computed for purposes of this definition as provided in paragraphs (ii) and (iii) below); or (B) one hundred twenty-five percent (125%) of the average annual Debt Service on all Bonds Outstanding (Debt Service being computed for purposes of this definition as provided in paragraphs (ii) and (iii) below); or C-7

214 (C) ten percent (10%) of the aggregate principal amount of all Bonds Outstanding; (ii) in calculating that portion of the Reserve Requirement which is determined with reference to Debt Service on all Bonds Outstanding, the interest on which is excluded from gross income for federal income tax purposes, the following interest rates shall be used, as applicable: (A) the rate of accrual of interest with respect to any such Bonds bearing interest at a Long-Term Interest Rate; or (B) to the extent clause (A) is not applicable to such Bonds, the fixed interest rate payable by the Authority under a Swap in effect with respect to such Bonds; and (C) as to such Bonds for which neither clause (A) nor clause (B) is applicable, that interest rate which is fifty (50) basis points in excess of the interest rate most recently published in The Bond Buyer under the 25 Bond Revenue Bond Index and available at the time of such determination; provided, however, to the extent any such determination would cause compliance with the covenants contained in the Trust Agreement or in the Tax Certificate to require the restriction of the investment of amounts deposited or deemed deposited in the Reserve Fund to investments with a yield not in excess of the yield of such Bonds, then such determination shall be reduced to the extent necessary to avoid such restriction; and (iii) in calculating that portion of the Reserve Requirement which is determined with reference to Debt Service on all Bonds Outstanding, the interest on which is not excluded from gross income for federal income tax purposes, the following interest rates shall be used, as applicable: (A) the rate of accrual of interest with respect to any such Bonds bearing interest at a Long-Term Interest Rate; or (B) to the extent clause (A) is not applicable to such Bonds, the fixed interest rate payable by the Authority under a Swap in effect with respect to such Bonds; and (C) as to such Bonds for which neither clause (A) nor clause (B) is applicable, that interest rate which is fifty (50) basis points in excess of the interest rate then prevailing on Government Securities with remaining stated maturities comparable to the remaining stated maturity of such Bonds; and (iv) notwithstanding the foregoing provisions, as of the Delivery Date of the Bonds, the amount of $12,449,785.72; provided, however, that the Reserve Fund Requirement shall be determined not later than the date of a sale of a Series of Bonds and thereafter may be adjusted only upon the redemption, payment at maturity or defeasance of a portion of such Series of the Bonds or Conversion of such Series of the Bonds to a Long-Term Interest Rate. Revenues means: (i) all Base Rental Payments paid by the City and received by the Authority pursuant to the provisions of the Sublease (but not Additional Payments); C-8

215 (ii) all interest or other income from any investment, pursuant to the provisions of the Trust Agreement, of any money in any fund or account (other than the Rebate Fund) established pursuant to the provisions of the Trust Agreement or the Sublease; and (iii) Swap Revenues. Retirement Law means Article XXVI of the Charter, as amended and supplemented. Senior Obligation means: (i) any bond or other obligation issued or incurred and outstanding as of the Delivery Date pursuant to the provisions of the Master PFRS Trust Agreement and any supplement thereto or amendment thereof; and (ii) any bond or other obligation issued or incurred after the Delivery Date in accordance with the provisions of the Sublease and the Master PFRS Trust Agreement and any supplement thereto or amendment thereof. Series, whenever used with respect to Bonds, means all of the Bonds designated as being of the same series, initially authenticated and delivered in a simultaneous transaction, regardless of variations in maturity, interest rate, redemption and other provisions, and any Bonds thereafter authenticated and delivered upon transfer or exchange of or in lieu of or in substitution for (but not to refund) such Bonds as provided in the Trust Agreement. Subordinated Obligation means any bond, note or other debt instrument issued or otherwise entered into by the City which as to Tax Override Revenues ranks junior and subordinate to the Senior Obligations and which may be paid from moneys constituting Pledged Revenues in accordance with the provisions of the Master PFRS Trust Agreement and any supplement thereto or amendment thereof. Supplemental Trust Agreement means any trust agreement then in full force and effect which has been duly executed and delivered by the Authority and the Trustee amendatory or supplemental to the Trust Agreement; but only if and to the extent such Supplemental Trust Agreement is executed and delivered pursuant to the provisions of the Trust Agreement. Swap means, with respect to the Bonds, an interest rate swap, cap, floor, collar or other hedging transaction which is entered into by the Authority concurrently with the issuance of the Bonds for the purpose of managing interest rate risk with respect to the Bonds. The term Swap does not include the Rate Swap Transaction between the City and GS Financial Products, U.S., L.P., dated January 9, Swap Revenues means the sum of money due to be paid by a Swap Party to the Authority pursuant to the provisions of any Swap, subject to any netting of payments provided by the applicable Swap. Swapped Bonds means the Bonds to which a Swap relates. System means the Police and Fire Retirement System of the City of Oakland established pursuant to the provisions of the Retirement Law. Tax Override and Tax Override Revenues mean the annual tax levy and the revenues generated and collected thereby by the City in each Fiscal Year, as and when collected and net of collection costs and administrative charges, as proceeds of the annual tax levy authorized by Measure R enacted by C-9

216 the voters of the City on June 8, 1976, amending Section 2602, 2607, 2608, 2610, 2618 and 2619 of the Charter, and Measure O approved by the voters of the City on June 7, 1988, amending Section 2619(6) of the Charter. The Tax Override Revenues shall not include investment earnings on such revenues while held by the City in the Tax Override Revenues Account. The use and application of the Tax Override Revenues shall be in accordance with Section 5.07(a) of the Master PFRS Trust Agreement and any supplement thereto or amendment thereof Liquidity Provider means any commercial bank or other financial institution issuing (or having the primary obligation, or acting as agent for the financial institutions obligated, under) a 2005 Liquidity Support Instrument. Conditions for the Issuance of Additional Bonds TRUST AGREEMENT The Authority may at any time, but only with the express prior written consent of the Bond Insurer and the 2005 Liquidity Provider, issue Additional Bonds pursuant to the provisions of a Supplemental Trust Agreement, payable from the Revenues as provided in the Trust Agreement and secured by a pledge of and charge and lien upon the Revenues as provided in the Trust Agreement equal to the pledge, charge and lien securing the Outstanding Bonds theretofore issued under the Trust Agreement, but only if all of the following conditions precedent shall have been satisfied prior to the issuance of such Additional Bonds: (a) the Authority shall be in compliance with all agreements and covenants contained in the Trust Agreement or in the Lease, and the City shall be in compliance with all agreements and covenants contained in the Sublease; (b) the Supplemental Trust Agreement shall require that the proceeds of the sale of such Additional Bonds shall be applied to the refunding or repayment of any Bonds then Outstanding, including the payment of redemption premiums and costs and expenses of and incident to the authorization and sale of such Additional Bonds and refunding of the Bonds to be refunded; (c) the Supplemental Trust Agreement shall provide, if necessary, that from such proceeds or other sources an amount shall be deposited in the Reserve Fund so that upon such deposit there shall be on deposit in the Reserve Fund an amount not less than the Reserve Fund Requirement; (d) the aggregate principal amount of Bonds issued and at any time Outstanding under the Trust Agreement shall not exceed any limit imposed by law, by the Trust Agreement or by any Supplemental Trust Agreement; (e) the Sublease shall have been amended, if necessary, so that the Base Rental Payments payable by the City thereunder in each Fiscal Year shall be not less than Debt Service, including Debt Service on the Additional Bonds, in each Fiscal Year; and (f) the Authority and the Trustee shall have received a Rating Confirmation from each Rating Agency of the then-current rating on the Bonds. C-10

217 Punctual Payment The Authority shall punctually pay, but only out of the Revenues and the other funds pledged under the Trust Agreement, the principal amount of, premium, if any and interest to become due in respect of every Bond issued under the Trust Agreement at the times and places and in the manner provided in the Trust Agreement and in the Bonds, according to the true intent and meaning thereof No Encumbrance Upon Revenues The Authority shall not create, or permit the creation of, any pledge, lien, charge or other encumbrance upon the Revenues and other assets pledged or assigned under the Trust Agreement while any of the Bonds are Outstanding, except the pledge and assignment created by the Trust Agreement. Subject to this limitation, the Authority expressly reserves the right to enter into one or more other indentures for any of its corporate purposes, including other programs under the Act, and reserves the right to issue other obligations for such purposes. Amendment of Lease or Sublease The Authority shall not supplement, amend, modify or terminate any of the terms of the Lease or the Sublease, or consent to any such supplement, amendment, modification or termination, without the prior written consent of the Trustee, any 2005 Liquidity Provider and the Bond Insurer. The Trustee shall give such written consent only in conjunction with a Rating Confirmation and only if such supplement, amendment, modification or termination: (a) will not materially adversely affect the interests of the Owners of the Bonds or result in any material impairment of the security given for the payment of the Bonds (provided that such supplement, amendment or modification shall be deemed not to have such adverse effect or to cause such material impairment solely by reason of providing for the payment of Additional Bonds in accordance with the provisions of the Trust Agreement; (b) is to add to the agreements, conditions, covenants and terms required to be observed or performed thereunder by any party thereto, or to surrender any right or power therein reserved to the Authority or the City; (c) is to cure, correct or supplement any ambiguous or defective provision contained therein; (d) is to modify the legal description of the Leased Property to add or delete property descriptions to reflect accurately the description of the property intended or preferred to be included therein; or (e) if the Trustee first obtains the written consent of the Owners of a majority in principal amount of the Bond then Outstanding to such supplement, amendment, modification or termination; provided, that no such supplement, amendment, modification or termination shall reduce the amount of Base Rental Payments to be made to the Authority or the Trustee by the City pursuant to the provisions of the Sublease, or extend the time for making such payments, or permit the creation of any lien prior to or on a parity with the lien created by the Trust Agreement on the Base Rental Payments (except as expressly provided in the Sublease), in each case without the prior written consent of all of the Owners of the Bonds then Outstanding. Any supplement, amendment or modification entered into pursuant to subsection (a) above shall not, for purposes of such section, be deemed to materially adversely affect the interest of the Owners of the C-11

218 Bonds or result in any material impairment of the security given for the payment of the Bonds so long as all Bonds are supported by the Bond Insurance Policy and the Bond Insurer and any 2005 Liquidity Provider shall have given their prior written consent to such supplement, amendment or modification. The Authority shall furnish or cause to be furnished to S&P a copy of any such supplement, amendment or modification. Leasehold Estate Without allowance for any days of grace which may or might exist or be allowed by law or granted pursuant to any terms or conditions of the Lease, the Authority shall in all respects promptly and faithfully keep, perform and comply with all of the terms, provisions, covenants, conditions and agreements of the Lease to be kept, performed and complied with by the Authority. The Authority shall not do or permit anything to be done, or omit or refrain from doing anything, in any case where any such act done or permitted to be done, or any such omission of or refraining from action, would or might be a ground for declaring a forfeiture of the Lease, or would or might be a ground for cancellation or termination of the Sublease by the City thereunder. Upon request of the Trustee, the Authority shall promptly deposit with the Trustee (to be held by the Trustee until the title and rights of the Trustee under the Trust Agreement shall be released or reconveyed in accordance with its terms) any and all documentary evidence received by the Authority showing compliance with the provisions of the Lease to be performed by the Authority. The Authority, immediately upon its receiving or giving any notice, communication or other document in any way relating to or affecting the Lease, or the leasehold estate thereby created, which may or can in any manner affect the estate of the lessor or of the Authority in or under the Lease, shall deliver the same, or a copy thereof, to the Trustee. Tax Covenants (a) The Authority covenants that it shall not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of the interest on the 2005 Series A Bonds under Section 103 of the Code. The Authority shall not directly or indirectly use or permit the use of any proceeds of the 2005 Series A Bonds in such a manner as would adversely affect the exclusion of interest on any 2005 Series A Bonds from gross income under Section 103 of the Code. The Authority shall not directly or indirectly use or permit the use of any proceeds of any 2005 Series A Bonds, or of any facilities financed thereby, or other funds of the Authority, or take or omit to take any action, that would cause any 2005 Series A Bonds to be arbitrage bonds within the meaning of Section 148 of the Code. To that end, the Authority shall comply with all requirements of Section 148 of the Code and all regulations of the United States Department of the Treasury issued thereunder to the extent such requirements are, at the time, in effect and applicable to the 2005 Series A Bonds. In the event that at any time the Authority is of the opinion that for purposes of this section regarding tax covenants it is necessary to restrict or to limit the yield on the investment of any moneys held by the Trustee under the Trust Agreement, the Authority shall so instruct the Trustee in writing, and the Trustee shall take such action as may be directed in such instructions. (b) The Authority specifically covenants that: (i) The Authority shall pay or cause to be paid the Rebate Requirement as provided in the Tax Certificate. (ii) The Authority shall determine the amount of and cause to be deposited in the Rebate Fund the Rebate Requirement as provided in the Tax Certificate. Subject to the provisions of this section regarding tax covenants, moneys held in the Rebate Fund are pledged to secure payments to the United C-12

219 States of America, and the Authority and the Owners of the 2005 Series A Bonds shall have no rights in or claim to such moneys. The Trustee shall invest all amounts held in the Rebate Fund as directed in writing by an Authorized Representative of the Authority. Upon receipt of the Rebate Instructions required to be delivered to the Trustee, the Trustee shall remit part or all of the balance held in the Rebate Fund, together with any completed forms to be filed therewith prepared by the Authority and delivered with such Rebate Instructions, to the United States of America to the extent so directed, including rebate due in connection with any 2005 Series A Bonds. In addition, if the Rebate Instructions so direct, the Trustee shall deposit moneys into or transfer moneys out of the Rebate Fund from or into such Accounts or Funds as the Rebate Instructions direct. The Trustee shall conclusively be deemed to have complied with the provisions of this section regarding tax covenants if it follows the directions of the Authority set forth in the Rebate Instructions and shall not be required to take any actions thereunder in the absence of Rebate Instructions from an Authorized Representative of the Authority. Payments Regarding Bonds (a) If, on the third (3rd) Business Day prior to the related scheduled Interest Payment Date or principal payment date with respect to the Bonds ( 2005 Payment Date ), there is not on deposit with the Trustee under the Trust Agreement, after making all transfers and deposits required under the Trust Agreement, moneys sufficient to pay the principal of, and interest on, the Bonds due on such 2005 Payment Date, the Trustee shall give notice to the Bond Insurer and to its designated agent (if any) (the Bond Insurer s Fiscal Agent ), by telephone or telecopy, of the amount of such deficiency by 10:00 a.m., New York City time, on such Business Day. If, on the Business Day prior to the related 2005 Payment Date, there is not on deposit with the Trustee moneys sufficient to pay the principal of, and interest on, the Bonds due on such 2005 Payment Date, the Trustee shall make a claim under the Bond Insurance Policy and give notice to the Bond Insurer and the Bond Insurer s Fiscal Agent (if any) by telephone of the amount of any deficiency in the amount available to pay principal and interest, and the allocation of such deficiency between the amount required to pay interest on the Bonds and the amount required to pay principal of the Bonds, confirmed in writing to the Bond Insurer and the Bond Insurer s Fiscal Agent by 10:00 a.m., New York City time, on such Business Day, by delivering the Notice of Nonpayment and Certificate. (b) For the purposes of the preceding subsection (a), Notice means telephonic or facsimile transmission notice, subsequently confirmed in a signed writing, or written notice by registered or certified mail, from the Trustee to the Bond Insurer, which notice shall specify: (i) the name of the entity making the claim, (ii) the policy number, (iii) the claimed amount and (iv) the date such claimed amount will become Due for Payment. Nonpayment means the failure of the Authority to have provided sufficient funds to the Trustee for payment in full of all principal of, and interest on, the Bonds that are Due for Payment. Due for Payment, when referring to the principal of Bonds, means when the stated maturity date or mandatory redemption date for the application of a required sinking fund installment has been reached and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by application of required sinking fund installments), acceleration or other advancement of maturity, unless the Bond Insurer shall elect, in its sole discretion, to pay such principal due upon such acceleration; and C-13

220 when referring to interest on Bonds, means when the stated date for payment of interest has been reached. Certificate means a certificate in form and substance satisfactory to the Bond Insurer as to the Trustee s right to receive payment under the Bond Insurance Policy. (c) Upon payment of a claim under the Bond Insurance Policy, the Trustee shall establish a separate special purpose trust account for the benefit of holders of Bonds referred to as the Bond Policy Payments Account and over which the Trustee shall have exclusive control and sole right of withdrawal. The Trustee shall receive any amount paid under Bond Insurance Policy with respect to the Bonds in trust on behalf of the Owners of Bonds and shall deposit any such amount in the Bond Policy Payments Account and distribute such amount only for purposes of making the payments for which a claim was made. Such amounts shall be disbursed by the Trustee to Owners of Bonds in the same manner as principal and interest payments are to be made with respect to the Bonds under the provisions of the Trust Agreement regarding payment of Bonds. It shall not be necessary for such payments to be made by check or wire transfer separate from the check or wire transfer used to pay Debt Service with other funds available to make such payments. (d) The Trustee shall designate on its books any portion of payment of principal on Bonds paid by the Bond Insurer at maturity as a reduction in the principal amount of Bonds registered to the then current Bondholder, whether DTC or its nominee or otherwise, and shall issue a replacement Bonds to the Bond Insurer, registered in the name of the Bond Insurer, in a principal amount equal to the amount of principal so paid (without regard to Authorized Denominations); provided, that the Trustee s failure so to designate any payment or issue any replacement Bond shall have no effect on the amount of principal or interest payable by the Bond Insurer on any Bond or the subrogation rights of the Bond Insurer. (e) The Trustee shall keep a complete and accurate record of all funds deposited by the Bond Insurer into the Bond Policy Payments Account and the allocation of such funds to payment of interest on and principal paid with respect to any Bond. The Bond Insurer shall have the right to inspect such records at reasonable times upon reasonable notice to the Trustee. (f) Funds held in the Bond Policy Payments Account shall not be invested by the Trustee and may not be applied to satisfy any costs, expenses or liabilities of the Trustee. (g) Any funds remaining in the Bond Policy Payments Account following an Interest Payment Date shall promptly be remitted to the Bond Insurer. (f) The Bond Insurer shall, to the extent it makes any payment of principal of or interest on the Bonds, become subrogated to the rights of the recipients of such payments in accordance with the terms of the Bond Insurance Policy. Amounts paid by the Bond Insurer under the Bond Insurance Policy shall not be deemed paid for purposes of the Trust Agreement and shall remain Outstanding and continue to be due and owing until paid by the Authority in accordance with the Trust Agreement. The Trust Agreement shall not be discharged, and any such amounts shall not be deemed defeased or otherwise satisfied or paid by the Authority, and the assignment and pledge effected by the Trust Agreement and all covenants, agreements and other obligations of the Authority to the Owners of the Bonds shall continue to exist and shall run to the benefit of the Bond Insurer, unless and until all amounts due or to become due to the Bond Insurer have been paid in full or duly provided for. Bond Insurer Deemed Owner Notwithstanding any provision of the Trust Agreement to the contrary, so long as the Bond Insurer is not in default in its payment obligations under the Bond Insurance Policy, the Bond Insurer shall C-14

221 at all times be deemed the sole and exclusive Owner of the Outstanding Bonds for the purposes of all approvals, consents, waivers, institution of any action and the direction of all remedies (including without limitation any acceleration of payment of any Bonds). Third-Party Beneficiary Pursuant to the provisions of the Trust Agreement, to the extent that the Trust Agreement confers upon or gives or grants to the Bond Insurer any right, remedy or claim under or by reason of the Trust Agreement, the Bond Insurer is explicitly recognized as being a third-party beneficiary under the Trust Agreement and may enforce any such right remedy or claim conferred, given or granted under the Trust Agreement. Events of Default Each of the following shall constitute an Event of Default under the Trust Agreement: (a) if default shall be made by the Authority in the due and punctual payment of the principal amount or redemption premium of any Bond as and when the same shall become due and payable (whether at maturity, by proceedings for redemption, or otherwise); (b) if default shall be made by the Authority in the due and punctual payment of the interest on any Bond when and as such interest shall become due and payable; (c) if default shall be made by the Authority in the performance or observance of any of the covenants, agreements or conditions on its part contained in the Trust Agreement or in the Bonds, other than as referred to in subsections (a) and (b) above, and such default shall have continued for a period of thirty (30) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Authority by the Trustee and the Bond Insurer, or to the Authority, the Bond Insurer and the Trustee by the Owners of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds then Outstanding; (d) if the Authority shall file a petition or answer seeking arrangement or reorganization under the federal bankruptcy laws or an other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction shall approve a petition filed with or without the consent of the Authority seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the provisions of any other law for the relief or aid of debtors any court of competent jurisdiction shall assume custody or control of the Authority or of the whole or any substantial part of its property; or (e) if an Event of Default has occurred under the Sublease. Institution of Legal Proceedings by the Trustee (a) If one or more Events of Default shall happen and be continuing, the Trustee in its discretion may, with the consent of the Bond Insurer, and upon the written request of either: (i) the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding, with the consent of the Bond, or (ii) the Bond Insurer, C-15

222 shall (in either case being indemnified to its reasonable satisfaction therefor), proceed to protect or enforce its rights or the rights of the Owners of the Bonds under the Trust Agreement or under the provisions of Article V of the Sublease, by a suit in equity or action at law, either for the specific performance of any covenant or agreement contained in the Trust Agreement or the Sublease, or in aid of the execution of any power granted in the Trust Agreement or the Sublease, or by mandamus or other appropriate proceeding for the enforcement of any other legal or equitable remedy as the Trustee, with the consent of the Bond Insurer, shall deem most effectual in support of any of its rights or duties under the Trust Agreement. (b) If, at any time after the institution of any legal proceeding under the Trust Agreement, the Event of Default giving rise to such legal proceeding and all other defaults known to the Trustee shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case, either: (i) the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding, with the consent of the Bond Insurer, or (ii) the Bond Insurer, by written notice to the Authority and to the Trustee, may, on behalf of the Owners of all of the Bonds, rescind and annul such declaration and its consequences and waive such default; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon. Application of Moneys Collected by the Trustee (a) Any moneys collected by the Trustee pursuant to the provisions of the Trust Agreement shall be applied in the following order, at the date or dates fixed by the Trustee and, in the case of distribution of such moneys on account of principal amount (or premium, if any), upon presentation of the Bonds, and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid: (i) first: to the payment of costs and expenses of collection and reasonable compensation to the Trustee for its own services and for the services of counsel, agents and employees by it properly engaged and employed, and all other expenses and liabilities incurred, and for advances, together with interest on such advances at a rate per annum equal to the Bond yield plus two percent (2%), made pursuant to the provisions of the Trust Agreement; (ii) second: in the case where no principal amount has become due and remains unpaid, to the payment of interest on Bonds in the order of the due dates thereof, in every instance such payment to be made to the persons entitled thereto without discrimination or preference; and (iii) third: in case the principal amount of any of the Bonds shall have become due by declaration or otherwise and remains unpaid, to the payment of interest on Bonds in default and to the payment of the principal amount of all Bonds then due and unpaid and the premium thereon, if any; in every instance such payment to be made ratably to the persons entitled thereto without discrimination or preference over claims for interest over principal amount or of any Bond over any other Bond. (b) Whenever moneys are to be applied pursuant to the provision of the Trust Agreement, such moneys shall be applied at such times, and from time to time, as the Trustee shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys C-16

223 becoming available for such application in the future. Whenever the Trustee shall apply such funds, it shall fix the date (which shall be an Interest Payment Date unless the Trustee shall deem another date more suitable) upon which such application is to be made and upon providing for the payment of the principal amount of the Bonds and the interest on the Bonds in accordance with the Trust Agreement on such date, interest on the Bonds shall cease to accrue. (c) Subject to the provisions of the Trust Agreement, whenever all principal amount of, and interest on all Bonds has been paid under the provisions of the Trust Agreement and all fees, expenses and charges of the Trustee (including without limitation those of its attorneys) have been paid, any balance remaining in the funds and accounts under the Trust Agreement shall be paid in accordance with the provisions of the Trust Agreement. Effect of Delay or Omission To Pursue Remedy No delay or omission of the Trustee or of any Owner of Bonds to exercise any right or power arising from any default shall impair any such right or power or shall be construed to be a waiver of any such default or acquiescence therein, and every power and remedy given by Article IX of the Trust Agreement to the Trustee, the Bond Insurer or to the Owners of Bonds may be exercised from time to time, and as often as shall be deemed expedient. In case the Trustee shall have proceeded to enforce any right under the Trust Agreement, and such proceedings shall have been discontinued or abandoned because of waiver or for any other reason, or shall have been determined adversely to the Trustee, then and in every such case the Authority and the Trustee, the Bond Insurer, and the Owners of the Bonds, severally and respectively, shall be restored to their former positions and rights under the Trust Agreement in respect to the trust estate; and all remedies, rights and powers of the Authority, the Trustee and the Owners of the Bonds shall continue as though no such proceedings had been taken. Remedies Cumulative No remedy conferred upon or reserved to the Trustee or to any Owner of the Bonds is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Trust Agreement or existing at law or in equity. Covenant To Pay Bonds in Event of Default The Authority covenants that, upon the happening of any Event of Default, the Authority shall pay to the Trustee, but only out of Revenues and other funds pledged under the Trust Agreement, upon demand, all sums which may be due under or secured by the Trust Agreement, including reasonable compensation to the Trustee and its agents and counsel and any expenses or liabilities incurred by the Trustee and, its agents and counsel. In case the Authority shall fail to pay the same forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled to institute proceedings at law or in equity in any court of competent jurisdiction to recover judgment for the amount due and unpaid, together with costs and reasonable attorneys fees, subject, however, to the condition that such judgment, if any, shall be limited to, and payable solely out of Revenues and other funds pledged under the Trust Agreement, as provided in the Trust Agreement and not otherwise. The Trustee shall be entitled to recover such judgment as aforesaid, either before or after or during the pendency of any proceedings for the enforcement of the Trust Agreement, and the right of the Trustee to recover such judgment shall not be affected by the exercise of any other right, power or remedy for the enforcement of the provisions of the Trust Agreement. C-17

224 Trustee Appointed Agent for Owners of Bonds The Trustee is appointed the agent and attorney-in-fact of the Owners of all Bonds Outstanding under the Trust Agreement for the purpose of filing any claims relating to the Bonds. Power of Trustee To Control Proceedings In the event that the Trustee, upon the happening of an Event of Default, shall have taken some action, by judicial proceedings or otherwise, pursuant to its duties under the Trust Agreement, whether upon its own discretion or upon the request of the Owners of Bonds or the Bond Insurer as provided in the Trust Agreement, it shall have full power, in the exercise of its discretion for the best interests of the Owners of the Bonds, with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Trustee shall not, without the prior written consent of the Bond Insurer, unless there no longer continues an Event of Default under the Trust Agreement, discontinue, withdraw, compromise or settle, or otherwise dispose of any litigation pending at law or in equity, if at the time there has been filed with it a written request signed by the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation. Limitation on Bond Owners Right To Sue (a) Notwithstanding any other provision of the Trust Agreement, no Owner of any Bond issued under the Trust Agreement shall have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon the Trust Agreement, unless: (i) such Owner shall have previously given to the Trustee written notice of the occurrence of an Event of Default under the Trust Agreement; (ii) the Owners of not less than a majority in aggregate principal amount of all the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers granted to it under the Trust Agreement or to institute such action, suit or proceeding in its own name; (iii) said Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (iv) the Trustee shall have refused or omitted to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee. Such notification, request, tender of indemnity and refusal or omission are declared, in every case, to be conditions precedent to the exercise by any Owner of Bonds of any remedy under the Trust Agreement; it being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to enforce any right under the Trust Agreement, except in the manner provided in the Trust Agreement, and that all proceedings at law or in equity to enforce any provision of the Trust Agreement shall be instituted, had and maintained in the manner in the Trust Agreement and for the equal benefit of all Owners of the Outstanding Bonds. (b) The right of any Owner of any Bond to receive payment of the principal amount of, premium, if any, and interest on such Bond out of Revenues and the funds pledged under the Trust Agree- C-18

225 ment, on and after the respective due dates expressed in such Bond, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Owner, notwithstanding the provisions of the Trust Agreement. Bond Insurer s Right To Direct Remedies Notwithstanding anything to the contrary in the Trust Agreement contained, so long as the Bond Insurer is not in default of its obligations under the Bond Insurance Policy, the Bond Insurer: (a) shall have the right to direct all remedies upon the occurrence of an Event of Default and there shall be no acceleration of the Bonds without the consent of the Bond Insurer; (b) shall be deemed the sole Owner of the Bonds secured by the Bond Insurance Policy for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the Owners of such Bonds are entitled to take pursuant to the Trust Agreement; and (c) shall have the right to institute any suit, action, or proceeding at law or in equity under the same terms as a Bondholder in accordance with applicable provisions of the Trust Agreement; provided, however, that nothing in this section entitled Bond Insurer s Right To Direct Remedies shall be deemed to restrict the rights of the Bond Insurer as the subrogee of Bondholder rights pursuant to the provisions of the Trust Agreement. Amendment Without Consent of Bondowners (a) Subject to the conditions and restrictions in the Trust Agreement contained, the Authority and the Trustee, from time to time and at any time, may enter into an agreement or agreements supplemental to the Trust agreement, which agreement or agreements thereafter shall form a part, including, without limitation, for one or more of the following purposes, provided that the Authority and the Trustee shall have received an Opinion of Counsel to the effect that such amendment or modification will not cause interest on the 2005 Series A Bonds to be included in the gross income of the Owners thereof for federal income tax purposes and the Trustee shall have received a written representation from the Authority to the effect that such amendment or modification will not materially and adversely affect the interests of the Owners of the Bonds (which written representation may be based on representations of other parties in accordance with the provisions of the Trust Agreement); provided that, if an Event of Default has occurred and is continuing, the Trustee rather than the Authority shall make a determination that such amendment or modification will not materially and adversely affect the interests of the Owners of the Bonds (provided that, in making such determination, the Trustee may conclusively rely on written representations of financial consultants or advisors or the opinion or advice of counsel): (i) to add to the covenants and agreements of the Authority contained in the Trust Agreement, other covenants and agreements thereafter to be observed, or to assign or pledge additional security for the Bonds, or to surrender any right or power reserved to or conferred upon the Authority; (ii) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing, correcting or supplementing any defective provision, contained in the Trust Agreement, or in regard to such matters or questions arising under the Trust Agreement as the Authority may deem necessary or desirable; C-19

226 (iii) to modify, amend or supplement the Trust Agreement or any Supplemental Trust Agreement in such manner as to permit the qualification of such Trust Agreement or Supplemental Trust Agreement under the Trust Indenture Act of 1939, as amended, or any similar federal statute then in effect, and, if they so determine, to add to the Trust Agreement or any Supplemental Trust Agreement such other terms, conditions and provisions as may be permitted by the Trust Indenture Act of 1939, as amended, or similar federal statute; or (iv) in connection with an amendment of the Lease or the Sublease permitted under the provisions of the Trust Agreement for the purpose of conforming the terms, conditions and covenants of the Trust Agreement to the corresponding or related provisions of such amended Lease or Sublease. (b) Any Supplemental Trust Agreement authorized by the Trust Agreement may be executed by the Authority and the Trustee without the consent of the Owners of any of the Bonds, notwithstanding any of the provisions of the Trust Agreement regarding modification with consent of Owners, but the Trustee shall not be obligated to enter into any such Supplemental Trust Agreement which affects the Trustee s own rights, duties or immunities under the Trust Agreement or otherwise. (c) The Trustee shall mail an executed copy of any Supplemental Trust Agreement authorized by the Trust Agreement to the Bond Insurer and each Rating Agency promptly after execution thereof by the Authority and the Trustee. Any failure of the Trustee to give such notice, or any defect therein, shall not in any way impair or affect the validity of any such Supplemental Trust Agreement. Modification with Consent of Bond Insurer or Bond Owners (a) With the prior written consent of the Bond Insurer of each Series of Bonds (or, in the event that the Bond Insurer is in default of its obligations under the Bond Insurance Policy, the Owners of not less than a majority in aggregate principal amount of the Bonds of such Series then Outstanding), the Authority and the Trustee may from time to time and at any time, with an Opinion of Counsel to the effect that such amendment or modification will not cause interest on the 2005 Series A Bonds to be included in the gross income of the Owners thereof for federal income tax purposes, enter into an indenture or indentures supplemental to the Trust Agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Trust Agreement or of any Supplemental Trust Agreement; provided, however, that no such Supplemental Trust Agreement shall: (i) extend the fixed maturity of any Bonds or reduce the rate of interest thereon, or change the method of computing the rate of interest thereon or extend the time of payment of interest, or reduce the principal amount thereof, or reduce any premium payable on the redemption thereof or (ii) reduce the aforesaid percentage of Owners of Bonds whose consent is required for the execution of such Supplemental Trust Agreements or extend the time of payment or permit the creation of any lien on the Revenues or the funds pledged in the Trust Agreement prior to or on a parity with the lien of the Trust Agreement or deprive the Owners of the Bonds of the lien created by the Trust Agreement upon the Revenues or the funds pledged in the Trust Agreement, without the consent of the Owners of all the Bonds then Outstanding. Upon receipt by the Trustee of a Written Request of the Authority authorizing the execution of any such Supplemental Trust Agreement, and upon the filing with the Trustee of evidence of the consent of the Bond Insurer and the Bondholders, to the extent required by the Trust Agreement, the Trustee shall join with the Authority in the execution of such Supplemental Trust Agreement unless such Supple- C-20

227 mental Trust Agreement affects the Trustee s own rights, duties or immunities under the Trust Agreement or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such Supplemental Trust Agreement. (b) It shall not be necessary for the consent of the Bondholders to approve the particular form of any proposed Supplemental Trust Agreement, but it shall be sufficient if such consent shall approve the substance thereof. (c) Promptly after the execution by the Authority and the Trustee of any Supplemental Trust Agreement pursuant to the provisions of the Trust Agreement, permitting modification with consent of Owner, the Trustee shall mail a notice, setting forth in general terms the substance of such Supplemental Trust Agreement, to each Rating Agency, the Bond Insurer and the Bondholders at the addresses shown on the Bond registration books maintained by the Trustee. Any failure of the Trustee to give such notice, or any defect therein, shall not in any way impair or affect the validity of any such Supplemental Trust Agreement. Disqualified Bonds Bonds owned or held by or for the account of the Authority or the City shall not be deemed Outstanding for the purpose of any consent or other action or any calculation of Outstanding Bonds provided in Article XI of the Trust Agreement; provided, however, that the Trustee shall have no duty of inquiry as to the ownership of Bonds and shall be fully protected in relying on the list of registered Owners as maintained by the Trustee in its registration books for the Bonds. Discharge of Trust Agreement (a) The Bonds may be paid by the Authority in any of the following ways, provided that the Authority also pays or causes to be paid any other sums payable under the Trust Agreement by the Authority: (i) by paying or causing to be paid the principal amount of, premium, if any, and interest on the Bonds Outstanding, as and when the same become due and payable; (iii) by depositing with the Trustee, in trust, at or before maturity, money or securities in the necessary amount (as provided in the Trust Agreement) to pay or redeem Bonds Outstanding; or (iii) by delivering to the Trustee, for cancellation by it, the Bonds Outstanding; (b) If the Authority shall pay all Bonds then Outstanding as provided above and shall also pay or cause to be paid all other sums payable under the Trust Agreement by the Authority, then and in that case, at the election of the Authority (evidenced by a Written Certificate of the Authority, filed with the Trustee, signifying the intention of the Authority to discharge all such indebtedness and the Trust Agreement), and notwithstanding that any Bonds shall not have been surrendered for payment, the Trust Agreement and the pledge of Revenues and the other funds made under the Trust Agreement and all covenants, agreements and other obligations of the Authority under the Trust Agreement shall cease, terminate, become void and be completely discharged and satisfied, except only as provided in the Trust Agreement. In such event, upon request of the Authority, the Trustee shall cause an accounting for such period or periods as may be requested by the Authority to be prepared and filed with the Authority and shall execute and deliver to the Authority all such instruments as may be necessary or desirable to evi- C-21

228 dence such discharge and satisfaction, and the Trustee shall pay over, transfer, assign or deliver to the Authority all moneys or securities or other property held by it pursuant to the Trust Agreement which are not required for the payment or redemption of Bonds not theretofore surrendered for such payment or redemption and which are not required for the payment of fees and expenses of the Trustee. Discharge of Liability on Bonds (a) Upon the deposit with the Trustee, in trust, at or before maturity, of money or securities in the necessary amount (as provided in the Trust Agreement) to pay or redeem any Outstanding Bond, whether upon or prior to its maturity or the redemption date of such Bond (provided that, if such Bond is to be redeemed prior to its maturity, notice of such redemption shall have been given as in Article IV provided or provision satisfactory to the Trustee shall have been made for the giving of such notice), then all liability of the Authority in respect of such Bond shall cease, terminate and be completely discharged, except only that thereafter the Owner thereof shall be entitled to payment of the principal amount of and interest on such Bond by the Authority, and the Authority shall remain liable for such payment but only out of the money or securities deposited with the Trustee as aforesaid for its payment, provided further, however, that the provisions of the Trust Agreement relating to payment of Bonds after discharge of the Trust Agreement shall apply in all events. (b) The Authority may at any time surrender to the Trustee for cancellation by it any Bonds previously issued and delivered, which the Authority may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired. Limitation of Rights to Parties and Bond Owners Nothing in the Trust Agreement or in the Bonds expressed or implied is intended or shall be construed to give to any person other than the Authority, the Trustee, the City, the Bond Insurer, any 2005 Liquidity Provider and the Owners of the Bonds any legal or equitable right, remedy or claim under or in respect of the Trust Agreement or any covenant, condition or provision contained in the Trust Agreement or the Sublease; and all such covenants, conditions and provisions are and shall be held to be for the sole and exclusive benefit of the Authority, the Trustee, the City, the Bond Insurer, any 2005 Liquidity Provider and the Owners of the Bonds. Concerning the Bond Insurer (a) Whenever provision is made in the Trust Agreement for notice to be given to the Bond Insurer or that any action under the Trust Agreement requires the consent of the Bond Insurer, each and every such provision shall require such notice or consent to be in writing and shall cease and terminate and be of no further force or effect if the Bond Insurer has defaulted in the payment of any amount due under the Bond Insurance Policy after proper demand therefor has been made by the Trustee. (b) In determining whether any amendment, consent or other action to be taken, or any failure to act, under the Trust Agreement would adversely affect the security for the Bonds or the rights of the Owners of the Bonds, the Trustee shall consider the effect of any such amendment, consent, action or inaction as if there were no Bond Insurance Policy. (c) In the event that the Authority, the Bond Insurer or any underwriter of the Bonds shall, directly or indirectly, enter into or otherwise consent to any amendment, supplement or other modification of any agreement or instrument related to the Bonds granting additional rights or benefits to such party or containing or representations covenants that are more restrictive as to the Authority than those contained C-22

229 in the Trust Agreement, the Authority shall give prompt written notice thereof to the Bond Insurer and shall enter into an agreement or instrument with the Bond Insurer to incorporate such remedies and covenants. Consent of the Bond Insurer (a) Any provision of the Trust Agreement expressly recognizing or granting rights in or to the Bond Insurer may not be amended in any manner which affects the rights of the Bond Insurer under the Trust Agreement without the prior written consent of the Bond Insurer. In addition, the Bond Insurer s consent shall be required for each of the following purposes: (i) execution and delivery of any Supplemental Trust Agreement or any amendment, supplement or change to or modification of the Lease or the Sublease, or (ii) initiation or approval of any action not described in clause (i) above which requires Bondholder consent. (b) Any reorganization or liquidation plan with respect to the Authority must be acceptable to the Bond Insurer. In the event of any reorganization or liquidation, the Bond Insurer shall have the right to vote on behalf of all Bondholders who hold the Bonds secured by the Bond Insurance Policy absent a default by the Bond Insurer under the Bond Insurance Policy. (c) The rights granted to the Bond Insurer under the Trust Agreement or the Lease and the Sublease to request, consent to or direct any action are rights granted to the Bond Insurer in consideration of its issuance of the Bond Insurance Policy. Any exercise by the Bond Insurer of such rights is merely an exercise of the Bond Insurer s contractual rights and shall not be construed or deemed to be taken for the benefit or on behalf of the Bondholders, nor does any such action evidence any position of the Bond Insurer, positive or negative, as to whether Bondholder consent is required in addition to consent of the Bond Insurer. Bond Insurer as Third-Party Beneficiary To the extent that the Trust Agreement confers upon or gives or grants to the Bond Insurer any right, remedy or claim under or by reason of the Trust Agreement, the Bond Insurer is explicitly recognized as being a third-party beneficiary under the Trust Agreement and may enforce any such right, remedy or claim conferred, given or granted under the Trust Agreement. Base Rental Payments SUBLEASE (a) The City shall pay to the Authority, as Base Rental Payments for the use and occupancy of the Leased Property during each Rental Payment Period (subject to the provisions of the Sublease), the Base Rental Payments in accordance with the Base Rental Payment Schedule attached to the Sublease as Exhibit B and made a part thereof. Base Rental Payments shall be made in installments, payable on or before the Base Rental Due Dates in the amounts, which amounts will vary from time to time, required by the Authority to pay the principal of, premium, if any, and interest on the Bonds and payments of any Related obligations due on or before the first (1st) day of the month following the Base Rental Due Date; provided that to the extent the Authority has received revenues available to pay debt service on the Bonds C-23

230 and any Related Obligations and has deposited such revenues with the Trustee by the Business Day immediately preceding the Base Rental Due Date, the City shall receive a credit to the extent of such revenues on the installment of Base Rental Payments for said month. For the purpose of calculating the amount of Base Rental Payments relating to Bonds and Related Obligations bearing interest at a rate which has not yet been determined, an interest rate shall be assumed which is equal to 100% of the Bond Market Association Municipal Swap Index, or any successor index, made available for the week preceding the date of determination. The Trustee and the Authority shall notify the City at least two (2) Business Days prior to each Base Rental Due Date of the amount of Base Rental Payments which will be due on the next succeeding Base Rental Due Date. (b) If the term of the Sublease shall have been extended pursuant to the provisions of the Sublease, Base Rental Payment installments shall continue to be due on the Base Rental Due Dates, and payable as described in the Sublease, continuing to and including the date of termination of the Sublease, in an amount sufficient to pay all unpaid principal of and interest on the Bonds, plus interest on the extended principal and interest at a rate equal to the rate of interest on the Bonds so extended, and any Related Obligations. Additional Payments (a) The City shall also pay such amounts (the Additional Payments ) as shall be required by the Authority for the payment of all amounts, costs and expenses incurred by the Authority in connection with the execution, performance or enforcement of the Sublease or any assignment thereof, the Trust Agreement, the Authority s interest in the Leased Property and the sublease of the Leased Property to the City, including but not limited to the payment of all fees, costs and expenses and all administrative costs of the Authority related to the Bonds, any Related Obligations and the Leased Property, including, without limiting the generality of the foregoing, insurance, taxes, salaries and wages of employees, all expenses, compensation and indemnification payable by the Authority to the Trustee under the provisions of the Trust Agreement and to any Remarketing Agent under any Remarketing Agreement, any Tender Agent, and any 2005 Liquidity Provider under any 2005 Liquidity Support Agreement, fees of auditors, accountants, attorneys or engineers, and all other necessary administrative costs of the Authority or charges required to be paid by the Authority in order to maintain its existence or to comply with the terms of the Bonds or of the Trust Agreement or of Related Obligations; but not including in such Additional Payments amounts required to pay the principal of or interest on the Bonds or payments of Related Obligations (which shall be paid from Base Rental Payments). (b) Such Additional Payments shall be billed to the City by the Authority or the Trustee from time to time, together with a statement certifying that the amount billed has been paid by the Authority or by the Trustee on behalf of the Authority, for one or more of the items above described, or that such amount is then payable by the Authority or the Trustee for such bill by the City. The City reserves the right to audit billings for Additional Payments, although any exercise of such right shall in no way affect the duty and obligation of the City to make full and timely payment of all Additional Payments. (c) The Authority has issued and may in the future issue bonds and may in the future enter into subleases to finance facilities other than the Leased Property. The administrative costs of the Authority shall be allocated among said facilities and the Leased Property, as provided in this subparagraph (c). The fees of the Trustee under the Trust Agreement, and any other expenses directly attributable to the Leased Property shall be included in the Additional Payments payable under the Sublease. The fees of any trustee or paying agent under any indenture or trust agreement securing bonds of the Authority (other than the Trust Agreement), and any other expenses directly attributable to any facilities other than the Leased Property, shall not be included in the administrative costs of the Leased Property and shall not be C-24

231 paid from the Additional Payments payable under the Sublease. Any expenses of the Authority not directly attributable to any particular project of the Authority shall be equitably allocated among all such projects, including the Leased Property, in accordance with sound accounting practices. In the event of any question or dispute as to such allocation, the written opinion of an Independent Certified Public Accountant, employed by the Authority to consider the question and render an opinion thereon, shall be a final and conclusive determination as to such allocation. The Trustee may conclusively rely upon the Written Request of the Authority, with the approval of an Authorized Representative of the City, endorsed thereon, in making any determination that costs relating to the Authority are payable as Additional Payments under the Sublease, and shall not be required to make any investigation as to whether or not the items so requested to be paid are expenses of operation of the Leased Property. Fair Rental Value Such payments of Base Rental Payments and Additional Payments for each Rental Payment Period during the term of the Sublease shall constitute the total rental for said Rental Payment Period and shall be paid by the City in each Rental Payment Period for and in consideration of the right of use and occupancy of the Leased Property during each such period for which such rental is to be paid. The Authority and the City have agreed and determined that such total rental payable for each Rental Payment Period represents no more than the fair rental value of the Leased Property for each such period. In making such determination, consideration has been given to costs of acquisition, design and construction of the Leased Property, other obligations of the Authority and the City under the Sublease, the uses and purposes which may be served by the Leased Property and the benefits therefrom which will accrue to the City and the general public. Payment Provisions (a) The Authority and the City recognize that the Authority is financing certain payments from the proceeds of its Bonds. At the request of the City, the Authority is issuing the Bonds to bear interest at rates to be determined from time to time in accordance with the provisions of the Trust Agreement in an effort to provide a lower cost to the City for the leasing of the Leased Property. It is contemplated by the Authority and the City that the amount of Base Rental Payments to be payable by the City to the Authority during each Rental Payment Period will be more than the amount needed in such Rental Payment Period by the Authority to pay the principal of and interest on the Bonds and the payment of any Related Obligations. The Authority agrees that if on any Base Rental Due Date, the amount of Base Rental Payments available pursuant to the terms of the Sublease shall exceed the needed by the Authority to pay the principal of and interest on the Bonds and payments of any Related Obligations coming due in the succeeding month, the excess amount may be deferred by the Authority, at its sole option, on such terms and conditions as it shall determine are necessary to protect the interests of the Owners of the Bonds and the provider of any Related Obligation, and thereupon such excess amount need not be paid by the City to the Authority at that time, but instead shall be deferred until such subsequent time within such Rental Payment Period as the Authority shall have need for such payment; provided that on each January 15 any deferred amount not needed by the Authority to pay the principal of and interest on the Bonds or payments of any Related Obligations on the next succeeding July 1 or January 1 shall be waived by the Authority, and such amount shall no longer be an obligation of the City. If in any month the principal of and interest on the Bonds or payment of any Related Obligation shall exceed the expected amount of Base Rental Payments payable by the City to the Authority in such month, the City shall pay the difference from rental deferred during the Rental Payment Period in which such month occurs. (b) Each Base Rental Payment installment or Additional Payment payable under the Sublease shall be paid in lawful money of the United States of America to or upon the order of the Authority at the C-25

232 corporate trust office of the Trustee or such other place as the Authority shall designate. Any Additional Payment accruing under the Sublease which shall not be paid when due and payable under the terms of the Sublease shall bear interest at the rate of twelve percent (12%) per annum, or such lesser rate of interest as may be the maximum rate permitted by law, from the date when the same is due under the Sublease until the same shall be paid. Notwithstanding any dispute between the Authority and the City, the City shall make all Base Rental Payments, Additional Payments and other payments when due without deduction or offset of any kind and shall not withhold any Base Rental Payments or Additional Payments or other payments pending the final resolution of such dispute. In the event of a determination that the City was not liable for said payments or any portion thereof, said payments or excess of payments, as the case may be, shall be credited against subsequent payments due under the Sublease or refunded at the time of such determination. Amounts required to be deposited by the City with the Trustee pursuant to the provisions of the Sublease for payment of Base Rental Payments on any date shall be reduced to the extent of amounts on deposit in the Revenue Fund and available therefor. (c) Base Rental Payments and Additional Payments shall be subject to abatement as and to the extent provided in the Sublease. (d) Nothing contained in the Sublease shall prevent the City from making from time to time contributions or advances to the Authority for any purpose at any time authorized by law, including the making of repairs to, or the restoration of, the Leased Property in the event of damage to or the destruction of the Leased Property. Appropriations and Funding Covenant; Pledged Revenues; Priority (a) The City covenants to take such action as may be necessary to include the Base Rental Payments and Additional Payments estimated by the City to be payable under the Sublease as a separate line item in its annual budget, and to make necessary annual appropriations for the Base Rental Payments and Additional Payments. Unless otherwise approved by the Bond Insurer, such appropriations shall be computed by the City (i) with respect to the 2005 Series A Bonds, (1) if such Bonds have borne interest at a rate other than a Long-Term Interest Rate for the preceding twelve (12)-month period, then the lesser of (A) the weighted average interest rate borne by such Bonds during such period or (B) the 25 Bond Revenue Bond Index most recently published in The Bond Buyer preceding the applicable date of calculation, or (ii) if such Bonds have borne interest at a Long-Term Interest Rate for the preceding twelve (12)-month period, then said 25 Bond Revenue Bond Index most recently published in The Bond Buyer preceding the applicable date of calculation; and (ii) as to the 2005 Series B Bonds (1) if such Bonds have borne interest at a rate other than a Long-Term Interest Rate for the preceding twelve (12)-month period, then the lesser of (A) the weighted average interest rate borne by such Bonds during such period or (B) the then applicable LIBOR swap rate for the remaining average life of such Bonds, or (2) if such Bonds have borne interest at a Long-Term Interest Rate for the preceding twelve (12)-month period, then the then applicable LIBOR swap rate for the remaining average life of such Bonds. The City shall deliver to the Authority and the Trustee a Certificate of the City describing that portion of its annual budget relating to the payment of Base Rental Payments and Additional Payments under the Sublease within thirty (30) days after the filing or adoption thereof. The covenants on the part of the City in the Sublease contained shall be deemed to be and shall be construed to be duties imposed by law, and it shall be the duty of each and every public official of the City to take such action and to do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements in the Sublease agreed to be carried out and performed by the City. (b) The City covenants that, so long as any Base Rental Payments and Additional Payments remain unpaid under the Sublease, the City in its capacity as the City shall levy the Tax Override (up to the C-26

233 maximum tax permitted by applicable law) in each Fiscal Year in accordance with the provisions of Section 5.07(a) of the Master PFRS Trust Agreement, whether or not the accrued unfunded actuarial liability of the City to the System is amortized prior to the final maturity of any Bond, in an amount that the City expects will be sufficient, when aggregated with the other amounts legally available to the City and on hand, and amounts budgeted by the City in such Fiscal Year and expected to be available, to pay all Base Rental Payments and Additional Payments due or becoming due under the Sublease during such Fiscal Year. Such covenant of the City under the Sublease, together with the obligation to pay Base Rental Payments and Additional Payments under the Sublease (but only to the extent such Base Rental Payments and Additional Payments are payable from or secured by Pledged Revenues), are declared by the City to be Subordinated Obligations for all purposes of the Master PFRS Trust Agreement and any supplement thereto or amendment thereof. Without limitation on the provisions of the preceding sentence, the lien and security interest pledged and assigned in accordance with the provisions of subsection (c) below shall be junior and subordinate to the lien on and security interest in any Tax Override Revenues and other assets granted to secure any Senior Obligation. (c) The City pledges and assigns to the Authority and the Trustee a lien on and security interest in the Pledged Revenues and, in its capacity as the City under the Master PFRS Trust Agreement, shall take all actions as may be necessary, permitted or required pursuant to the provisions of Sections 4.08 and 5.07 of the Master PFRS Trust Agreement to constitute or cause to be constituted available Tax Override Revenues as Pledged Revenues, including without limitation the making of Written Requests to the Master PFRS Trustee for Tax Override Revenues to be disbursed or transferred to or for the account of the City for any cost or purpose of the Program, it being understood and agreed that the transactions occurring in connection with the issuance and sale of the Bonds, the Sublease and the Trust Agreement, including without limitation the refunding and payment of the Refunded Bonds, are and shall be for purposes of the Program within the meaning of the PFRS Pension Obligation Bond Law and the Master PFRS Trust Agreement and any supplement thereto or amendment thereof, as provided in the Sublease. For all purposes of the Master PFRS Trust Agreement and each supplement thereto and amendment thereof, including without limitation the provisions of Section 4.04(b)(iii) of the First Supplemental PFRS Trust Agreement, the pledge of Pledged Revenues under the Sublease shall constitute a specific pledge of such revenues to the payment of debt service on indebtedness, including Subordinated Obligations. (d) The Authority and the City understand and intend that the obligation of the City to pay Base Rental Payments and Additional Payments under the Sublease shall constitute a current expense of the City and shall not in any way be construed to be a debt of the City in contravention of any applicable constitutional or statutory limitation or requirement concerning the creation or incurring of indebtedness by the City, nor shall anything contained in the Sublease constitute a pledge of the general tax revenues, funds or moneys of the City, other than the Pledged Revenues. Base Rental Payments and Additional Payments or other payments due under the Sublease shall be payable only from Pledged Revenues or from current funds which are budgeted and appropriated for such purpose or obtained pursuant to the provisions of subsection (b) above or otherwise legally available for the purpose of paying Base Rental Payments and Additional Payments or other payments due under the Sublease as consideration for the use of the Leased Property. The City has not pledged the full faith and credit of the City, the State or any agency, department or subdivision thereof to the payment of the Base Rental Payments and Additional Payments or any other payments due under the Sublease. Rental Abatement Except to the extent provided in the last sentence of this paragraph, the Base Rental Payments due in accordance with the Base Rental Schedule attached to the Sublease as Exhibit B and Additional C-27

234 Payments shall be abated proportionately, during any period in which by reason of any material damage or destruction (other than by condemnation as provided for in the Sublease) there is substantial interference with the use of the Leased Property by the City, in the proportion in which the cost of that portion of the Leased Property rendered unusable bears to the cost of the whole of the Leased Property. Such abatement shall continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction. In the event of any such damage or destruction, the Sublease shall continue in full force and effect, and the City waives the benefits of California Civil Code Section 1932(2) and 1933(4) and any and all other rights to terminate the Sublease by virtue of any such damage or destruction or interference. Notwithstanding the foregoing, to the extent that moneys are available for the payment of Base Rental Payments in any of the funds and accounts established under the Trust Agreement or are available as Pledged Revenues pursuant to the provisions of the Sublease, Base Rental Payments shall not be abated as provided above but, rather shall be payable by the City as a special and limited obligation payable solely from said funds, accounts and revenues (including, without limitation, Pledged Revenues consisting of Tax Override Revenues). Defaults and Remedies (a) If the City shall fail to pay any Base Rental Payment, Additional Payment or other amount payable under the Sublease when the same becomes due and payable, time being expressly declared to be of the essence of the Sublease, or if the City shall fail, for a period of thirty (30) days after notice of such failure has been given to the City by the Authority, the Bond Insurer or the Trustee or for such additional time as is reasonably required, in the discretion of the Trustee (with the prior written consent of the Bond Insurer) to correct the same, to keep, observe or perform any other term, covenant or condition contained in the Sublease to be kept or performed by the City, or upon the happening of any of the events specified in subsection (b) below (any such case above being an Event of Default ), the City shall be deemed to be in default under the Sublease, and it shall be lawful for the Authority to exercise any and all remedies granted pursuant to the provisions of the Sublease. Upon the occurrence or during the pendency of any such default, the Authority, without terminating the Sublease, may collect each Base Rental Payment and Additional Payment installment and other amounts as they become due and enforce any other terms or provisions of the Sublease to be kept or performed by the City, regardless of whether or not the City has abandoned the Leased Property or any portion thereof. In such event, the City shall remain liable and agree to keep or perform all covenants and conditions contained in the Sublease to be kept or performed by the City and to pay the full amount of the Base Rental Payments, Additional Payments and other amounts to the end of the term of the Sublease and further agrees to pay said Base Rental Payments and Additional Payments and other amounts punctually at the same time and in the same manner as provided in the Sublease for the payment of Base Rental Payments, Additional Payments and other amounts under the Sublease (without acceleration). (b) If any of the following shall occur: (i) the City s interest in the Sublease or any part thereof be assigned or transferred, either voluntarily or by operation of law or otherwise, without the prior written consent of the Authority, the Bond Insurer and any 2005 Liquidity Provider, or (ii) the City or any assignee of the City shall file any petition or institute any proceeding under any act or acts, State or federal, dealing with or relating to the subject or subjects or bankruptcy or insolvency, or under any amendment of such act or acts, either as a bankrupt or as an insolvent, or as a debtor, or in any similar capacity, wherein or whereby the City asks, seeks or prays to be adjudicated a bankrupt, or is to be discharged from any or all of the City s debts or obligations, or offers to the City s creditors to effect a composition or extension of time to pay C-28

235 the City s debts or obligations, or asks, seeks or prays for reorganization or to effect a plan of reorganization, or for a readjustment of the City s debts or obligations, or for any other similar relief, or if any such petition or any such proceedings of the same or similar kind or character be filed or be instituted or taken against the City, or if a receiver of the powers or of the property or assets of the City shall be appointed by any court, except a receiver appointed at the instance or request of the Authority, or if the City shall make a general or any assignment for the benefit of the City s creditors; or (iii) the City shall abandon or vacate the Leased Property, then the City shall be deemed to be in default under the Sublease. (c) The Authority shall in no event be in default in the performance of any of its obligations under the Sublease or imposed by any statute or rule of law unless and until the Authority shall have failed to perform such obligations within thirty (30) days or such additional time as is reasonably required to correct any such default after notice by the City to the Authority properly specifying wherein the Authority has failed to perform any such obligation. In the event of default by the Authority, the City shall be entitled to pursue any remedy provided by law. (d) Upon the occurrence of an event of default as described in the Sublease, the Authority shall proceed to protect and enforce the rights vested in the Authority by the Sublease. The provisions of the Sublease and the duties of the City and of its officials, officers or employees shall be enforceable by the Authority by mandamus or other appropriate suit, action or proceeding in any court of competent jurisdiction. Without limiting the generality of the foregoing, the Authority may bring the following actions: (i) Accounting. By action or suit in equity, to require the City and its officials, officers and employees and their assigns to account as the trustee of an express trust. (ii) Injunction. By action or suit in equity, to enjoin any acts or things which may be unlawful or in violation of any right of the Authority. (iii) Mandamus. By mandamus or other suit, action or proceeding at law or in equity, to enforce any right of the Authority against the City (and its officials, officers and employees) and to compel the City to perform and carry out its duties and obligations under the law and its covenants and agreements with the Authority as provided in the Sublease. The exercise of any rights or remedies under the Sublease shall not permit acceleration of Base Rental Payments and shall be subject to the terms and provisions of the Trust Agreement, including without limitation the right of the Bond Insurer to direct all remedies under the Sublease. (e) Each and all of the remedies provided to the Authority under the Sublease or by any law at any future time enacted are cumulative, and the single or partial exercise of any right, power or privilege under the Sublease shall not impair the right of the Authority to the exercise of any or all other rights, powers and privileges. If any statute or rule of law validly shall limit the remedies provided to the Authority under the Sublease, the Authority nevertheless shall be entitled to whatever remedies are allowable under any statute or rule of law. (f) In the event the Authority shall prevail in any action brought to enforce any of the terms and provisions of the Sublease, the City shall pay a reasonable amount as and for attorneys fees incurred by or on behalf of the Authority in attempting to enforce any of the remedies available to the Authority un- C-29

236 der the Sublease, whether or not a lawsuit has been filed and whether or not any lawsuit culminates in a judgment. Waiver Failure of the Authority to take advantage of any default on the part of the City shall not be, or be construed as, a waiver thereof, nor shall any custom or practice which may develop between the Authority and the City in the course of administering the Sublease be construed to waive or to lessen the right of the Authority to insist upon performance by the lessee of any term, covenant or condition of the Sublease or to exercise any right provided to the Authority with respect to such default. Any waiver of a particular default shall not be deemed to be a waiver of the same or any subsequent default. The acceptance of payments under the Sublease shall not be, nor be construed to be, a waiver of any term, covenant or condition in the Sublease. Eminent Domain (a) If the whole of the Leased Property or so much thereof as to render the remainder unusable for the purposes for which it was used by the City shall be taken under the power or threat of eminent domain, the term of the Sublease shall cease as of the day that possession shall be so taken. If less than the whole of the Leased Property shall be taken under the power or threat of eminent domain and the remainder is usable for the purposes for which it is used by the City at the time of such taking, then the Sublease shall continue in full force and effect as to such remainder, and the Authority and the City waive the benefits of any law to the contrary, and in such event there shall be a partial abatement of the rental due under the Sublease in an amount equivalent to the amount by which the annual payments of principal of and interest on the Bonds then Outstanding will be reduced by the application of the proceeds of the award in eminent domain to the redemption of Outstanding Bonds. So long as any Bonds shall be Outstanding, any award made in eminent domain proceedings for taking the Leased Property or any portion thereof shall be paid to the Trustee and applied to the prepayment of Base Rental Payments as provided in the Sublease. Any such award made after all of the Base Rental Payments and Additional Payments have been fully paid, or provision therefor made, shall be paid to the City. (b) The City covenants that it will not take the Authority s interest in the Leased Power under the power or threat of eminent domain unless the City first prepays all Base Rental Payments pursuant to the provisions of the Sublease. Prepayment (a) The City shall prepay on any date from insurance and eminent domain proceeds, to the extent provided in the Sublease (provided, however, that in the event of partial damage to or destruction of the Leased Property caused by perils covered by insurance, if in the judgment of the Authority the insurance proceeds are sufficient to repair, reconstruct or replace the damaged or destroyed portion of the Leased Property, such proceeds shall be held by the Trustee and used to repair, reconstruct or replace the damaged or destroyed portion of the Leased Property, pursuant to the procedure set forth in the Sublease for proceeds of insurance), all or any part (in an integral multiple of $5,000 principal component) of Base Rental Payments then unpaid so that the aggregate annual amounts of Base Rental Payments which shall be payable after such prepayment date shall be as nearly proportional as practicable to the aggregate annual amounts of Base Rental Payments unpaid prior to the prepayment date, at a prepayment amount equal to the principal of and interest on the Bonds to the date of redemption of the Bonds. C-30

237 (b) The City may prepay, from any source of available funds, all or any portion of Base Rental Payments by: (i) depositing with the Trustee moneys or securities as provided in the Trust Agreement sufficient to retire or redeem Bonds corresponding to such Base Rental Payments when due or redeemable, and (ii) satisfying the other requirements of the Trust Agreement and satisfying the requirements of any Related Obligations. The City agrees that if following such prepayment the Leased Property is damaged or destroyed or taken by eminent domain, the City shall not be entitled to, and by such prepayment shall waive the right of, abatement of such prepaid Base Rental Payments and shall not be entitled to any reimbursement of such Base Rental Payments. (c) Before making any prepayment pursuant to Article VI of the Sublease, the City shall, within five (5) days following the event creating such right or obligation to prepay, give written notice to the Authority and the Trustee describing such event and specifying the date on which the prepayment will be made, which date shall be not less than forty-five (45) days after the date such notice is given. (d) When: (i) there shall have been deposited with the Trustee at or prior to the due dates of the Base Rental Payments or date when the City may exercise its option to purchase the Leased Property, in trust for the benefit of the Owners of the Bonds and irrevocably appropriated and set aside to the payment of the Base Rental Payments or option price, sufficient moneys and Permitted Investments described in paragraph (i) of the definition of such term in the Trust Agreement, not redeemable prior to their maturity, the principal of and interest on which when due will provide money sufficient to pay all principal of and interest on the Bonds to the due date of such Bonds or date when the City may exercise its option to purchase the Leased Property, as the case may be, and to the payment in full of all other amounts due under the Sublease or under the Trust Agreement or on any Related Obligations; and (ii) all of the requirements set forth in the Trust Agreement shall have been satisfied; (iii) an agreement shall have been entered into with the Trustee for the payment of its fees and expenses so long as any Bonds shall remain unpaid; then and in that event the right, title and interest of the Authority in the Sublease and the obligations of the City under the Sublease shall thereupon cease, terminate, become void and be completely discharged and satisfied (except for the right of the Authority and the obligation of the City to have such moneys and such Permitted Investments applied to the payment of the Base Rental Payments or option price), and the Authority s interest in and title to the Leased Property or the applicable portion or item thereof shall be transferred and conveyed to the City. In such event, the Authority shall cause an accounting for such period or periods as may be requested by the City to be prepared and filed with the Authority (and accompanied by a verification report of an Independent Certified Public Accountant) and evidence such discharge and satisfaction, and the Authority shall pay over to the City as an overpayment of Base Rental Payments all such moneys or Permitted Investments held by it pursuant to the provisions of the Sublease other than such moneys and Permitted Investments as are required for the payment or prepayment of the Base Rental Payments or the option price and the fees and expenses of the Trustee, which moneys and Permitted Investments shall continue to be held by the Trustee in trust for the payment of Base Rental C-31

238 Payments or the option price and the fees and expenses of the Trustee, and shall be applied by the Authority to the payment and redemption of the Bonds and the fees and expenses of the Trustee. Option To Purchase; Sale or Disposition of Leased Property (a) The City shall have the option to purchase the Authority s interest in any part of the Leased Property upon the payment to the Authority of an option price consisting of moneys or securities of the category specified in clause (i) of the definition of the term Permitted Investments contained in the Trust Agreement (not callable by the issuer thereof prior to maturity) in an amount sufficient (together with the earnings and interest on such securities) to provide funds to pay the aggregate amount for the entire remaining term of the Sublease of the part of the total rent under the Sublease attributable to such part of the Leased Property (determined by reference to the proportion which the cost of such part of the Leased Property bears to the cost of all of the Leased Property). Any such payment shall be made to the Trustee and shall be treated as Base Rental Payments and shall be applied by the Trustee to pay the principal of, premium, if any, and interest on the Bonds and to redeem such Bonds if the Bonds are then subject to redemption pursuant to the provisions of the Trust Agreement. Upon the making of such payment to the Trustee and the satisfaction of all requirements set forth in the Trust Agreement: (i) the Base Rental Payments thereafter payable under the Sublease shall be reduced by the amount thereof attributable to such part of the Leased Property and theretofore paid pursuant to this section entitled Option To Purchase; Sale or Disposition of Leased Property, (ii) the sections entitled Rental Abatement and Option To Purchase; Sale or Disposition of Leased Property of the Sublease shall not thereafter be applicable to such part of the Leased Property, (iii) the insurance required under the provisions of the Sublease need not be maintained as to such part of the Leased Property, and (iv) the Authority s leasehold interest in such part of the Leased Property shall terminate pursuant to the provisions of the Lease and the term of the Sublease shall end as to the Leased Property. (b) The City, in its discretion, may request the Authority to sell, exchange or otherwise transfer, convey or dispose of any part of the Leased Property, and to release said part of the Leased Property from the Sublease, if: (i) in the opinion of the City the property so sold or exchanged is no longer required or useful in connection with the operation of the Leased Property, and (ii) the consideration to be received from the property is of a value substantially equal to the value of the property to be released or the property which replaces all or any portion of the Leased Property has fair rental value, together with the fair rental value of the remaining Leased Property, not less than the remaining Base Rental Payments and has a remaining useful life not shorter than the remaining average maturity of the Bonds; provided, however, that any replacement of property as a component of the Leased Property shall be subject to the prior approval of the Bond Insurer and approval in an Opinion of Bond Counsel. In the event of any such replacement of property, the additional property shall become part of the Leased Property under the Sublease. In the event of any such sale, the full amount of the money or consideration received C-32

239 for the personal property so sold and released shall be paid to the Authority and shall, so long as the City is not in default under any of the provisions of the Sublease, be used upon the Written Request of the City to purchase additional property which meets the requirements set forth in subparagraph (ii) above and is approved by the Bond Insurer and in an Opinion of Bond Counsel, which property shall become a part of the Leased Property under the Sublease. At the request of the Authority or the Bond Insurer, the City shall provide such additional opinions, certificates and other documents as reasonably requested in connection with any sale, exchange or purchase or new property subject to the Sublease. Liens In the event the City shall at any time during the term of the Sublease cause any changes, alterations, additions, improvements or other work to be done or performed or materials to be supplied upon the Leased Property, the City shall pay, when due, all sums of money that may become due for, or purporting to be for, any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to or for the City upon or about the Leased Property and shall keep the Leased Property free of any and all mechanics or materialmen s liens or other liens against the Leased Property or the Authority s interest therein. In the event any such lien attaches to or is filed against the Leased Property or the Authority s interest therein, the City shall cause each such lien to be fully discharged and released at the time the performance of any obligation secured by any such lien matures or becomes due, except that if the City desires to contest any such lien it may do so in good faith. If any such lien shall be reduced to a final judgment and such judgment or such process as may be issued for the enforcement thereof is not promptly stayed, or if so stayed and said stay thereafter expires, the City shall forthwith pay and discharge said judgment. The City agrees to and shall, to the maximum extent permitted by law, indemnify and hold the Authority, the Bond Insurer and the Trustee and their respective members, directors, agents, successors and assigns, harmless from and against, and defend each of them against, any claim, demand, loss, damage, liability or expense (including attorneys fees) as a result of any such lien or claim of lien against the Leased Property or the Authority s interest therein. Quiet Enjoyment The Authority and the City mutually covenant that the City, by keeping and performing the covenants and agreements contained in the Sublease and if not in default under the Sublease, shall at all times during the term of the Sublease peaceably and quietly have, hold and enjoy the Leased Property without suit, trouble or hindrance from the Authority. Authority Not Liable (a) The Authority and its members, directors, officers, agents, employees and assignees shall not be liable to the City or to any other party whomsoever for any death, injury or damage that may result to any person or property by or from any cause whatsoever about the Leased Property. (b) The City, to the extent permitted by law, shall indemnify and hold the Authority and each of its members, directors, officers, agents, employees and assignees, harmless from, and defend each of them against, any and all claims, liens and judgments arising from: (i) the Leased Property, including without limitation death of or injury to any person or damage to property whatsoever occurring about the Leased Property regardless of responsibility for negligence, but excepting the active negligence of the person or entity seeking such indemnity, and C-33

240 Subleasing (ii) the issuance of the Bonds and any other action of the Authority taken pursuant to the Trust Agreement, including but not limited to any liability of the Authority incurred pursuant to the provisions of the Trust Agreement. The City acknowledges that: (a) the Leased Property may not be subleased by the City, and the City covenants that it shall not permit any sublease of its rights or duties under the Sublease, except as provided in subsection (b) below; (b) the Leased Property may be subleased by the City, with the prior written consent of the Authority and the Bond Insurer, provided that such sublease complies with each of the following conditions: (i) the Sublease, and the obligations of the City under the Sublease, shall at all times during the term of the Sublease, be and remain the continuing obligations of the City, notwithstanding any such sublease; and (ii) the City shall furnish a copy of each such sublease to the Authority and the Trustee; (iii) no sublease by the City shall cause the Leased Property to be used for any purpose which would violate any provision of the Sublease or the Trust Agreement or the Constitution or laws of the State or cause the interest on the 2005 Series A Bonds to be included in gross income for federal income tax purposes. Tax Covenants (a) The City covenants that it shall not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of the interest on the 2005 Series A Bonds under Section 103 of the Code. The City shall not directly or indirectly use or permit the use of any proceeds of the 2005 Series A Bonds or of the Leased Property in such a manner as would adversely affect the exclusion of interest on any 2005 Series A Bonds from gross income under Section 103 of the Code. The City shall not directly or indirectly use or permit the use of any proceeds of any 2005 Series A Bonds, or of any facilities financed thereby, or other funds of the City, or take or omit to take any action, that would cause any 2005 Series A Bonds to be arbitrage bonds within the meaning of Section 148 of the Code. To that end, the City shall comply with all requirements of Section 148 of the Code and all regulations of the United States Department of the Treasury issued thereunder to the extent such requirements are, at the time, in effect and applicable to the 2005 Series A Bonds. In the event that at any time the Authority or the City is of the opinion that for purposes of the Sublease it is necessary to restrict or to limit the yield on the investment of any moneys held by the Trustee under the Trust Agreement, the Authority shall so instruct the Trustee in writing, and the Trustee shall take such action as may be directed in such instructions. (b) The City specifically covenants that it shall pay or cause to be paid the Rebate Requirement as provided in the Tax Certificate. C-34

241 APPENDIX D SUMMARY OF AUCTION PROCEDURES The following is a summary of certain provisions relating to the auction procedures that are contained in the Trust Agreement. This summary is not intended to a be a full statement of the terms of the Trust Agreement and accordingly, is qualified by reference thereto and is subject to the full text thereof. Capitalized terms not previously defined in the Official Statement or defined in this appendix have the meanings set forth in the Trust Agreement. ARTICLE I: DEFINITIONS Section Definitions. Agent Member means a member of, or participant in, the Depository who will act on behalf of a Bidder. All-Hold Rate means, as of any Auction Date, fifty-five per cent (55%) of the Index in effect on such Auction Date. ARB Default Rate means the ARB Maximum Rate. ARB Interest Payment Date means, with respect to ARBs, (a) when used with respect to any Auction Period (including the initial Auction Period commencing on and including the effective date of a change in the Interest Rate Period to an ARB Interest Rate Period and expiring on and including the initial Auction Date (or, if such initial Auction Date is not followed by a Business Day, the next succeeding day that is followed by a Business Day) determined by the Authority in connection with a change in the Interest Rate Period to an ARB Interest Rate Period) other than a daily Auction Period or a Flexible Auction Period, the Business Day immediately following such Auction Period, (b) when used with respect to a daily Auction Period, the first (1st) Business Day of the month immediately succeeding such Auction Period, and (c) when used with respect to a Flexible Auction Period of (i) seven (7) or more but fewer than one hundred eighty-two (182) days, the Business Day immediately following such Flexible Auction Period, or (ii) one hundred eighty-two (182) or more days, each January 1 and July 1 and on the Business Day immediately following such Flexible Auction Period. ARB Interest Rate means, for ARBs for each Auction Period, the rate of interest to be borne by the ARBs during that Auction Period, which ARB Interest Rate shall be determined in accordance with Section 2.03 of this Exhibit B, and if Sufficient Clearing Bids exist, the ARB Interest Rate shall be the Winning Bid Rate; provided, that if all of the ARBs are the subject of Submitted Hold Orders, the ARB Interest Rate shall be the All-Hold Rate with regard to such ARBs, and if Sufficient Clearing Bids do not exist, the ARB Interest Rate shall be the ARB Maximum Rate. ARB Maximum Rate means twelve per cent (12%) per annum. Auction means each periodic implementation of the Auction Procedures. D-1

242 Auction Date means, with respect to ARBs, during any period in which the Auction Procedures are not suspended in accordance with the provisions of the Trust Agreement, (i) if the ARBs are in a daily Auction Period, each Business Day, (ii) if the ARBs are in a Flexible Auction Period, the last Business Day of the Flexible Auction Period, and (iii) if the ARBs are in any other Auction Period, the Business Day immediately preceding each ARB Interest Payment Date for such ARBs (whether or not an Auction will be conducted on such date); provided, that the last Auction Date with respect to ARBs in an Auction Period other than a daily Auction Period or a Flexible Auction Period will be the earlier of (a) the Business Day immediately preceding the ARB Interest Payment Date immediately preceding the effective date of a change in the Interest Rate Period from an ARB Interest Rate Period to a different Interest Rate Period for such ARBs and (b) the Business Day immediately preceding the ARB Interest Payment Date immediately preceding the Maturity Date for such ARBs; and provided further, that if such ARBs are in a daily Auction Period, the last Auction Date will be the earlier of (x) the Business Day immediately preceding the effective date of a change in the Interest Rate Period applicable to such ARBs from an ARB Interest Rate Period to a different Interest Rate Period and (y) the Business Day immediately preceding the Maturity Date for such ARBs; and provided further, that the last Business Day of a Flexible Auction Period shall be the Auction Date for the Auction Period which begins on the next succeeding Business Day, if any. On the Business Day preceding the Conversion from a daily Auction Period to another Auction Period, there will be two Auctions, one for the last daily Auction Period and one for the first (1st) Auction Period following the Conversion. Auction Period means: (a) Flexible Auction Period; (b) with respect to ARBs in a daily Auction Period, a period beginning on each Business Day and extending to but not including the next succeeding Business Day; (c) with respect to ARBs in a seven (7)-day Auction Period and with Auctions generally conducted on (i) Fridays, a period of generally seven (7) days beginning on a Monday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Sunday) and ending on the Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) Mondays, a period of generally seven (7) days beginning on a Tuesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Monday) and ending on the Monday thereafter (unless such Monday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (iii) Tuesdays, a period of generally seven (7) days beginning on a Wednesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Tuesday) and ending on the Tuesday thereafter (unless such Tuesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (iv) Wednesdays, a period of generally seven (7) days beginning on a Thursday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Wednesday) and ending on the Wednesday thereafter (unless such Wednesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), and (v) Thursdays, a period of generally seven (7) days beginning on a Friday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Thursday) and ending on the Thursday thereafter (unless such Thursday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day); (d) with respect to ARBs in a twenty-eight (28)-day Auction Period and with Auctions generally conducted on (i) Fridays, a period of generally twenty-eight (28) days beginning on a Monday (or the last day of the prior Auction Period if the prior Auction Period does not end on a Sunday) and ending on the D-2

243 fourth (4th) Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) Mondays, a period of generally twenty-eight (28) days beginning on a Tuesday (or the last day of the prior Auction Period if the prior Auction Period does not end on a Monday) and ending on the fourth (4th) Monday thereafter (unless such Monday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (iii) Tuesdays, a period of generally twenty-eight (28) days beginning on a Wednesday (or the last day of the prior Auction Period if the prior Auction Period does not end on a Tuesday) and ending on the fourth (4th) Tuesday thereafter (unless such Tuesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (iv) Wednesdays, a period of generally twenty-eight (28) days beginning on a Thursday (or the last day of the prior Auction Period if the prior Auction Period does not end on a Wednesday) and ending on the fourth (4th) Wednesday thereafter (unless such Wednesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), and (v) Thursdays, a period of generally twenty-eight (28) days beginning on a Friday (or the last day of the prior Auction Period if the prior Auction Period does not end on a Thursday) and ending on the fourth (4th) Thursday thereafter (unless such Thursday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day). (e) with respect to ARBs in a thirty-five (35)-day Auction Period and with Auctions generally conducted on (i) Fridays, a period of generally thirty-five (35) days beginning on a Monday (or the last day of the prior Auction Period if the prior Auction Period does not end on Sunday) and ending on the fifth (5th) Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) Mondays, a period of generally thirty-five (35) days beginning on a Tuesday (or the last day of the prior Auction Period if the prior Auction Period does not end on Monday) and ending on the fifth (5th) Monday thereafter (unless such Monday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (iii) Tuesdays, a period of generally thirty-five (35) days beginning on a Wednesday (or the last day of the prior Auction Period if the prior Auction Period does not end on Tuesday) and ending on the fifth (5th) Tuesday thereafter (unless such Tuesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (iv) Wednesdays, a period of generally thirtyfive (35) days beginning on a Thursday (or the last day of the prior Auction Period if the prior Auction Period does not end on Wednesday) and ending on the fifth (5th) Wednesday thereafter (unless such Wednesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), and (v) Thursdays, a period of generally thirty-five (35) days beginning on a Friday (or the last day of the prior Auction Period if the prior Auction Period does not end on Thursday) and ending on the fifth (5th) Thursday thereafter (unless such Thursday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day); (f) with respect to ARBs in a three (3)-month Auction Period, a period of generally three (3) months (or shorter period upon a Conversion from another Auction Period) beginning on the day following the last day of the prior Auction Period and ending on the day that is ninety (90) days thereafter (unless such day is not Wednesday, in which case on the first (1st) Wednesday succeeding such day), provided, that if such day is not followed by a Business Day, on the next succeeding day which is followed by a Business Day; and (g) with respect to ARBs in a six (6)-month Auction Period, a period of generally six (6) months (or shorter period upon a Conversion from another Auction Period) beginning on the day following the last day of the prior Auction Period and ending on the day that is one hundred eighty (180) days thereafter (unless such day is not Wednesday, in which case on the first (1st) Wednesday succeeding such day), provided, that if such day is not followed by a Business Day, on the next succeeding day which is followed by a Business Day; D-3

244 provided, that: (a) if there is a Conversion of ARBs with Auctions generally to be conducted on Fridays (i) from a daily Auction Period to a seven (7)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on the next succeeding Sunday (unless such Sunday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) from a daily Auction Period to a twentyeight (28)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on the Sunday (unless such Sunday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than twenty-one (21) days but not more than twenty-eight (28) days after such Conversion Date, and (iii) from a daily Auction Period to a thirty-five (35)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on Sunday (unless such Sunday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than twentyeight (28) days but not more than thirty-five (35) days after such Conversion Date; (b) if there is a Conversion of ARBs with Auctions generally to be conducted on Mondays (i) from a daily Auction Period to a seven (7)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on the next succeeding Monday (unless such Monday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) from a daily Auction Period to a twentyeight (28)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on the Monday (unless such Monday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than twenty-one (21) days but not more than twenty-eight (28) days after such Conversion Date, and (iii) from a daily Auction Period to a thirty-five (35)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on Monday (unless such Monday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than twentyeight (28) days but not more than thirty-five (35) days after such Conversion Date; (c) if there is a Conversion of ARBs with Auctions generally to be conducted on Tuesdays (i) from a daily Auction Period to a seven (7)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on the next succeeding Tuesday (unless such Tuesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) from a daily Auction Period to a twentyeight (28)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on the Tuesday (unless such Tuesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than twenty-one (21) days but not more than twenty-eight (28) days after such Conversion Date, and (iii) from a daily Auction Period to a thirty-five (35)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on Tuesday (unless such Tuesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than twentyeight (28) days but not more than thirty-five (35) days after such Conversion Date; (d) if there is a Conversion of ARBs with Auctions generally to be conducted on Wednesdays (i) from a daily Auction Period to a seven (7)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on the next succeeding Wednesday (unless such Wednesday is not followed by a Business Day, in which case on D-4

245 the next succeeding day which is followed by a Business Day), (ii) from a daily Auction Period to a twenty-eight (28)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on the Wednesday (unless such Wednesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than twenty-one (21) days but not more than twenty-eight (28) days after such Conversion Date, and (iii) from a daily Auction Period to a thirty-five (35)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on Wednesday (unless such Wednesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than twenty-eight (28) days but not more than thirty-five (35) days after such Conversion Date; and (e) if there is a Conversion of ARBs with Auctions generally to be conducted on Thursdays (i) from a daily Auction Period to a seven (7)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on the next succeeding Thursday (unless such Thursday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) from a daily Auction Period to a twentyeight (28)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on the Thursday (unless such Thursday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than twenty-one (21) days but not more than twenty-eight (28) days after such Conversion Date, and (iii) from a daily Auction Period to a thirty-five (35)-day Auction Period, the next Auction Period shall begin on the Conversion Date (i.e., the ARB Interest Payment Date for the prior Auction Period) and shall end on Thursday (unless such Thursday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than twentyeight (28) days but not more than thirty-five (35) days after such Conversion Date; provided further, that any Auction Period that is greater than thirty-five (35) days may be extended as provided in paragraph (d) of Section 2.03 of this Exhibit B. Auction Procedures means the procedures for conducting Auctions for ARBs during an ARB Interest Rate Period set forth in this Exhibit B. Available Bonds means for ARBs on each Auction Date, the aggregate principal amount of ARBs that are not the subject of Submitted Hold Orders. Bid has the meaning specified in Section 2.01(a) of this Exhibit B. Bidder means each Existing Owner and Potential Owner who places an Order. Buyer s Broker-Dealer has the meaning set forth in Section 2.05(a)(iv) hereof. Existing Owner means (i) with respect to and for the purpose of dealing with the Auction Agent in connection with an Auction, a Person who is a Broker-Dealer listed in the Existing Owner registry at the close of business on the Business Day immediately preceding the Auction Date for such Auction and (ii) with respect to and for the purpose of dealing with a Broker-Dealer in connection with an Auction, a Person who is a Beneficial Owner of the Bonds. Flexible Auction Period means, with respect to ARBs, (a) any period one hundred eighty-two (182) days or less which is divisible by seven (7) and begins on an ARB Interest Payment Date and ends (i) in the case of ARBs with Auctions generally conducted on Fridays, on a Sunday unless such Sunday is D-5

246 not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day, (ii) in the case of ARBs with Auctions generally conducted on Mondays, on a Monday unless such Monday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day, (iii) in the case of ARBs with Auctions generally conducted on Tuesdays, on a Tuesday unless such Tuesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day, (iv) in the case of ARBs with Auctions generally conducted on Wednesdays, on a Wednesday unless such Wednesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day, and (v) in the case of ARBs with Auctions generally conducted on Thursdays, on a Thursday unless such Thursday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day or (b) any period which is longer than one hundred eighty-two (182) days, which begins on an ARB Interest Payment Date and ends not later than the final scheduled Maturity Date of such ARBs. Hold Order has the meaning specified in Section 2.01(a) of this Exhibit B. Index has the meaning specified in Section 2.06 of this Exhibit B. Order means a Hold Order, Bid or Sell Order. Potential Owner means any person, including any Existing Owner, who may be interested in acquiring a beneficial interest in ARBs, in addition to the ARBs currently owned by such person, if any. Sell Order has the meaning specified in Section 2.01(a) of this Exhibit B. Seller s Broker-Dealer has the meaning set forth in Section 2.05(a)(iii) hereof. Submission Deadline means 1:00 p.m., New York City time, on each Auction Date not in a daily Auction Period and 11:00 a.m., New York City time, on each Auction Date in a daily Auction Period, or such other time on such date as will be specified from time to time by the Auction Agent pursuant to the provisions of the Auction Agent Agreement as the time by which Broker-Dealers are required to submit Orders to the Auction Agent. Submission Processing Deadline shall mean the earlier of (i) 40 minutes after the Submission Deadline and (ii) the time when the Auction Agent begins to disseminate the results of the Auction to the Broker-Dealers. hereof. Submission Processing Representation shall have the meaning, specified in Section 2.02(g) Submitted Bid has the meaning specified in Section 2.03(b) of this Exhibit B. Submitted Hold Order has the meaning specified in Section 2.03(b) of this Exhibit B. Submitted Order has the meaning specified in Section 2.03(b) of this Exhibit B. Submitted Sell Order has the meaning specified in Section 2.03(b) of this Exhibit B. Sufficient Clearing Bids means with respect to ARBs, an Auction for which the aggregate principal amount of ARBs that are the subject of Submitted Bids by Potential Owners specifying one or more rates not higher than the ARB Maximum Rate is not less than the aggregate principal amount of D-6

247 ARBs that are the subject of Submitted Sell Orders and of Submitted Bids by Existing Owners specifying rates higher than the ARB Maximum Rate. Winning Bid Rate means with respect to ARBs, the lowest rate specified in any Submitted Bid which if selected by the Auction Agent as the ARB Interest Rate would cause the aggregate principal amount of ARBs that are the subject of Submitted Bids specifying a rate not greater than such rate to be not less than the aggregate principal amount of Available Bonds. ARTICLE II: AUCTION AND SETTLEMENT PROCEDURES Section Orders by Existing Owners and Potential Owners. (a) Prior to the Submission Deadline on each Auction Date: (i) each Existing Owner may submit to a Broker-Dealer, in writing or by such other method as will be reasonably acceptable to such Broker-Dealer, information as to: (A) the principal amount of ARBs, if any, held by such Existing Owner which such Existing Owner irrevocably commits to continue to hold for the next succeeding Auction Period without regard to the rate determined by the Auction Procedures for such Auction Period, (B) the principal amount of ARBs, if any, held by such Existing Owner which such Existing Owner irrevocably commits to continue to hold for the next succeeding Auction Period if the rate determined by the Auction Procedures for such Auction Period will not be less than the rate per annum then specified by such Existing Owner (and which such Existing Owner irrevocably offers to sell on the next succeeding ARB Interest Payment Date (or the same day in the case of a daily Auction Period) if the rate determined by the Auction Procedures for the next succeeding Auction Period will be less than the rate per annum then specified by such Existing Owner), and/or (C) the principal amount of ARBs, if any, held by such Existing Owner which such Existing Owner irrevocably offers to sell on the next succeeding ARB Interest Payment Date (or on the same day in the case of a daily Auction Period) without regard to the rate determined by the Auction Procedures for the next succeeding Auction Period; and (ii) for the purpose of implementing the Auctions and thereby to achieve the lowest possible interest rate on the ARBs, the Broker-Dealers will contact Potential Owners, including persons that are Existing Owners, to determine the principal amount of ARBs, if any, which each such Potential Owner irrevocably offers to purchase if the rate determined by the Auction Procedures for the next succeeding Auction Period is not less than the rate per annum then specified by such Potential Owner. (iii) For the purposes hereof an Order containing the information referred to in clause (i)(a) above is herein referred to as a Hold Order, an Order containing the information referred to in clause (i)(b) or (ii) above is herein referred to as a Bid, and an Order containing the information referred to in clause (i)(c) above is herein referred to as a Sell Order. (b) (i) A Bid by an Existing Owner will constitute an irrevocable offer to sell: D-7

248 (A) the principal amount of ARBs specified in such Bid if the rate determined by the Auction Procedures on such Auction Date will be less than the rate specified therein; or (B) such principal amount or a lesser principal amount of ARBs to be determined as described in Section 2.04(a)(v) hereof if the rate determined by the Auction Procedures on such Auction Date will be equal to such specified rate; or (C) a lesser principal amount of ARBs to be determined as described in Section 2.04(b)(iv) hereof if such specified rate will be higher than the ARB Maximum Rate, and Sufficient Clearing Bids do not exist. (ii) A Sell Order by an Existing Owner will constitute an irrevocable offer to sell: (A) the principal amount of ARBs specified in such Sell Order; or (B) such principal amount or a lesser principal amount of ARBs as described in Section 2.04(b)(iv) hereof if Sufficient Clearing Bids do not exist. (iii) A Bid by a Potential Owner will constitute an irrevocable offer to purchase: (A) the principal amount of ARBs specified in such Bid if the rate determined by the Auction Procedures on such Auction Date will be higher than the rate specified therein; or (B) such principal amount or a lesser principal amount of ARBs as described in Section 2.04(a)(vi) hereof if the rate determined by the Auction Procedures on such Auction Date will be equal to such specified rate. (c) Anything herein to the contrary notwithstanding: (i) for purposes of any Auction, any Order which specifies ARBs to be held, purchased or sold in a principal amount which is not twenty-five thousand dollars ($25,000) or an integral multiple thereof will be rounded down to the nearest twenty-five thousand dollars ($25,000), and the Auction Agent will conduct the Auction Procedures as if such Order had been submitted in such lower amount; (ii) for purposes of any Auction other than during a daily Auction Period, any portion of an Order of an Existing Owner which relates to an ARB which has been called for redemption on or prior to the ARB Interest Payment Date next succeeding such Auction will be invalid with respect to such portion and the Auction Agent will conduct the Auction Procedures as if such portion of such Order had not been submitted; (iii) for purposes of any Auction other than during a daily Auction Period, no portion of an ARB which has been called for redemption on or prior to the ARB Interest Payment Date next succeeding such Auction will be included in the calculation of Available Bonds for such Auction; and (iv) the Auction Procedures will be suspended during the period commencing on the date of the Auction Agent s receipt of a Notice of ARB Payment Default from the Trustee of the occurrence of an ARB Payment Default (provided, that for purposes of this provision only, D-8

249 payment by any Credit Provider will be deemed to cure such ARB Payment Default and no suspension of the Auction Procedures will occur) but will resume two (2) Business Days after the date on which the Auction Agent receives a Notice of Cure of ARB Payment Default from the Trustee that such ARB Payment Default has been waived or cured, with the next Auction to occur on the next regularly scheduled Auction Date occurring thereafter. Section Submission of Orders by Broker-Dealers to Auction Agent. (a) Each Broker-Dealer will submit to the Auction Agent in writing or by such other method as will be reasonably acceptable to the Auction Agent, including such electronic communication acceptable to the parties, prior to the Submission Deadline on each Auction Date, all Orders obtained by such Broker-Dealer and specifying, if requested, with respect to each Order: (i) the name of the Bidder placing such Order; (ii) the aggregate principal amount of ARBs, if any, that are the subject of such Order; (iii) to the extent that such Bidder is an Existing Owner: (A) the principal amount of ARBs, if any, subject to any Hold Order placed by such Existing Owner; (B) the principal amount of ARBs, if any, subject to any Bid placed by such Existing Owner and the rate specified in such Bid; and (C) the principal amount of ARBs, if any, subject to any Sell Order placed by such Existing Owner; and (iv) to the extent such Bidder is a Potential Owner, the rate specified in such Bid. (b) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent will round such rate up to the next highest one thousandth of one percent (0.001%). (c) If an Order or Orders covering all of the ARBs held by an Existing Owner is or are not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent will deem a Hold Order to have been submitted on behalf of such Existing Owner covering the principal amount of ARBs held by such Existing Owner and not subject to Orders submitted to the Auction Agent; provided, however, that if there is a Conversion from one Auction Period to another Auction Period and Orders have not been submitted to the Auction Agent prior to the Submission Deadline covering the aggregate principal amount of ARBs to be converted held by such Existing Owner, the Auction Agent will deem a Sell Order to have been submitted on behalf of such Existing Owner covering the principal amount of ARBs to be converted held by such Existing Owner not subject to Orders submitted to the Auction Agent. (d) If one or more Orders covering in the aggregate more than the principal amount of Outstanding ARBs held by any Existing Owner are submitted to the Auction Agent, such Orders will be considered valid as follows: (i) all Hold Orders will be considered Hold Orders, but only up to and including the aggregate principal amount of ARBs held by such Existing Owner; D-9

250 (ii) (A) any Bid of an Existing Owner will be considered valid as a Bid of an Existing Owner up to and including the excess of the principal amount of ARBs held by such Existing Owner over the principal amount of the ARBs subject to Hold Orders referred to in paragraph (i) above; (B) subject to clause (A) above, all Bids of an Existing Owner with the same rate will be aggregated and considered a single Bid of an Existing Owner up to and including the excess of the principal amount of ARBs held by such Existing Owner over the principal amount of ARBs held by such Existing Owner subject to Hold Orders referred to in paragraph (i) above; (C) subject to clause (A) above, if more than one Bid with different rates is submitted on behalf of such Existing Owner, such Bids will be considered Bids of an Existing Owner in the ascending order of their respective rates up to the amount of the excess of the principal amount of ARBs held by such Existing Owner over the principal amount of ARBs held by such Existing Owner subject to Hold Orders referred to in paragraph (i) above; and (D) the principal amount, if any, of such ARBs subject to Bids not considered to be Bids of an Existing Owner under this paragraph (ii) will be treated as the subject of a Bid by a Potential Owner; and (iii) all Sell Orders will be considered Sell Orders, but only up to and including a principal amount of ARBs equal to the excess of the principal amount of ARBs held by such Existing Owner over the sum of the principal amount of the ARBs considered to be subject to Hold Orders pursuant to the provisions of paragraph (i) above and the principal amount of ARBs considered to be subject to Bids of such Existing Owner pursuant to the provisions of paragraph (ii) above. (e) If more than one Bid is submitted on behalf of any Potential Owner, each Bid submitted with the same rate will be aggregated and considered a single Bid and each Bid submitted with a different rate will be considered a separate Bid with the rate and the principal amount of ARBs specified therein. (f) Neither the Trustee nor the Auction Agent will be responsible for the failure of any Broker- Dealer to submit an Order to the Auction Agent on behalf of any Existing Owner or Potential Owner. (g) Anything herein to the contrary notwithstanding, Broker-Dealers may submit an Order after the Submission Deadline and prior to the Submission Processing Deadline if the Order was (i) received by the Broker-Dealer from Existing Owners or Potential Owners prior to the Submission Deadline or (ii) initiated internally by the Broker-Dealer for its own account prior to the Submission Deadline. Each Order submitted to the Auction Agent after the Submission Deadline and prior to the Submission Processing Deadline shall constitute a representation by the Broker-Dealer that such Order was (i) received from an Existing Owner or Potential Owner prior to the Submission Deadline or (ii) initiated internally by the Broker-Dealer for its own account prior to the Submission Deadline (the Submission Processing Representation ). Section Determination of ARB Interest Rate. (a) Not later than 9:30 a.m., New York City time, on each Auction Date for ARBs, the Auction Agent will advise the Broker-Dealers and the Trustee by telephone or other electronic communication acceptable to them of the All-Hold Rate and the Index for the ARBs. D-10

251 (b) Promptly after the Submission Deadline on each Auction Date, but subject a Submission Processing Representation, the Auction Agent will assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to as a Submitted Hold Order, a Submitted Bid or a Submitted Sell Order, as the case may be, and collectively as a Submitted Order ) and will determine (i) the Available Bonds, (ii) whether there are Sufficient Clearing Bids, and (iii) the ARB Interest Rate. (c) Promptly after the Auction Agent has made the determinations pursuant to the provisions of subsection (b) above the Auction Agent will advise the Trustee by telephone (promptly confirmed in writing), telex or facsimile transmission or other electronic communication acceptable to the parties of the ARB Interest Rate for the next succeeding Auction Period and the Auction Agent will promptly notify DTC of such ARB Interest Rate. (d) In the event the Auction Agent fails to calculate or, for any reason, fails to timely provide the ARB Interest Rate for any Auction Period, (i) if the preceding Auction Period was a period of thirty-five (35) days or less, the new Auction Period shall be the same as the preceding Auction Period and the ARB Interest Rate for the new Auction Period shall be the same as the ARB Interest Rate for the preceding Auction Period, and (ii) if the preceding Auction Period was a period of greater than thirty-five (35) days, the preceding Auction Period shall be extended to the seventh (7th) day following the day that would have been the last day of such Auction Period had it not been extended (or if such seventh (7th) day is not followed by a Business Day then to the next succeeding day which is followed by a Business Day) and the ARB Interest Rate in effect for the preceding Auction Period will continue in effect for the Auction Period as so extended. In the event an Auction Period is extended as set forth in clause (ii) of the preceding sentence, an Auction shall be held on the last Business Day of the Auction Period as so extended to take effect for an Auction Period beginning on the Business Day immediately following the last day of the Auction Period as extended which Auction Period will end on the date it would otherwise have ended on had the prior Auction Period not been extended. (e) In the event that the Auction Procedures are suspended pursuant to the provisions of Section 2.01(c)(iv) hereof due to the failure to pay principal of or premium or interest on any ARB, the ARB Interest Rate for the next succeeding Auction Period will be the ARB Default Rate. (f) In the event of a failed Conversion with respect to the ARBs to a Daily Interest Rate Period, a Weekly Interest Rate Period or a Long-Term Interest Rate Period, or in the event of a failure to change the length of the current Auction Period due to the lack of Sufficient Clearing Bids at the Auction on the Auction Date for the first (1st) new Auction Period, the ARB Interest Rate for the next Auction Period will be the ARB Maximum Rate and the Auction Period will be a seven (7)-day Auction Period. (g) If the ARBs are not rated or if the ARBs are no longer registered in the name of the Depository, then the ARB Interest Rate will be the ARB Maximum Rate. (h) In the event that the ARB Interest Rate as determined in accordance with Section 2.03 of this Exhibit B exceeds the ARB Maximum Rate, the Authority will use its best efforts to convert the Interest Rate Period applicable to the ARBs to another Interest Rate Period. Section Allocation of ARBs. (a) In the event of Sufficient Clearing Bids for ARBs, subject to the further provisions of subsections (c) and (d) below, Submitted Orders for ARBs will be accepted or rejected as follows in the following order of priority: D-11

252 (i) the Submitted Hold Order of each Existing Owner will be accepted, thus requiring each such Existing Owner to continue to hold the ARBs that are the subject of such Submitted Hold Order; (ii) the Submitted Sell Order of each Existing Owner will be accepted and the Submitted Bid of each Existing Owner specifying any rate that is higher than the Winning Bid Rate will be rejected, thus requiring each such Existing Owner to sell the ARBs that are the subject of such Submitted Sell Order or Submitted Bid; (iii) the Submitted Bid of each Existing Owner specifying any rate that is lower than the Winning Bid Rate will be accepted, thus requiring each such Existing Owner to continue to hold the ARBs that are the subject of such Submitted Bid; (iv) the Submitted Bid of each Potential Owner specifying any rate that is lower than the Winning Bid Rate will be accepted, thus requiring each such Potential Owner to purchase the ARBs that are the subject of such Submitted Bid; (v) the Submitted Bid of each Existing Owner specifying a rate that is equal to the Winning Bid Rate will be accepted, thus requiring each such Existing Owner to continue to hold the ARBs that are the subject of such Submitted Bid, but only up to and including the principal amount of ARBs obtained by multiplying (A) the aggregate principal amount of Outstanding ARBs which are not the subject of Submitted Hold Orders described in paragraph (i) above or of Submitted Bids described in paragraphs (iii) or (iv) above by (B) a fraction the numerator of which is the principal amount of Outstanding ARBs held by such Existing Owner subject to such Submitted Bid and the denominator of which is the aggregate principal amount of Outstanding ARBs subject to such Submitted Bids made by all such Existing Owners that specified a rate equal to the Winning Bid Rate, and the remainder, if any, of such Submitted Bid will be rejected, thus requiring each such Existing Owner to sell any excess amount of ARBs; (vi) the Submitted Bid of each Potential Owner specifying a rate that is equal to the Winning Bid Rate will be accepted, thus requiring each such Potential Owner to purchase the ARBs that are the subject of such Submitted Bid, but only in an amount equal to the principal amount of ARBs obtained by multiplying (A) the aggregate principal amount of Outstanding ARBs which are not the subject of Submitted Hold Orders described in paragraph (i) above or of Submitted Bids described in paragraphs (iii), (iv) or (v) above by (B) a fraction the numerator of which is the principal amount of Outstanding ARBs subject to such Submitted Bid and the denominator of which is the sum of the aggregate principal amount of Outstanding ARBs subject to such Submitted Bids made by all such Potential Owners that specified a rate equal to the Winning Bid Rate, and the remainder of such Submitted Bid will be rejected; and (vii) the Submitted Bid of each Potential Owner specifying any rate that is higher than the Winning Bid Rate will be rejected. (b) In the event there are not Sufficient Clearing Bids for ARBs, subject to the further provisions of subsections (c) and (d) below, Submitted Orders for ARBs will be accepted or rejected as follows in the following order of priority: (i) the Submitted Hold Order of each Existing Owner will be accepted, thus requiring each such Existing Owner to continue to hold the ARBs that are the subject of such Submitted Hold Order; D-12

253 (ii) the Submitted Bid of each Existing Owner specifying any rate that is not higher than the ARB Maximum Rate will be accepted, thus requiring each such Existing Owner to continue to hold the ARBs that are the subject of such Submitted Bid; (iii) the Submitted Bid of each Potential Owner specifying any rate that is not higher than the ARB Maximum Rate will be accepted, thus requiring each such Potential Owner to purchase the ARBs that are the subject of such Submitted Bid; (iv) the Submitted Sell Orders of each Existing Owner will be accepted as Submitted Sell Orders and the Submitted Bids of each Existing Owner specifying any rate that is higher than the ARB Maximum Rate with respect to the ARBs will be deemed to be and will be accepted as Submitted Sell Orders, in both cases only up to and including the principal amount of ARBs obtained by multiplying (A) the aggregate principal amount of ARBs subject to Submitted Bids described in paragraph (iii) of this subsection (b) by (B) a fraction the numerator of which is the principal amount of Outstanding ARBs held by such Existing Owner subject to such Submitted Sell Order, or such Submitted Bid deemed to be a Submitted Sell Order, and the denominator of which is the principal amount of Outstanding ARBs subject to all such Submitted Sell Orders and such Submitted Bids deemed to be Submitted Sell Orders, and the remainder of each such Submitted Sell Order or Submitted Bid will be deemed to be and will be accepted as a Hold Order and each such Existing Owner will be required to continue to hold such excess amount of ARBs; and (v) the Submitted Bid of each Potential Owner specifying any rate that is higher than the ARB Maximum Rate with respect to the ARBs will be rejected. (c) If, as a result of the procedures described in subsection (a) or (b) above, any Existing Owner or Potential Owner would be required to purchase or sell an aggregate principal amount of ARBs which is not an Authorized Denomination for ARBs on any Auction Date, the Auction Agent will by lot, in such manner as it will determine in its sole discretion, round up or down the principal amount of ARBs to be purchased or sold by any Existing Owner or Potential Owner on such Auction Date so that the aggregate principal amount of ARBs purchased or sold by each Existing Owner or Potential Owner on such Auction Date will be an Authorized Denomination for ARBs, even if such allocation results in one or more of such Existing Owners or Potential Owners not purchasing or selling any ARBs on such Auction Date. (d) If, as a result of the procedures described in subsection (a) above, any Potential Owner would be required to purchase an Authorized Denomination of a principal amount of ARBs that is less than an Authorized Denomination for ARBs on any Auction Date, the Auction Agent will by lot, in such manner as it will determine in its sole discretion, allocate ARBs for purchase among Potential Owners so that the principal amount of ARBs purchased on such Auction Date by any Potential Owner will be an Authorized Denomination for ARBs, even if such allocation results in one or more of such Potential Owners not purchasing ARBs on such Auction Date. Section Settlement Procedures. (a) On each Auction Date, the Auction Agent will notify by telephone or other telecommunication device or other electronic communication acceptable to the parties or in writing each Broker-Dealer that participated in the Auction held on such Auction Date of the following with respect to ARBs for which an Auction was held on such Auction Date: (i) the ARB Interest Rate determined on such Auction Date for the succeeding Auction Period; D-13

254 Rate; (ii) whether Sufficient Clearing Bids existed for the determination of the Winning Bid (iii) if such Broker-Dealer (a Seller s Broker-Dealer ) submitted a Bid or a Sell Order on behalf of an Existing Owner, whether such Bid or Sell Order was accepted or rejected and the principal amount of ARBs, if any, to be sold by such Existing Owner; (iv) if such Broker-Dealer (a Buyer s Broker-Dealer ) submitted a Bid on behalf of a Potential Owner, whether such Bid was accepted or rejected and the principal amount of ARBs, if any, to be purchased by such Potential Owner; (v) if the aggregate principal amount of the ARBs to be sold by all Existing Owners on whose behalf such Broker-Dealer submitted Bids or Sell Orders is different from the aggregate principal amount of ARBs to be purchased by all Potential Owners on whose behalf such Broker- Dealer submitted a Bid, the name or names of one or more Broker-Dealers (and the Agent Member, if any, of each such other Broker-Dealer) and the principal amount of ARBs to be (A) purchased from one or more Existing Owners on whose behalf such other Broker-Dealers submitted Bids or Sell Orders or (B) sold to one or more Potential Owners on whose behalf such Broker-Dealer submitted Bids; and (vi) the immediately succeeding Auction Date. (b) On each Auction Date with respect to ARBs for which an Auction was held on such Auction Date, each Broker-Dealer that submitted an Order on behalf of any Existing Owner or Potential Owner will: (i) advise each Existing Owner and Potential Owner on whose behalf such Broker-Dealer submitted an Order as to (A) the ARB Interest Rate determined on such Auction Date, (B) whether any Bid or Sell Order submitted on behalf of each such Owner was accepted or rejected and (C) the immediately succeeding Auction Date; (ii) instruct each Potential Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, to instruct such Potential Owner s Agent Member to pay to such Broker-Dealer (or its Agent Member) through the Depository the amount necessary to purchase the principal amount of ARBs to be purchased pursuant to such Bid (including, with respect to the ARBs in a daily Auction Period, accrued interest if the purchase date is not an ARB Interest Payment Date for such ARB) against receipt of such ARBs; and (iii) instruct each Existing Owner on whose behalf such Broker-Dealer submitted a Sell Order that was accepted or a Bid that was rejected in whole or in part, to instruct such Existing Owner s Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Depository the principal amount of ARBs to be sold pursuant to such Bid or Sell Order against payment therefor. (c) On the basis of the information provided to it pursuant to the provisions of Section 2.05(a) hereof, each Broker-Dealer that submitted an Order in an Auction is required to allocate any funds received by it in connection with such Auction pursuant to the provisions of Section 2.05(b)(ii) hereof, and any ARBs received by it in connection with such Auction pursuant to the provisions of Section 2.05(b)(iii) hereof among the Potential Owners, if any, on whose behalf such Broker-Dealer Submitted Bids, the Existing Owners, if any on whose behalf such Broker-Dealer Submitted Bids or Sell Orders in such Auction, and any Broker-Dealers identified to it by the Auction Agent following such Auction pursuant to the provisions of Section 2.05(a)(v) or 2.05(a)(v) hereof. (d) On each Auction Date: D-14

255 (i) each Potential Owner and Existing Owner with an Order in the Auction on such Auction Date shall instruct its Participant as provided in Section 2.05(b)(ii) or 2.05(b)(iii) hereof, as the case may be; (ii) each Seller s Broker-Dealer that is not a Participant of the Depository shall instruct its Participant to (A) pay through the Depository to the Participant of the Existing Owner delivering ARBs to such Broker-Dealer following such Auction pursuant to the provisions of Section 2.05(b)(iii) hereof the amount necessary to purchase such ARBs against receipt of such ARBs, and (B) deliver such ARBs through the Depository to a Buyer s Broker-Dealer (or its Participant) identified to such Seller s Broker-Dealer pursuant to the provisions of Section 2.05(a)(v) hereof against payment therefor; and (iii) each Buyer s Broker-Dealer that is not a Participant in the Depository shall instruct its Participant to (A) pay through the Depository to Seller s Broker-Dealer (or its Participant) identified following such Auction pursuant to the provisions of Section 2.05(a)(vi) hereof the amount necessary to purchase the ARBs to be purchased pursuant to the provisions of Section 2.05(b)(ii) hereof against receipt of such ARBs, and (B) deliver such ARB through the Depository to the Participant of the purchaser thereof against payment therefor. (e) On the Business Day following each Auction Date: (i) each Participant for a Bidder in the Auction on such Auction Date referred to in Section 2.05(d)(i) hereof shall instruct the Depository to execute the transactions described under Section 2.05(b)(ii) or 2.05(b)(iii) hereof for such Auction, and the Depository shall execute such transactions; (ii) each Seller s Broker-Dealer or its Participant shall instruct the Depository to execute the transactions described in Section 2.05(d)(ii) hereof for such Auction, and the Depository shall execute such transactions; and (iii) each Buyer s Broker-Dealer or its Participant shall instruct the Depository to execute the transactions described in Section 2.05(d)(iii) hereof for such Auction, and the Depository shall execute such transactions. (f) If an Existing Owner selling ARBs in an Auction fails to deliver such ARBs (by authorized book-entry), a Broker-Dealer may deliver to the Potential Owner on behalf of which it submitted a Bid that was accepted a principal amount of ARBs that is less than the principal amount of ARBs that otherwise was to be purchased by such Potential Owner. In such event, the principal amount of ARBs to be so delivered shall be determined solely by such Broker-Dealer. Delivery of such lesser principal amount of ARBs shall constitute good delivery. Notwithstanding the foregoing terms of this subsection, any delivery or nondelivery of ARB which shall represent any departure from the results of an Auction, as determined by the Auction Agent, shall be of no effect unless and until the Auction Agent shall have been notified of such delivery or nondelivery in accordance with the provisions of the Auction Agent Agreement and the Broker-Dealer Agreements. D-15

256 Section Index. (a) The Index on any Auction Date with respect to ARBs in any Auction Period of thirty-five (35) days or less shall be LIBOR. The Index on any Auction Date with respect to ARBs in any Auction Period greater than thirty-five (35) days but less than one hundred eighty (180) days shall be the greater of LIBOR or the Thirty-Day AA Financial Composite Commercial Paper Rate on such date. The Index with respect to ARBs in any Auction Period of one hundred eighty (180) days or more but less than three hundred sixty-five (365) days shall be the greater of LIBOR or the rate on United States Treasury Securities having a maturity which most closely approximates the length of the Auction Period, as last published in The Wall Street Journal. The Index with respect to ARBs in any Auction Period of three hundred sixty-five (365) days or more shall be the rate on United States Treasury Securities having a maturity which most closely approximates the length of the Auction Period, as last published in The Wall Street Journal. If LIBOR, the Thirty-Day AA Financial Composite Commercial Paper Rate or the rate on United States Treasury Securities last published in The Wall Street Journal is unavailable, the Index will be an index or rate agreed to by all Broker-Dealers with ARBs in such Auction Period and consented to by the City. Thirty-Day AA Financial Composite Commercial Paper Rate on any date of determination, means the interest equivalent of the Thirty-Day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated AA by Standard & Poor s, or the equivalent of such rating by Standard & Poor s, as made available on a discount basis or otherwise by (A) the Federal Reserve Board or the Business Day immediately preceding such date of determination, or (B) if the Federal Reserve Board does not make available any such rate, then the arithmetic average of such rates, as quoted on a discount basis or otherwise, by Morgan Stanley & Co. Incorporated or, in lieu of any thereof, its affiliates or successors which are commercial paper dealers (the Commercial Paper Dealers ), to the Auction Agent before the close of business on the Business Day immediately preceding such date of determination. For purposes of the definitions of Thirty-Day AA Financial Composite Commercial Paper Rate, the interest equivalent means the equivalent yield on a three-hundred sixty (360)-day basis of a discount-basis security to an interest-bearing security. If any Commercial Paper Dealer does not quote a commercial paper rate required to determine the Thirty-Day AA Financial Composite Commercial Paper Rate, the Thirty-Day AA Financial Composite Commercial Paper Rate will be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any substitute commercial paper dealer not included within the definition of Commercial Paper Dealer above, which may be Morgan Stanley & Co. Incorporated or its affiliates or successors which are commercial paper dealers (a Substitute Commercial Paper Dealer ) selected by the Authority to provide such commercial paper rate or rates not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or if the Authority does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. LIBOR on any date of determination for any Auction Period, means (i) for any Auction Period of fewer than forty-nine (49) days, the offered rate for deposits in U.S. dollars for a one (1)-month period which appears on the Telerate Page 3750 at approximately 11:00 A.M., London time, on such date, or if such date is not a date on which dealings in U.S. dollars are transacted in the London interbank market, then on the next preceding day on which such dealings were transacted in such market (the calculation date ) and (ii) for any Auction Period of (A) forty-nine (49) or more but fewer than seventy (70) days, such rates for deposits in U.S. dollars for a two (2)-month period, (B) seventy (70) or more but fewer than eighty-five (85) days, the arithmetic average of such rates for deposits in U.S. dollars for two (2) and three (3)-month periods, (C) eighty-five (85) or more but fewer than one hundred twenty (120) days, such rate for deposits in U.S. dollars for a three (3)-month period, (D) one hundred twenty (120) or more but D-16

257 fewer than one hundred forty-eight (148) days, the arithmetic average of such rates for deposits in U.S. dollars for three (3) and six (6)-month periods, (E) one hundred forty-eight (148) or more but fewer than one hundred eighty (180) days, such rate for deposits in U.S. dollars for a six (6)-month period, (F) one hundred eighty (180) or more but fewer than two hundred twenty-five (225) days, the arithmetic average of such rates for deposits in U.S. dollars for six (6) and nine (9)-month periods, (G) two hundred twentyfive (225) or more but fewer than two hundred ninety (290) days, such rate for deposits in U.S. dollars for a nine (9)-month period, (H) two hundred ninety (290) or more but fewer than three hundred twenty-five (325) days, the arithmetic average of such rates for deposits in U.S. dollars for nine (9)-month and one (1)-year periods and (I) three hundred twenty-five (325) or more but fewer than three hundred sixty-five (365) days, such rate for deposits in U.S. dollars for a one (1)-year period. (b) If for any reason on any Auction Date the Index will not be determined as hereinabove provided in this section, the Index will be the Index for the Auction Period ending on such Auction Date. (c) The determination of the Index as provided herein will be conclusive and binding upon the Trustee, the Broker-Dealers, the Auction Agent and the Owners of the ARBs. D-17

258 (THIS PAGE INTENTIONALLY LEFT BLANK)

259 APPENDIX E CITY OF OAKLAND INVESTMENT POLICY FISCAL YEAR

260 (THIS PAGE INTENTIONALLY LEFT BLANK)

261 City of Oakland and Oakland Redevelopment Agency Investment Policy For Fiscal Year Prepared by Treasury Division, Financial Services Agency Adopted by the City Council and Oakland Redevelopment Agency On June 15, 2004

262 Table of Contents Topic Page Number 1) General Authority 1 Scope 1 Delegation 1 Prudent Investor Standard 2 Ethics and Avoidance of Conflicts of Interest 2 Internal Control 2 2) Applicable Ordinances Nuclear Free Zone Ordinance 3 Linked Banking Ordinance 3 Tobacco Divestiture Resolution 3 3) The Portfolio Definition of the Portfolio 4 Objectives 4 Custody 5 Reporting Requirements 5 Derivatives 6 General Credit Quality 6 Maturity 6 Trading Policies 7 4) Permitted Investments U. S. Treasury Securities 8 Federal Agencies and Instrumentalities 8 Banker's Acceptances 9 Commercial Paper 9 Asset -Backed Commercial Paper 10 Local Agency Pooled Investment & Deposit Commercial Paper Limits 10 Medium Term Notes 11 Negotiable Certificates of Deposit 11 Repurchase Agreements 12 Reverse Repurchase Agreements 12 Secured Obligations and Agreements 13 Certificates of Deposit 13 Money Market Mutual Funds 14 State Investment Pool (Local Agency Investment Fund) 15 Local City/Agency Bond 15 State of California Bonds 16 Other Local Agency Bonds 16

263 I. General Authority Pursuant to Council Resolution Nos C.M.S. and C.M.S. and in accordance with Government Codes Section 53607, the City Council delegates to the Director of Finance and Management Agency/Treasurer the authority to invest the City's and the Agency's operating fund within the guidelines of Section of the Government Code of the State of California (the "Code"). The Code also directs the City to present an annual investment policy for confirmation to the City Council. This Investment Policy is now amended and adopted as of July 2004 and will serve as the City of Oakland's Investment Policy for fiscal year and until further revised. By approval of this Investment Policy the City Council extends the authority and responsibility of the Director of Finance and Management Agency/Treasurer to invest or to reinvest the City's and the Agency's funds, or to sell or exchange securities so purchased, all as provided by Government Code Section Scope The Investment Policy applies to the operating funds of the City of Oakland and the Port of Oakland (the "City Operating Portfolio") and the Oakland Redevelopment Agency (the "Agency Operating Portfolio"). As specified in the Government Code, the proceeds of notes, bond issues or similar financings including, but not limited to reserve funds, project funds, debt service funds and capital trust funds derived from such financings, are not governed by this Investment Policy, but rather shall be invested pursuant to their respective bond or trust indentures or the State of California Government Code 53600, as applicable. Similarly, retirement/pension funds and deferred compensation funds also are not governed by this Investment Policy, but rather by the policies and federal or State statutes explicitly applicable to such funds. Delegation Management responsibility for the investment program is specifically delegated to the Treasury Manager who shall establish procedures for the investment program, which are consistent with this Investment Policy. Authorization for investment decisions is limited to the Treasurer, Treasury Manager, and Assistant Treasury Manager. The Financial and Treasury Analysts may make decisions only with respect to overnight investments. The Financial and Treasury Analysts also may implement investment decisions of the Treasurer, Treasury Manager or Assistant Treasury Manager, with implementation of such approved transactions to be reviewed daily by the Treasurer, Treasury Manager or Assistant Treasury Manager. 1

264 Prudent Investor Standard All investments and evaluation of such investments shall be made with regard to the "prudent Investor" standard of care, that is, with the care, skill, prudence and diligence under the circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the professional management of their business affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. Ethics and Avoidance of Conflicts of Interest All officers and employees involved in the investment process shall not engage in any personal business activity, which could conflict with proper execution of the investment program or impair their ability to make impartial investment decisions. Any material financial interests in financial institutions, which do business with the City, should be disclosed to the City Administrator. Personal investment transactions are to be subordinate to those of the City, particularly with respect to the timing of purchases and sales. All individuals involved in the investment process are required to report all gifts and income in accordance with California State law. Internal Control The Director of Finance and Management Agency/Treasurer, Treasury Manager, and Assistant Treasury Manager shall maintain a system of internal controls designed to ensure compliance with the Investment Policy and to prevent losses due to fraud, employee error, misrepresentations by third parties or unanticipated changes in financial markets. The independent/external auditors shall perform an annual appraisal audit of the investment portfolio to evaluate the effectiveness of the City's investment program as well as its compliance with the Investment Policy. Additionally, the City Auditor's Office is directed to conduct periodic audits of Treasury operations to review its procedures and policies and to make recommendations for changes and improvements, if warranted. 2

265 2. Applicable Ordinances Nuclear Free Zone Ordinance Under the guidelines of a voter-approved Measure, the Oakland City Council approved Ordinance No C.M.S., which restricts the City's investment in U.S. Government Treasuries. The Treasurer will make every attempt to invest in any available short-term option that provides approximately the same level of security and return as Treasuries issued by the Government. In the event that no reasonable alternatives exist, or to the extent that the City may experience financial hardship as a result of investment in these alternatives, the City Council may adopt a waiver for a period not to exceed 60 days, as authorized by the Ordinance, allowing the City to invest in U.S. Treasury securities. Linked Banking Ordinance Pursuant to Ordinance No C.M.S. the City has established a Linked Banking Service Program. This reference applies to depositories for both the City of Oakland and the Port of Oakland banking needs. Depositories are defined within the Ordinance as "all banking services utilized by the City including the Port of Oakland operating fund, with the exception of investments made through investment banks and broker/dealers." Depositories providing services to the City and the Port of Oakland must provide to the City, annually, the information enumerated under Section 3 of the Ordinance. Tobacco Divestiture Resolution On February 17, 1998 Council adopted Resolution No C.M.S., which prohibits investment in businesses deriving greater than fifteen percent of their revenues from tobacco products. Treasury Division maintains a list of firms excluded from permitted investments due to the tobacco divestiture requirements. Preferences When possible, it is the City's policy to invest in companies that promote the use and production of renewable energy resources and any other socially responsible investments, subject to the prudent investment standard. 3

266 3. The Portfolio Definition of the Portfolio For the purposes of this Investment Policy, the "Portfolio" or "Fund" consists of the unexpended fund balances of the City of Oakland (including certain operating funds held from time to time for the City's Retirement Systems) and the Port of Oakland, and the "Agency Portfolio" or "Agency Fund" consists of the unexpended fund balances of the Oakland Redevelopment Agency. This Investment Policy applies equally to both the City and the Agency, and all references to "Portfolio" or "Fund" are deemed to include that of each respective entity. As specified in the Government Code, the proceeds of notes, bond issues or similar financings including, but not limited to reserve funds, project funds, debt service funds and capital trust funds derived from such financings, are not included in the Portfolio, but rather shall be invested separately pursuant to their respective bond or trust indentures or the State of California Government Code 53600, as applicable. Similarly, retirement/pension funds and deferred compensation funds are not included in the Portfolio, but rather shall be invested separately pursuant to the respective policies and federal or State statutes explicitly applicable to such funds. Objectives Preservation of Capital (Safety) The first and primary goal of the Fund is the preservation of capital. Investments shall be made with the aim of avoiding losses due to market value risk, issuer default and broker default. Diversification of the Fund further ensures that potential losses on individual securities do not exceed the income generated on the remainder of the Fund. Liquidity Adequate cash on hand to meet cash disbursements and payroll are to be covered through maturing investments. Cash flow modeling is an integral part of the overall cash management responsibilities of the Treasury Division. Diversity Reducing overall portfolio risks while maintaining market average rates of return is essential. The objective is to avoid over-concentration in issuers, instruments, and maturity sectors. No more than 5 percent of the total assets of the investments held by the City may be invested in the securities of any one issuer, except the obligations of the United States government or government-sponsored enterprises, investment with the Local Agency Fund and proceeds of or pledged revenues for any tax revenue anticipation notes. 4

267 Yield Custody While not the primary consideration of the Fund, it is important to recognize that the objectives of the City go beyond the preservation of capital. The Fund is managed to maximize its overall return with consideration of the safety, liquidity, and diversity parameters discussed above. All investments of the City/Agency are to be secured through third-party custody and safekeeping procedures. All securities purchased from dealers and brokers shall be held in safekeeping by the City's custodial bank, which establishes ownership, by the City of Oakland or the Agency, as applicable. All collateralized securities, such as repurchase agreements, are to be purchased using delivery versus payment procedures. Reporting Requirements Interim Requirements to Council The Director of Finance and Management Agency/Treasurer will submit a quarterly investment report for the City and the Agency within 30 days following the period being reported to the City Council. Such a quarterly report will be deemed timely pursuant to this Investment Policy and Government Code Section 53646, so long as it has been placed in the published Council agenda materials within 30 days following the period being reported. The report will include the information required under Government Code Section including: the type of investment, issuer, date of maturity, par and dollar amount invested (this data may be in the form of a subsidiary ledger of investments); a description of any investments under management of contracted parties, if any; current market values and source of valuation; statement of compliance or manner of noncompliance with the Investment Policy; and a statement denoting the ability to meet the Fund's expenditure requirements for the next six months. In addition, the report shall summarize economic conditions, liquidity, diversity, risk characteristics and other features of the portfolio. The report will disclose the total investment return for the 3- month period. In meeting these requirements, the report shall include an appendix that discloses all transactions during each month and the holdings at the end of each month during the period being reported. Reports to California Debt and Investment Advisory Commission (CDIAC) Pursuant to section of the Government Code, the legislature is mandated to appropriate fund for Investment report. During the fiscal year , the legislature suspended the Investment Reports appropriation. The City is therefore not mandated to send report to the state. 5

268 Annual Requirements The annual report shall provide an overall performance appraisal of various investment securities classes, overall economic and interest rate trends, and the overall outlook for the portfolio. As a part of the annual audit, the portfolio will be marked to market each June 30 in accordance with requirements of generally accepted accounting principals and the Government Accounting Standards Board. However, unrealized gains or losses will not be distributed. Derivatives Callable step-up securities and floaters (which are tied to a short-term index such as 3- or 6- month LIBOR, 3-month Treasury Bills or Fed Funds rate) are considered suitable investments. Structured notes, capped and range floaters, floating rate notes tied to a long-term index such as the Cost of Funds Index, inverse floaters and leveraged floaters are not permitted investments of the Fund at this time. Collateralized Mortgage Obligations or their derivatives such as interest only strips are not permitted investments at this time. General Credit Quality Short- term debt shall be rated at least A-1 by Standard & Poor s Corporation, P-1 by Moody s Investor Service, Inc. or F-1 by Fitch. Long-term debt shall be rated at least A by Standard & Poor s Corporation, Moody s Investors Service, Inc., or Fitch. The minimum credit requirement for each security is further defined within the Permitted Investments section of the policy. If securities which are purchased for the Fund are downgraded below the credit quality required by the Fund, the Treasurer, in consultation with the Treasury Manager, will determine whether to retain or to sell the security. Evaluation of divestiture of securities will be determined on a case-by-case basis. Maturity The average maturity of the investment portfolio shall not exceed 540 days. The maximum maturity for any one investment shall not exceed 5 years unless authority for such investment is expressly granted in advance by the City Council in accordance with Government Code Section

269 Trading Policies Sales Prior to Maturity "Buy and hold" is not necessarily the strategy to be used in managing the Funds. It is expected that gains will be realized when prudent. Losses are acceptable if the proposed swap/trade clearly enhances the portfolio yield over the life of the new security on a total return basis. Sufficient written documentation will be maintained to facilitate audit of the transaction. Losses, if any, will be recognized and recorded based on the transaction date. Purchasing Entities, Broker/Dealers and Financial Institutions The purchase of any authorized investment shall be made either directly from the issuer or from any of the following: Institutions licensed by the State of California as a broker/dealer Members of a federally regulated securities exchange National or state-chartered banks Federal or state savings institutions or associations as defined in Finance Code Section 5102 Brokerage firms reporting as a primary government dealer to the Federal Reserve Bank The Treasury Manager will maintain a current and eligible list of reputable primary and regional dealers, brokers and financial institutions with whom securities trading and placement of funds are authorized. A strong capital base credit worthiness, and, where applicable, a broker/dealer staff experienced in transactions with California local governments are the primary criteria for inclusion on the City of Oakland's approved list. Approved dealers and brokers shall be limited to primary dealers or regional dealers that qualify under Securities and Exchange Commission Rule 15C3-1 (uniform net capital rule) and which provide: proof of National Association of Securities Dealers certification; proof of California State registration; and a completed City of Oakland broker/dealer questionnaire. In addition, prior to approval and annually thereafter, approved dealers and brokers must provide: an audited financial statement; certification of receipt, review of and willingness to comply with the current Investment Policy; and certification of compliance with Rule G-37 of the Municipal Securities Rulemaking Board regarding limitations on political contributions to the Mayor or any member of the City Council or to any candidate for these offices. The Treasurer or Treasury Manager may remove a firm from the approved list at any time due to: any failure to comply with any of the above criteria; any failure to successfully execute a transaction; any change in broker/dealer staff; or any other action, event or failure to act which, in the sole discretion of the Treasurer or Treasury Manager is materially adverse to the best interests of the City/Agency. 7

270 4. Permitted Investments The following securities are permissible investments pursuant to Section of the Government Code as well as this Investment Policy. Any other investment not specified hereunder shall be made only upon prior approval by the City Council and/or the Agency. U. S. Treasury Securities Bills, notes and bonds issued by the U.S. Treasury which are direct obligations of the federal government. Maximum Maturity 5 years Maximum Portfolio Exposure 20%* Maximum Issuer Exposure Credit Requirement Prudent person standard applies overall N.A. * 20% limit is a result of the Nuclear Free Zone Ordinance, subject also to prior adoption by Council of a waiver for a period not to exceed 60 days allowing investment in U.S. Treasury securities due to specified findings. There is no limitation under the Government Code. Federal Agencies and Instrumentalities Notes and bonds of federal agencies, government-sponsored enterprises and international institutions. Not all are direct obligations of the U. S. Treasury but may involve federal sponsorship and/or guarantees, in some instances. Maximum Maturity Maximum Portfolio Exposure Maximum Issuer Exposure Credit Requirement 5 years None Prudent person standard applies overall N.A. 8

271 Banker's Acceptances (BA) Bills of exchange or time drafts drawn on and accepted by a commercial bank, typically created from a letter of credit issued in a foreign trade transaction. Maximum Maturity 180 days Maximum Portfolio Exposure 40% Maximum Issuer Exposure Credit Requirement 30% of total surplus funds may be in BAs of one commercial bank; maximum 5% per issuer Al, P1, or F1 (S&P/Moody's/Fitch) Commercial Paper A short-term, unsecured promissory note issued by financial and non-financial companies to raise short-term cash. Financial companies issue commercial paper to support their consumer and/or business lending; non-financial companies issue for operating funds. Maximum Maturity 270 days Maximum Portfolio Exposure 25% Maximum Issuer Exposure Credit Requirement Eligibility 10% of the outstanding paper of the issuer; maximum 5% per issuer Prime quality of the highest letter and number rating as provided by a nationally recognized statistical rating organization (NRSRO). For example, A1 or P1 (S&P/Moody's); or F1 (Fitch). Limited to general corporations organized and operating in the United States with assets in excess of $500 million, and having "A" or higher ratings for the issuer's debt, other than commercial paper, if any, as provided by NRSRO. 9

272 Asset-Backed Commercial Paper Asset-Backed Commercial Paper ( ABCP ) issued by special purpose corporations ( SPCs ) that is supported by credit enhancement facilities (e.g. over-collateralization, letters of credit, surety bonds, etc.) Maximum Maturity Maximum Portfolio Exposure Credit Requirement Eligibility 270 days 25% (Not to exceed 25% of total secured and unsecured CP) Rated A1 by Standard and Poor s, P1 by Moody, or F1 by Fitch Issued by special purpose corporations ( SPC ) organized and operating in the the United States with assets exceeding $500 million. Restricted to programs sponsored by commercial banks or finance companies organized and operated in the United States. Program must have credit facility that provides at least 100% liquidity Serialized ABCP programs are not eligible Ratings are to be routinely monitored. The Treasurer, Treasury Manager or Assistant Treasury Manager is to perform his/her own due diligence as to creditworthiness. Local Agency Pooled Investment & Deposit Commercial Paper Limits For local agencies (including counties, cities or other local agencies) that pool money in deposits or investments with other local agencies, investments may be made subject to the following: Maximum Maturity Maximum Portfolio Exposure N/A None or, in the case of commercial paper, subject to the following concentration limits: No more than 40% of local agency s total money in eligible commercial paper No more than 10% of local agency s total money invested in outstanding commercial paper of any single issuer No more than 10% of outstanding commercial paper of any single issuer may be purchased 10

273 Medium Term Notes Corporate Bonds, Corporate Notes and Deposit Notes. Issuers are banks and bank holding companies, thrifts, finance companies, insurance companies and industrial corporations. These are debt obligations that are generally unsecured. Maximum Maturity 5 years (additional limitations based on credit, below) Maximum Portfolio Exposure 30% Maximum Issuer Exposure Credit Requirement Eligibility Prudent person standard applies overall; maximum 5% per issuer Top 3 rating categories, A, A2 or A (S&P/Moody's/Fitch) being the lowest. Maturity no greater than 24 months ("A" category) or 36 months ("AA" category) Limited to corporations organized and operating within the United States or depository institutions licensed by the United States or any state and operating within the United States Negotiable Certificates of Deposit Issued by commercial banks and thrifts, and foreign banks (Yankee CD's). Maximum Maturity 5 years Maximum Portfolio Exposure 30% Maximum Issuer Exposure Credit Requirement Prudent person standard applies overall; maximum 5% per issuer Top 3 rating categories, A, A2 or A (S&P/Moody's/Fitch) being the lowest, if rated by S&P, Moody's or Fitch, otherwise, for Domestic Banks and Savings & Loans a minimum of C (Thomson Bank Watch) and for Foreign Banks a minimum of B (Thomson Bank Watch), or in either case equivalent ratings from another generally recognized authority on bank ratings 11

274 Repurchase Agreements A contractual transaction between the investor and a bank/dealer to exchange cash for temporary ownership or control of securities/collateral with an agreement by the bank/dealer to repurchase the securities on a future date. Primarily used as an overnight investment vehicle. Maximum Maturity Maximum Portfolio Exposure Maximum Dealer Exposure Collateral Requirements Mark-to-market Eligibility 360 days None Prudent person standard applies overall; maximum 5% per issuer Collateral limited to Treasury and Agency securities; must be 102% or greater Daily Limited to primary dealers of the Federal Reserve Bank of New York, for which a current Master Repurchase Agreement has been executed with the City/Agency Reverse Repurchase Agreements The mirror image of a repurchase agreement. Used as a source of liquidity when there is a mismatch of cash flow requirement and scheduled maturities. A mechanism to avoid liquidating securities for immediate cash needs. Restricted to securities owned for a minimum of 30 days prior to settlement of the repurchase agreement. This strategy should be used solely for liquidity and not for arbitrage or leverage purposes. Maximum Maturity 92 days (unless a written agreement guaranteeing the earnings or spread for the entire period) Maximum Portfolio Exposure Mark-to-Market Eligibility 20% of the base value of the portfolio Daily Limited to primary dealers of the Federal Reserve Bank of New York or nationally or State chartered bank with significant banking relationship with the City Secured Obligations and Agreements 12

275 Obligations, including notes or bonds, collateralized at all times in accordance with Sections and of the Government Code. Maximum Maturity 2 years Maximum Portfolio Exposure 20% Maximum Issued/Provider Exposure Collateral Requirements Mark-to-market Credit Requirement Prudent person standard applies overall; maximum 5% per issue Collateral limited to Treasury and Agency securities; must be 102% or greater Daily Issuer/Provider rated in "AA" category by at least one national rating agency; or agreement guaranteed by an "AA" company Eligibility Banks, insurance companies, insurance holding companies and other financial institutions Certificates of Deposit Time deposits, which are non-negotiable, are issued most commonly by commercial banks, savings and loans and credit unions with federal deposit insurance available for amounts up to $100,000. Deposits in banks, savings and loan associations and federal credit unions with a branch office within Oakland will be made (to the extent permissible by State and federal law or rulings) pursuant to the following conditions: Maximum Maturity Maximum Portfolio Exposure Maximum Issuer Exposure Collateral Credit Requirement 360 days Prudent person standard applies Prudent person standard applies Waive first $100,000 pursuant to Gov. Code (due to federal insurance); otherwise as provided in Gov. Code For deposits over $100,000: Top 3 rating categories - A, A2 or A (S&P/Moody s/ Fitch) being the lowest, if rated by S&P, Moody s or Fitch; otherwise, for Domestic (continued on next page) Banks and Savings & Loans, a minimum standard of C (Thompson Bank Watch) and for Foreign Banks a minimum of B 13

276 (Thompson Bank Watch), or in either case equivalent ratings from another generally recognized authority on bank ratings Deposit Limit Depository Selection Institution Requirements For federally insured deposits of $100,000 or less: No minimum credit rating required. City s deposits cannot exceed the total shareholder s equity of the institution Highest available rate of interest Most recent Annual Report Note: Pursuant to Government code 53637, the City is prohibited from investing in negotiable certificates of deposit of a state or federal credit union if a member of the legislative body or decision-making authority serves on the board of directors or committee. Money Market Mutual Funds Regulated by the SEC, these funds operate under strict maturity and diversification guidelines. These funds have no federal guarantee but are viewed as a very safe short-term cash investment. Maximum Maturity N/A Maximum Portfolio Exposure 20% NAV Requirement $1.00 Credit Requirement Top ranking or highest letter and numerical rating provided by at least two nationally recognized statistical rating organizations Investment Advisor Alternative to Ratings Registered with the SEC with not less than 5 years experience in investing securities as authorized by the Code, and with assets under management in excess of $500 million Fund Composition Comprised of instruments in accordance with the California State Government Code State Investment Pool (Local Agency Investment Fund) A pooled investment fund overseen by the State Treasurer, which operates like a money market fund, but is for the exclusive benefit of governmental entities within the state. Maximum 14

277 currently authorized by Local Agency Investment Fund (LAIF) is $40 million, which is subject to change. The LAIF is in trust in the custody of the State Treasurer. The City s right to withdraw its deposited monies from LAIF is not contingent upon the State s failure to adopt a State Budget by July 1 st of each new fiscal year. Maximum Maturity Maximum Portfolio Exposure N/A None Local City/Agency Bonds Bonds issued by the City of Oakland, the Redevelopment Agency or any department, board, agency or authority of the City or the Redevelopment Agency. Maximum Maturity Maximum Portfolio Exposure Maximum Issuer Exposure Credit Requirement 5 years None Prudent person standard applies overall; maximum 5% per issuer Prudent person standard applies State of California Bonds State of California registered state warrants, treasury notes, or bonds issued by the State or by a department, board, agency or authority of the State. Maximum Maturity Maximum Portfolio Exposure Credit Requirement Maximum Issuer Exposure 360 days None Prudent person standard applies Prudent person standard applies overall; maximum 5% per issuer Other Local Agency Bonds Bonds, notes, warrants or other evidences of indebtedness of any local agency within the state. 15

278 Maximum Maturity Maximum Portfolio Exposure Maximum Issuer Exposure Credit Requirement 5 years Prudent person standard applied overall; maximum 5% per issuer Prudent person standard applies Prudent person standard applies 16

279 APPENDIX F FORM OF BOND COUNSEL OPINION, 2005 Oakland Joint Powers Financing Authority Oakland, California City of Oakland Oakland, California FINAL OPINION Oakland Joint Powers Financing Authority Refunding Revenue Bonds 2005 Series A-1 (Auction Rate Securities) (Tax-Exempt Bonds), 2005 Series A-2 (Auction Rate Securities) (Tax-Exempt Bonds) and 2005 Series B (Auction Rate Securities) (Taxable Bonds) Greetings: We have acted as bond counsel to the Oakland Joint Powers Financing Authority (the Authority ) in connection with the Authority s issuance of $63,500,000 aggregate principal amount Refunding Revenue Bonds, 2005 Series A-1 (Auction Rate Securities) (Tax-Exempt Bonds) and $63,475,000 aggregate principal amount Refunding Revenue Bonds, 2005 Series A-2 (Auction Rate Securities) (Tax-Exempt Bonds) (collectively, the Tax-Exempt Bonds ) and $17,975,000 aggregate principal amount Refunding Revenue Bonds, 2005 Series B (Auction Rate Securities) (Taxable Bonds) (the Taxable Bonds, and together with the Tax-Exempt Bonds the Bonds ). The Bonds have been issued by the Authority pursuant to the Constitution and laws of the State of California, including Article 4 of Chapter 5 of Division 7 of Title 1 of the California Government Code (the Act ), Article 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code of the State (the Refunding Law ), a resolution adopted by the Authority on May 17, 2005 (the Resolution ), and a Trust Agreement, dated as of June 1, 2005 (the Trust Agreement ), by and between the Authority and The Bank of New York Trust Company, N.A., as trustee. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Trust Agreement. In such connection, we have examined the record of proceedings submitted to us relative to the issuance of the Bonds, including the Resolution, the Trust Agreement, the Amended and Restated Lease (the Lease ), the Amended and Restated Sublease (the Sublease ), the Tax Certificate as to Arbitrage and the Provisions of Sections 103 and of the Internal Revenue Code of 1986 in respect of the Tax-Exempt Bonds (the Tax Certificate ), other certifications and opinions of the Authority, the City, the Trustee and the Auction Agent, and such other documents and matters deemed necessary by us to render the opinions set forth herein, although in doing so, we have not undertaken to verify independently the accuracy of the factual matters represented, warranted or certified therein, and we have assumed the genuineness of all signatures thereto. F-1

280 Oakland Joint Powers Authority City of Oakland, 2005 Page 2 of 3 The opinions expressed herein are based upon an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have undertaken neither to determine, nor to inform any person, whether any such actions are taken or omitted or events do occur or whether any other matters come to our attention after the date hereof. We call attention to the fact that the rights and obligations under the Bonds, the Resolution, the Trust Agreement, the Lease, the Sublease and the Tax Certificate may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases, and to the limitations contained in applicable law regarding legal remedies against the Authority. We undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Bonds and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The Bonds and the Trust Agreement have been duly authorized, executed and delivered by the Authority. The Bonds constitute valid and binding special obligations of the Authority and the Trust Agreement constitutes a valid, legal and binding agreement of the Authority enforceable in accordance with their respective terms. The Trust Agreement creates a valid pledge, to secure the payment of the principal of and interest on the Bonds, of the Revenues (as set forth in the Trust Agreement) and any other amounts held by the Trustee in any fund or account established pursuant to the Trust Agreement, except the Rebate Fund (as set forth in the Trust Agreement), subject to the provisions of the Trust Agreement permitting the application thereof for the purposes and on the terms and conditions set forth therein. 2. The Lease and the Sublease have been duly executed and delivered by, and each constitutes the valid and binding obligation of, the Authority and the City, enforceable in accordance with their respective terms. 3. The Authority is a public entity and agency, organized and existing under the laws of the State of California, including the Act, with power to adopt the Resolution, to execute and deliver the Trust Agreement, the Lease and the Sublease and to perform the agreements on its part contained therein, and to issue the Bonds. 4. The Internal Revenue Code of 1986, as amended (the Code ), imposes certain requirements that must be met subsequent to the issuance and delivery of the Tax-Exempt Bonds for interest thereon to be and remain excluded from gross income for Federal income tax purposes. Noncompliance with such requirements could cause the interest on the Tax-Exempt Bonds to be included in gross income for Federal income tax purposes retroactive to the date of issuance of the Tax-Exempt Bonds. Pursuant to the Trust Agreement and the Tax Certificate, the Authority has covenanted to comply with the applicable requirements of the Code in order to maintain the exclusion of the interest on the Tax- Exempt Bonds from gross income for Federal income tax purposes pursuant to Section 103 of the Code. In addition, Authority has made certain representations and certifications in the Trust Agreement and the F-2

281 Oakland Joint Powers Authority City of Oakland, 2005 Page 3 of 3 Tax Certificate. We have not and will not independently verify the accuracy of those representations and certifications. Under existing law and assuming compliance with the aforementioned covenant, and the accuracy of certain representations and certifications made by the Authority described above, interest on the Tax-Exempt Bonds is excluded from gross income for Federal income tax purposes under Section 103 of the Code. Such interest is not treated as a preference item in calculating the alternative minimum tax imposed under the Code with respect to individuals and corporations. Interest on the Tax-Exempt Bonds is, however, included in the adjusted current earnings of certain corporations for purposes of computing the alternative minimum tax imposed on such corporations. 5. Interest on the Taxable Bonds is included in gross income for Federal income tax purposes. Prospective purchasers of the Taxable Bonds should consult their tax advisors as to the applicability and impact of such consequences. 6. Interest on the Bonds is exempt from California personal income taxes. Except as stated in the preceding four paragraphs, we express no opinion as to any Federal or state tax consequences of the ownership or disposition of the Bonds. Furthermore, we express no opinion as to any Federal, state or local tax law consequences with respect to the Bonds, or the interest thereon, if any action is taken with respect to the Bonds or the proceeds thereof upon the advice or approval of other counsel. Respectfully submitted, NIXON PEABODY LLP F-3

282 (THIS PAGE INTENTIONALLY LEFT BLANK)

283 APPENDIX G FORM OF CONTINUING DISCLOSURE AGREEMENT THIS CONTINUING DISCLOSURE AGREEMENT (this Disclosure Agreement ) is executed and delivered by the OAKLAND JOINT POWERS FINANCING AUTHORITY (the Authority ), the CITY OF OAKLAND (the City ) and THE BANK OF NEW YORK TRUST COMPANY, N.A., as trustee (the Trustee ), in connection with the issuance of $63,500,000 aggregate principal amount Refunding Revenue Bonds, 2005 Series A-1 (Auction Rate Securities) (Tax-Exempt Bonds) and $63,475,000 aggregate principal amount Refunding Revenue Bonds, 2005 Series A-2 (Auction Rate Securities) (Tax-Exempt Bonds) (collectively, the Tax-Exempt Bonds ) and $17,975,000 aggregate principal amount Refunding Revenue Bonds, 2005 Series B (Auction Rate Securities) (Taxable Bonds) (the Taxable Bonds, and together with the Tax-Exempt Bonds the Bonds ). The Bonds are being executed and delivered pursuant to that certain Trust Agreement, dated as of June 1, 2005, between the Authority and the Trustee (the Trust Agreement ). The Authority, the City and the Trustee covenant and agree as follows: Section 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Authority, the City and the Trustee for the benefit of the holders and beneficial owners of the Bonds and in order to assist the Participating Underwriters in complying with the Rule (as defined below). Section 2. Definitions. The definitions set forth in the Trust Agreement apply to all capitalized terms used in this Disclosure Agreement unless otherwise defined in this Section. The following capitalized terms shall have the following meanings: Annual Report shall mean any Annual Report provided by the Authority and the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement. Beneficial Owner shall mean any person that (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes. Dissemination Agent shall mean the City, or any successor Dissemination Agent designated in writing by the Authority and the City and which has filed with the Trustee a written acceptance of such designation. Listed Events shall mean any of the events listed in Section 5 of this Disclosure Agreement. National Repository shall mean the repositories designated by the Securities and Exchange Commission from time to time for purposes of the Rule. Information on the National Repositories as of a particular date is available on the Internet at Participating Underwriter shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds. Repository shall mean each National Repository and each State Repository. Information regarding the National Repositories as of a particular date is available on the Internet at G-1

284 Information regarding state information repositories can be found at Rule shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. State Repository shall mean any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission, if any. Section 3. Provision of Annual Reports. (a) The Authority and the City shall, or shall cause the Dissemination Agent to, not later than 270 days after the end of the City s fiscal year (which is currently June 30) commencing with the fiscal year, provide to the Trustee and each Repository an Annual Report that is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the City s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5. (b) Not later than fifteen (15) Business Days prior to the date specified in subsection (a) above for providing the Annual Report to the Repositories, the Authority and the City shall provide the Annual Report to the Dissemination Agent (if other than the City). (c) If the Trustee is unable to verify pursuant to subsection (b) above that an Annual Report has been provided to the Repositories by the date required in subsection (a) above, the Trustee shall send a notice to each Repository in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall: (i) (ii) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and the State Repository; and if other than the City, file a report with the Authority and the City certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and listing the Repositories to which it was provided. Section 4. Content of Annual Reports. The Authority s and the City s Annual Report shall contain the CUSIP numbers of the Bonds and shall contain or incorporate by reference the following: (a) The adopted budget of the City for the then current fiscal year, the audited financial statements of the City for the prior fiscal year, prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the City s audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. G-2

285 (b) (c) (d) (e) the assessed valuation of taxable property in the City; property taxes due, property taxes collected and property taxes delinquent; property tax levy rate per $1,000 of assessed valuation; and outstanding general obligation debt of the City. The City's current fiscal year ends June 30. The City may adjust such fiscal year by providing written notice of the change of fiscal year to each then existing National Repository and the State Repository. Any or all of the items listed above may be incorporated by reference from other documents, including official statements of debt issues of the Authority, the City or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document incorporated by reference is a final official statement, it must be available from the MSRB. Section 5. Material Events. The Authority and the City agree to provide or cause to be provided, in a timely manner, to each of the Repositories or to the MSRB notice of the occurrence of any of the following events (the Listed Events ) with respect to the Bonds, if material: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Principal and interest payment delinquencies. Non-payment related defaults. Modifications to rights of the Holders of the Bonds. Optional, contingent or unscheduled bond calls. Defeasances. Rating changes. Adverse tax opinions or events adversely affecting the tax-exempt status of the Bonds. Unscheduled draws on debt service reserves reflecting financial difficulties. Unscheduled draws on credit enhancements reflecting financial difficulties. Substitution of the credit or liquidity providers or their failure to perform. Release, substitution or sale of property securing repayment of the Bonds. provided, that the occurrence of any event set forth in paragraph (a) or (f) above will always be deemed by the Authority or the City to be material. If the Authority or the City determine that knowledge of the occurrence of a Listed Event would be material, such party shall promptly file a notice of such occurrence with each Repository. G-3

286 Notwithstanding any other provision of this Section, the Authority and the City may amend this Section 5, and any provision of this Agreement may be waived, provided that the following conditions are satisfied: (a) the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of business conducted; (b) the undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) the amendment or waiver either (i) is approved by the Bondholders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Bondholders. This Section shall inure solely to the benefit of the Authority, the City, the Participating Underwriters and holders from time to time of the Bonds and no other person shall have any rights hereunder. Section 6. Filing with Certain Dissemination Agents or Conduits. The Authority and the City may satisfy its obligations hereunder to file any notice, document or information with a National Repository or State Repository by filing the same with any dissemination agent or conduit, including any central post office or similar entity, assuming or charged with responsibility for accepting notices, documents or information for transmission to such National Repository or State Repository, to the extent permitted by the Securities and Exchange Commission or Securities and Exchange Commission staff or required by the Securities and Exchange Commission. For this purpose, permission shall be deemed to have been granted by the Securities and Exchange Commission staff if and to the extent the agent or conduit has received an interpretive letter, which has not been revoked, from the Securities and Exchange Commission staff to the effect that using the agent or conduit to transmit information to the National Repository and State Repository will be treated for purposes of the Rule as if such information were transmitted directly to the National Repository and State Repository. Section 7. Termination of Reporting Obligation. The obligations of the Authority and the City under this Disclosure Agreement shall terminate upon the legal defeasance or payment in full of all of the Bonds. If such termination occurs prior to the final maturity date of the Bonds, the Authority and the City shall give notice of such termination in the same manner as for a Listed Event under Section 5. Section 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Authority and the City may amend this Disclosure Agreement, and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied: (a) If the amendment or waiver relates to the provisions of Section 4, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of business conducted; (b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the G-4

287 original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) The amendment or waiver either (i) is approved by the Owners of the Bonds in the same manner as provided in the Ordinance for amendments to the Ordinance with the consent of Owners, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Owners or Beneficial Owners of the Bonds. Section 9. Dissemination Agent. The Authority and the City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Agent, with or without appointing a successor Dissemination Agent. Section 10. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Authority and the City agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder (including, without limitation, any alleged violations of the Securities Exchange Act of 1934, as amended), including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the Authority and the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. Neither the Trustee nor the Dissemination Agent shall be responsible for the accuracy or validity of any information contained in any Annual Report or report of a Listed Event prepared by the City under this Disclosure Agreement. Section 11. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Authority or the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the Authority or the City chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the Authority or the City shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Authority, the City, the Trustee, the Dissemination Agent, the Participating Underwriters and holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity. Section 13. Default. In the event of a failure of the Authority or the City to comply with any provision of this Disclosure Agreement, any Owner or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Authority or the City, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Ordinance, and the sole remedy under this Disclosure Agreement in the event of any failure of the Authority or the City to comply with this Disclosure Agreement shall be an action to compel performance. G-5

288 Section 14. Prior Undertakings. The Authority and the City each hereby certifies that it is in compliance in all material respects with all prior undertakings made by it pursuant to Rule 15c2-12(b)(5). Section 15. 1, Effective Date. This Disclosure Agreement shall be effective on and as of June Section 16. Notices. Any notices or communications to the Authority and the City relating to this Disclosure Agreement may be given as follows: If to the City: If to the Authority: If to the Trustee: City of Oakland Finance and Management Agency 150 Frank H. Ogawa Plaza, Suite 5330 Oakland, California Attention: Treasury Manager Telephone: (510) Fax: (510) Oakland Joint Powers Financing Authority c/o City of Oakland Finance and Management Agency 150 Frank H. Ogawa Plaza, Suite 5330 Oakland, California Attention: Treasury Manager Telephone: (510) Fax: (510) The Bank of New York Trust Company, N.A. 550 Kearny Street, Suite 600 San Francisco, CA Telephone: (415) Fax: (415) The Authority and the City may, by written notice to the other parties acting hereunder, designate a different address or telephone number(s) to which subsequent notices or communications should be sent. Section 17. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. G-6

289 IN WITNESS WHEREOF, this Disclosure Agreement is given as of the 1 st day of June OAKLAND JOINT POWERS FINANCING AUTHORITY Authorized Representative CITY OF OAKLAND, CALIFORNIA Treasury Manager THE BANK OF NEW YORK TRUST COMPANY, N.A. By: Authorized Officer G-7

290 EXHIBIT A NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT Name of Obligor: Name of Bond Issues: Oakland Joint Powers Financing Authority The City of Oakland, California $144,950,000 aggregate principal Oakland Joint Powers Financing Authority Refunding Revenue Bonds, 2005 Series A-1 (Auction Rate Securities) (Tax-Exempt Bonds), 2005 Series A-2 (Auction Rate Securities) (Tax-Exempt Bonds) and 2005 Series B (Auction Rate Securities) (Taxable Bonds) Date of Delivery: June, NOTICE IS HEREBY GIVEN that neither the Oakland Joint Powers Financing Authority (the Authority ) nor the City of Oakland, California (the City ) have provided an Annual Report with respect to the above-named Bonds as required by the Trust Agreement dated as of June 1, 2005 relating to the Bonds. The Authority and the City anticipate that the Annual Report will be filed by. Dated: THE BANK OF NEW YORK TRUST COMPANY, N.A. By: Authorized Officer G-8

291 APPENDIX H THE DEPOSITORY TRUST COMPANY General The 2005 Bonds will be delivered in book-entry only form. DTC will act as securities depository for the 2005 Bonds. The 2005 Bonds will be issued as fully-registered certificates registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond will be delivered for each maturity of the 2005 Bonds, in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 2 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and Purchases of the 2005 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2005 Bonds on DTC s records. The ownership interest of each actual purchaser of each Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2005 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the 2005 Bonds, except in the event that use of the book-entry system for the 2005 Bonds is discontinued. To facilitate subsequent transfers, all 2005 Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co, or such other name as may be requested by an authorized representatives of DTC. The deposit of 2005 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial H-1

292 ownership. DTC has no knowledge of the actual Beneficial Owners of the 2005 Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such 2005 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. The Authority, the City and the Trustee will not have any responsibility or obligation to such DTC Participants or the persons for whom they act as nominees with respect to the 2005 Bonds. Prepayment notices shall be sent to DTC. If less than all of the 2005 Bonds within an issue are being prepaid, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be prepaid. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the 2005 Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the 2005 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, premium, if any, and interest payments with respect to the 2005 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the Authority or the Trustee, on each payment date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owner will be governed by standing instructions and customer practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Trustee or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC, is the responsibility of the District or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the 2005 Bonds at any time by giving reasonable notice to the Authority or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, 2005 Bonds are required to be printed and delivered as described in the Trust Agreement. The Authority may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered. The Authority and the Trustee cannot and do not give any assurance that DTC, DTC Participants or others will distribute payments of principal, interest or any premium with respect to the 2005 Bonds paid to DTC or its nominee as the registered owner, or any prepayment or other notices, to the Beneficial Owner, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The Authority and the Trustee are not responsible or liable for the failure of DTC or H-2

293 any DTC Participant to make any payment or give any notice to a Beneficial Owner with respect to the 2005 Bonds or any error or delay relating thereto. The foregoing description of the procedures and record-keeping with respect to beneficial ownership interest in the 2005 Bonds, payment of principal, premium, if any, interest and other payments on the 2005 Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in such 2005 Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be. Discontinuance of DTC Services In the event that (a) DTC determines not to continue to act as securities depository for the 2005 Bonds or (b) the Authority determines to remove DTC from its functions as a depository, DTC s role as securities depository for the 2005 Bonds and use of the book-entry system will be discontinued. If the Authority fails to select a qualified securities depository to replace DTC, the Authority will cause the Trustee to execute and deliver new 2005 Bonds in fully registered form in such denominations numbered in the manner determined by the Trustee and registered in the names of such persons as are required in a written request of the Authority. The Trustee shall not be required to deliver such new 2005 Bonds within a period of less than 60 days from the date of receipt of such written request of the Authority. Upon such registration, such persons in whose names the 2005 Bonds are registered will become the registered owners of the 2005 Bonds for all purposes. In the event that the book-entry system is discontinued, the following provisions would also apply: (a) 2005 Bonds may be exchanged for a new Bond or 2005 Bonds of the same aggregate principal amount and maturity date and of the same or other authorized denominations; (b) any Bond may be transferred on the registration books maintained by the Trustee under the Trust Agreement by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender thereof to the Trustee accompanied by delivery of a duly executed written instrument of transfer in a form acceptable to the Trustee; (c) for every exchange or transfer of 2005 Bonds, the Trustee shall require the payment by any Owner requesting such transfer or exchange of any tax or other governmental charge that may be imposed with respect to such exchange or registration of transfer; (d) the Trustee will not be required to transfer or exchange any Bond during the period established by the Trustee for the selection of any 2005 Bonds for redemption or any Bond which has been selected for redemption in whole or in part from and after the day of mailing of a notice of redemption of such Bond selected for redemption; (e) all interest payments on the 2005 Bonds will be made by check mailed by the Trustee to the Owners thereof to such Owner s address as it appears on the registration books maintained by the Trustee on the fifteenth day of the month next preceding such interest payment date; provided, that upon request of a Bondowner of $1,000,000 or more in aggregate principal amount of the 2005 Bonds received by the Trustee prior to the fifteenth day of the month next preceding an interest payment date, interest shall be paid by wire transfer in immediately available funds; and (f) all payments of principal, and any premium on the 2005 Bonds, will be made upon surrender thereof at the corporate trust office of the Trustee specified in the Trust Agreement. H-3

294 (THIS PAGE INTENTIONALLY LEFT BLANK)

295 APPENDIX I FORM OF FINANCIAL GUARANTY BOND INSURANCE POLICY

296 (THIS PAGE INTENTIONALLY LEFT BLANK)

297 MUNICIPAL BOND INSURANCE POLICY ISSUER: [ ] BONDS: [ ] 1221 Avenue of the Americas New York, New York Telephone: (212) Policy No: [ ] Effective Date: [ ] XL Capital Assurance Inc. (XLCA), a New York stock insurance company, in consideration of the payment of the premium and subject to the terms of this Policy (which includes each endorsement attached hereto), hereby agrees unconditionally and irrevocably to pay to the trustee (the "Trustee") or the paying agent (the "Paying Agent") (as set forth in the documentation providing for the issuance of and securing the Bonds) for the benefit of the Owners of the Bonds or, at the election of XLCA, to each Owner, that portion of the principal and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment. XLCA will pay such amounts to or for the benefit of the Owners on the later of the day on which such principal and interest becomes Due for Payment or one (1) Business Day following the Business Day on which XLCA shall have received Notice of Nonpayment (provided that Notice will be deemed received on a given Business Day if it is received prior to 10:00 a.m. Pacific time on such Business Day; otherwise it will be deemed received on the next Business Day), but only upon receipt by XLCA, in a form reasonably satisfactory to it, of (a) evidence of the Owner's right to receive payment of the principal or interest then Due for Payment and (b) evidence, including any appropriate instruments of assignment, that all of the Owner's rights with respect to payment of such principal or interest that is Due for Payment shall thereupon vest in XLCA. Upon such disbursement, XLCA shall become the owner of the Bond, any appurtenant coupon to the Bond or the right to receipt of payment of principal and interest on the Bond and shall be fully subrogated to the rights of the Owner, including the Owner's right to receive payments under the Bond, to the extent of any payment by XLCA hereunder. Payment by XLCA to the Trustee or Paying Agent for the benefit of the Owners shall, to the extent thereof, discharge the obligation of XLCA under this Policy. In the event the Trustee or Paying Agent has notice that any payment of principal or interest on a Bond which has become Due for Payment and which is made to an Owner by or on behalf of the Issuer of the Bonds has been recovered from the Owner pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such Owner within the meaning of any applicable bankruptcy law, such Owner will be entitled to payment from XLCA to the extent of such recovery if sufficient funds are not otherwise available. The following terms shall have the meanings specified for all purposes of this Policy, except to the extent such terms are expressly modified by an endorsement to this Policy. "Business Day" means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of California, the State of New York or the Insurer's Fiscal Agent are authorized or required by law or executive order to remain closed. "Due for Payment", when referring to the principal of Bonds, is when the stated maturity date or a mandatory redemption date for the application of a required sinking fund installment has been reached and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by application of required sinking fund installments), acceleration or other advancement of maturity, unless XLCA shall elect, in its sole discretion, to pay such principal due upon such acceleration; and, when referring to interest on the Bonds, is when the stated date for payment of interest has been reached. "Nonpayment" means the failure of the Issuer to have provided sufficient funds to the Trustee or Paying Agent for payment in full of all principal and interest on the Bonds which are Due for Payment. "Notice" means telephonic or telecopied notice, subsequently confirmed in a signed writing, or written notice by registered or certified mail, from an Owner, the Trustee or the Paying Agent to XLCA which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount and (d) the date such claimed amount became Due for Payment. "Owner" means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof, except that "Owner" shall not include the Issuer or any person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds. XLCAP-005 (Muni Spec - California ) 1

298 XLCA may, by giving written notice to the Trustee and the Paying Agent, appoint a fiscal agent (the "Insurer's Fiscal Agent") for purposes of this Policy. From and after the date of receipt by the Trustee and the Paying Agent of such notice, which shall specify the name and notice address of the Insurer's Fiscal Agent, (a) copies of all notices required to be delivered to XLCA pursuant to this Policy shall be simultaneously delivered to the Insurer's Fiscal Agent and to XCLA and shall not be deemed received until received by both and (b) all payments required to be made by XLCA under this Policy may be made directly by XLCA or by the Insurer's Fiscal Agent on behalf of XLCA. The Insurer's Fiscal Agent is the agent of XLCA only and the Insurer's Fiscal Agent shall in no event be liable to any Owner for any act of the Insurer's Fiscal Agent or any failure of XLCA to deposit or cause to be deposited sufficient funds to make payments due hereunder. Except to the extent expressly modified by an endorsement hereto, (a) this Policy is non-cancelable by XLCA, and (b) the Premium on this Policy is not refundable for any reason. This Policy does not insure against loss of any prepayment or other acceleration payment which at any time may become due in respect of any Bond, other than at the sole option of XLCA, nor against any risk other than Nonpayment. This Policy sets forth the full undertaking of XLCA and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. IN THE EVENT THAT XLCA WERE TO BECOME INSOLVENT, ANY CLAIMS ARISING UNDER THIS POLICY ARE NOT COVERED BY THE CALIFORNIA GUARANTY INSURANCE FUND SPECIFIED IN ARTICLE 12119(b) OF THE CALIFORNIA INSURANCE CODE. In witness whereof, XLCA has caused this Policy to be executed on its behalf by its duly authorized officers. SPECIMEN Name: Title: SPECIMEN Name: Title: XLCAP-005 (Muni Spec - California ) 2

299 APPENDIX J FORM OF RESERVE FUND SURETY POLICY

300 (THIS PAGE INTENTIONALLY LEFT BLANK)

301 DEBT SERVICE RESERVE INSURANCE POLICY 1221 Avenue of the Americas New York, New York Telephone: (212) ISSUER: Policy No.: BONDS: Effective Date: Premium: XL CAPITAL ASSURANCE INC. ( XLCA ), a New York stock insurance company, for consideration received, hereby unconditionally and irrevocably agrees to pay the trustee or the paying agent (the Beneficiary ) under the documentation (the Bond Document ) providing for the issuance of and securing the Bonds, for the benefit of the Owners, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer. XLCA will make payment as provided in this Policy to the Beneficiary on the later of the Business Day on which such principal and interest becomes Due for Payment or the Business Day next following the Business Day on which XLCA shall have received Notice of Nonpayment, in a form reasonably satisfactory to it. A Notice of Nonpayment will be deemed received on a given Business Day if it is received by XLCA prior to 10:00 a.m. (Pacific time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by XLCA is incomplete or does not conform to the terms and conditions of this Policy, it shall be deemed not to have been received by XLCA for purposes of the preceding sentence and XLCA shall promptly so advise the Beneficiary, who may thereupon submit an amended Notice of Nonpayment. Payment by XLCA to the Beneficiary for the benefit of the Owners shall, to the extent thereof, discharge the obligation of XLCA under this Policy. Upon such payment, XLCA shall become entitled to reimbursement of the amount so paid (together with interest and expenses) pursuant to the Financial Guaranty Agreement. Upon disbursement in respect of a Bond, XLCA shall become the owner of the Bond, any appurtenant coupon to the Bond or right to receipt of payment of principal of or interest on the Bond and shall be fully subrogated to the rights of the Owner, including the Owner s right to receive payments under the Bond and all insurance policies in respect of the Bond, to the extent of any payment by XLCA hereunder. The amount available under this Policy for payment shall not exceed the Policy Limit. The amount available at any particular time to be paid to the Beneficiary under the terms of this Policy shall automatically be reduced by any payment under this Policy. However, after such payment, the amount available under this Policy shall be reinstated in full or in part, but only up to the Policy Limit, to the extent of the reimbursement of such payment (exclusive of interest and expenses) to XLCA by or on behalf of the Issuer. Within three Business Days of such reimbursement, XLCA shall provide the Beneficiary and the Issuer with notice of the reimbursement and reinstatement.

302 Payment under this Policy shall not be available with respect to (a) any Nonpayment that occurs prior to the Effective Date or after the Termination Date of this Policy or (b) Bonds that are not outstanding under the Bond Document. If the amount payable under this Policy is also payable under another insurance policy or surety bond insuring the Bonds, payment first shall be made under this Policy to the extent of the amount available under this Policy up to the Policy Limit. In no event shall XLCA incur duplicate liability for the same amounts owing with respect to the Bonds that are covered under this Policy and any other insurance policy or surety bond that XLCA has issued. Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. Business Day means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of California or the State of New York are, or the Insurer s Fiscal Agent is, authorized or required by law or executive order to remain closed. Due for Payment means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or on a mandatory sinking fund redemption date stated in the Bond or the Bond Document and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity unless XLCA shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration and (b) when referring to interest on a Bond, payable on the date stated in the Bond for payment of interest. Financial Guaranty Agreement means the Financial Guaranty Agreement dated as of the effective date hereof in respect of this Policy, as the same may be amended or supplemented from time to time. Nonpayment means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds for payment in full of all principal and interest that is Due for Payment on such Bond. Nonpayment shall also include, in respect of a Bond, any payment of principal or interest that is Due for Payment made to an Owner by or on behalf of the Issuer that has been recovered from such Owner pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a court having competent jurisdiction. Notice means telecopied notice, subsequently confirmed in a signed writing, or written notice by registered or certified mail, from the Beneficiary to XLCA substantially in the form of Attachment I which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount and (d) the date such claimed amount became Due for Payment. Owner means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment of principal or interest thereunder, except that Owner shall not include the Issuer or any person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds. Policy Limit shall be the dollar amount of the debt service reserve fund required to be maintained for the Bonds by the Bond Document from time to time (the Debt Service Reserve Requirement ), but in no event shall the Policy Limit exceed $[Amount of Debt Reserve ]. The Policy Limit shall automatically and irrevocably be reduced from time to time by the amount of each reduction in the Debt Service Reserve Requirement, as provided in the Bond Document. Termination Date means the earlier of (i) [Final Maturity of Bonds] and (ii) the date the Bonds are no longer outstanding under the Bond Document. XLCA may appoint a fiscal agent (the Insurer s Fiscal Agent ) for purposes of this Policy by giving written notice to the Beneficiary specifying the name and notice address of the Insurer s Fiscal Agent. From and after the date of receipt of such notice by the Beneficiary, (a) copies of all notices required to be delivered to XLCA pursuant to this Policy shall be simultaneously delivered to the Insurer s Fiscal Agent and to XLCA pursuant to this Policy and shall not be deemed received until received by both and (b) all payments required to be made by XLCA under this Policy may be made directly by XLCA or by the Insurer s Fiscal Agent on behalf of XLCA. The Insurer s Fiscal Agent is the agent of XLCA only and the Insurer s Fiscal Agent shall in no event be liable to any Owner for any act of the Insurer s Fiscal Agent or any failure of XLCA to deposit or cause to be deposited sufficient funds to make payments due under this Policy.

303 To the fullest extent permitted by applicable law, XLCA agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights (whether by counterclaim setoff or otherwise) and defenses (including, without limitation, the defense of fraud) whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to XLCA to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy shall be governed by and interpreted under the laws of the State of New York, and any suit hereunder in connection with any amount due hereunder may be brought only by the Issuer or the Beneficiary and only within one year after the date on which the applicable Notice of Nonpayment can be made pursuant to the terms of this Policy. This Policy sets forth in full the undertaking of XLCA, and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Except to the extent expressly modified by an endorsement hereto, (a) any premium paid in respect of this Policy is nonrefundable for any reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity and (b) this Policy may not be canceled or revoked. IN THE EVENT THAT XLCA WERE TO BECOME INSOLVENT, ANY CLAIMS ARISING UNDER THIS POLICY ARE NOT COVERED BY THE CALIFORNIA GUARANTY INSURANCE FUND SPECIFIED IN ARTICLE 12119(b) OF THE CALIFORNIA INSURANCE CODE.

304 In witness whereof, XL CAPITAL ASSURANCE INC. has caused this Policy to be executed on its behalf by its duly authorized officers. XL CAPITAL ASSURANCE INC. SPECIMEN Name: Title: SPECIMEN Name: Title:

305 Attachment I Policy No. [..] XL CAPITAL ASSURANCE INC Avenue of the Americas New York, New York Attention: NOTICE OF NONPAYMENT Reference is made to the Policy No. [..] (the Policy ) issued by XL Capital Assurance Inc. ( XLCA ). The terms which are capitalized herein and not otherwise defined have the meanings specified in the Policy unless the context otherwise requires. The Beneficiary hereby certifies that: 1. $ became [will become] Due for Payment on ; 2. The amount on deposit in the [Bond Fund] available to pay such amount is $, which is $ less than the amount due (the Deficiency Amount ); 3. The Beneficiary hereby demands payment of $ which amount does not exceed the lesser of (i) the Deficiency Amount and (ii) the amount available to be drawn under the Policy which in no event shall exceed the Policy Limit; 4. The Beneficiary has not heretofore made demand under the Policy for the amount specified in 3. above or any portion thereof; and 5. The Beneficiary hereby requests that payment of the amount specified in 3. above be made by XLCA under the Policy and directs that payment under the Policy be made to the following account by bank wire transfer of federal or other immediately available funds in accordance with the terms of the Policy: [Beneficiary s Account]

306 [Any Person Who Knowingly And With Intent To Defraud Any Insurance Company Or Other Person File An Application For Insurance Or Statement Of Claim Containing Any Materially False Information; Or Conceals For The Purpose Of Misleading, Information Concerning Any Fact Material Thereto, Commits A Fraudulent Insurance Act, Which Is And Shall Also Be Subject To A Civil Penalty Not To Exceed Five Thousand Dollars And The Stated Value Of The Claim For Each Such Violation.] [Foregoing language to be included in the case of issuers in certain states.] [Beneficiary] By: Its:

307

308