NEW ISSUE- BOOK ENTRY ONLY RATINGS:

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1 NEW ISSUE- BOOK ENTRY ONLY RATINGS: Moody s: Aaa ; Underlying Rating: A1 S&P: AAA ; Underlying Rating: AA- Fitch: AAA ; Underlying Rating: A+ In the opinion of Nossaman, Guthner, Knox & Elliott, LLP, Irvine, California ( Bond Counsel ), under existing statutes, regulations, rulings and judicial decisions, and assuming certain representations and compliance with certain covenants and requirements described herein, interest on the Bonds is excludable from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, interest on the Bonds is exempt from State of California personal income tax. See OTHER INFORMATION Tax Matters herein with respect to tax consequences with respect to the Bonds. $26,000,000 CITY OF REDWOOD CITY PUBLIC FINANCING AUTHORITY WATER REVENUE BONDS SERIES 2006A Dated: Date of Delivery Due: February 1, as shown on the inside front cover Authority for Issuance. The bonds captioned above (the Bonds ) are being issued by the City of Redwood City Public Financing Authority (the Authority ) under an Indenture of Trust, dated as of February 1, 2006, by and between the Authority and The Bank of New York Trust Company, N.A., as trustee (the Trustee ). See THE BONDS Authority for Issuance. Use of Proceeds. The Bonds are being issued to (i) finance a water recycling project (as more fully described herein, the Project ) for the City s water system (the Enterprise ), (ii) fund a reserve fund for the Bonds, and (iii) pay certain costs incurred in connection with issuing the Bonds. See FINANCING PLAN. Security for the Bonds. The Bonds are payable from and secured by the Authority s pledge of revenues under the Indenture, consisting primarily of installment payments to be made by the City of Redwood City (the City ) under an Installment Purchase Contract dated as of February 1, 2006, by and between the Authority and the City, under which the Authority will acquire the Project and sell the Project to the City. The Bonds are also secured by moneys on deposit in the funds and accounts established under the Indenture (other than the Project Fund and the Rebate Fund). The Installment Purchase Contract permits the City to issue bonds or incur other obligations payable from and secured by a pledge of and lien upon any of the Net Revenues on a parity with the Installment Payments if the conditions contained in the Installment Purchase Contract are satisfied. The City s obligation to make installment payments under the Installment Purchase Contract is on a parity with its obligation to make installment payments under an installment purchase contract entered into in connection with the issuance of the Authority s $35,790,000 Water Revenue Bonds, Series 2005A. See SECURITY FOR THE BONDS Additional Debt. Bond Terms; Book-Entry Only. The Bonds will bear interest at the rates shown below, payable semiannually on February 1 and August 1 of each year, commencing August 1, 2006, and will be issued in fully registered form in the denomination of $5,000 or any integral multiple of $5,000. The Bonds will be issued in book-entry only form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). Purchasers of the Bonds will not receive certificates representing their interests in the Bonds. Redemption. Prior to their maturity, the Bonds are subject to optional redemption, mandatory redemption from insurance or condemnation proceeds, and mandatory sinking fund redemption, as described in this Official Statement. See THE BONDS - Redemption. The scheduled payment of the principal of and interest on the Bonds, when due, will be insured by a municipal bond insurance policy to be issued by MBIA Insurance Corporation simultaneously with the delivery of the Bonds. See BOND INSURANCE herein. MATURITY SCHEDULE (See inside front cover) THE BONDS ARE LIMITED OBLIGATIONS OF THE AUTHORITY AND ARE PAYABLE SOLELY FROM REVENUES DERIVED UNDER THE INDENTURE AS DESCRIBED HEREIN. NEITHER THE BONDS NOR THE OBLIGATION TO PAY PRINCIPAL OF OR INTEREST ON THE BONDS CONSTITUTES A DEBT OR A LIABILITY OF THE AUTHORITY, THE CITY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL LIMITATION ON INDEBTEDNESS. IN NO EVENT WILL THE BONDS BE PAYABLE OUT OF ANY FUNDS OR PROPERTIES OTHER THAN THOSE OF THE AUTHORITY AS DESCRIBED IN THIS OFFICIAL STATEMENT. This cover page contains certain information for quick reference only. It is not a summary of this issue of Bonds. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision with respect to the purchase of the Bonds. The Bonds were sold pursuant to competitive sale on February 8, The Bonds are offered when, as and if issued and accepted by the Underwriter, subject to the approval as to their legality by Nossaman, Guthner, Knox & Elliott, LLP, Irvine, California, Bond Counsel. Certain legal matters will be passed upon for the Authority and the City by the City Attorney. Jones Hall, A Professional Law Corporation, San Francisco, California, is serving as Disclosure Counsel to the Authority. It is anticipated that the Bonds will be delivered in definitive form through DTC on or about March 1, The date of this Official Statement is February 8, 2006.

2 MATURITY SCHEDULE Maturity Date (February 1) Principal Amount Interest Rate Yield CUSIP 2007 $ 590, % 3.100% 75788RBF , RBG , RBH , RBJ , RBK , RBL , RBM , RBN , RBP , RBQ , RBR , RBS , RBT , RBU , RBV , RBW , RBX , RBY , RBZ ,025, RCA ,065, RCB ,110, RCC ,160, RCD ,210, RCE ,260, RCF5 $5,640, % Term Bonds due February 1, 2035; Price - 100%; CUSIP: 75788RCK4 Copyright 2006, American Bankers Association. CUSIP data herein is provided by Standard & Poor's CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc.

3 CITY OF REDWOOD CITY CITY OF REDWOOD CITY PUBLIC FINANCING AUTHORITY MAYOR AND CITY COUNCIL/GOVERNING BODY OF THE AUTHORITY Barbara Pierce, Mayor Rosanne Foust, Vice Mayor Alicia Aguirre, Councilmember Ian Bain, Councilmember Jim Hartnett, Councilmember Diane Howard, Councilmember Jeff Ira, Councilmember CITY STAFF Edward P. Everett, City Manager Brian J. Ponty, Director of Finance Alison Freeman, Financial Services Manager Peter C. Ingram, Public Works Services Director Stan Yamamoto, Esq., City Attorney Patricia Howe, City Clerk BOND COUNSEL Nossaman, Guthner, Knox & Elliott, LLP Irvine, California FINANCIAL ADVISOR William Euphrat Municipal Finance, Inc. San Francisco, California DISCLOSURE COUNSEL Jones Hall, A Professional Law Corporation San Francisco, California TRUSTEE The Bank of New York Trust Company, N.A., San Francisco, California

4 GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT Use of Official Statement. This Official Statement is submitted in connection with the sale of the Bonds referred to in this Official Statement and may not be reproduced or used, in whole or in part, for any other purpose. Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the Authority or the City, in any press release and in any oral statement made with the approval of an authorized officer of the Authority or the City, the words or phrases "will likely result," "are expected to", "will continue", "is anticipated", "estimate", "project," "forecast", "expect", "intend" and similar expressions identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. Limit of Offering. No dealer, broker, salesperson or other person has been authorized by the Authority, the City or the Underwriter to give any information or to make any representations other than those contained in this Official Statement and, if given or made, such other information or representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy the Bonds, nor may there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Involvement of Underwriter. The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Official Statement Speaks Only as of its Date. The information and expressions of opinions in this Official Statement are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder will, under any circumstances, create any implication that there has been no change in the affairs of the City or the Authority since the date hereof. Document Summaries. All summaries of the Indenture, the Installment Purchase Contract (as such terms are defined in this Official Statement) or other documents referred to in this Official Statement, are made subject to the provisions of such documents, respectively, and do not purport to be complete statements of any or all of such provisions. No Registration or Qualification. THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXCEPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

5 TABLE OF CONTENTS Page INTRODUCTION...1 Authority for Issuance...1 Financing Purpose...1 Security for the Bonds...1 Bond Insurance...2 Outstanding Enterprise Debt...2 Future Parity Debt...2 Rate Covenants...2 The Official Statement...2 FINANCING PLAN...3 The Recycled Water Project...3 Estimated Sources and Uses of Funds...4 THE BONDS...5 Authority for Issuance...5 Bond Terms...5 Redemption...5 Debt Service Schedule...7 SECURITY FOR THE BONDS...9 Revenues; Pledge of Revenues...9 Installment Sale Payments; Application of Systems Revenues...9 Covenant to Maintain and Budget...11 Reserve Fund...11 Special Obligation; Obligations Absolute...13 Rate Covenants; Collection of Rates and Charges...13 Additional Debt...14 Insurance; Net Proceeds; Condemnation Awards...16 MUNICIPAL BOND INSURANCE...18 The Municipal Bond Insurance Policy...18 MBIA Insurance Corporation...19 Regulation...19 Financial Strength Ratings of MBIA...19 MBIA Financial Information...20 Incorporation of Certain Documents by Reference...20 CITY OF REDWOOD CITY PUBLIC FINANCING AUTHORITY...21 THE ENTERPRISE...21 General Background...21 Management...21 Service Area...22 Water Supply and Demand...22 Historical Wholesale Water Cost...25 Water Conservation Program...25 Water Storage and Distribution System...26 Water Quality Environmental Issues and Regulatory Requirements...27 Capital Improvement Program...27 Billing and Collection Procedures...29 Current Water Rates, Fees and Charges...29 Water Rate Increases...31 Comparative Monthly Water Bills...31 Customer Base...32 ENTERPRISE FINANCIAL INFORMATION...34 Budgetary Process...34 Financial Statements...34 i

6 Enterprise Accounting...35 Outstanding Enterprise Obligations...35 Enterprise Historical and Projected Operating Results...35 RISK FACTORS...37 Risks Relating to Water Supplies...37 Seismic Considerations...38 Environmental Regulation...38 Limited Obligations...38 Limitations on Remedies and Limited Recourse on Default...38 Initiatives...39 Tax Exemption of the Bonds...39 Secondary Market for Bonds...39 CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING CITY REVENUES AND APPROPRIATIONS...40 Article XIIIA of the California Constitution...40 Article XIIIB of the California Constitution...40 Proposition Future Initiatives...42 OTHER INFORMATION...42 Certain Legal Matters...42 Continuing Disclosure...42 Tax Matters...43 Absence of Litigation...44 RATINGS...44 UNDERWRITING...44 FINANCIAL ADVISOR...44 EXECUTION...45 APPENDIX A General Information About the City of Redwood City APPENDIX B Redwood City Audited Financial Statements for Fiscal Year APPENDIX C Summary of the Indenture and the Installment Purchase Contract APPENDIX D Form of Continuing Disclosure Certificate APPENDIX E DTC and the Book-Entry Only System APPENDIX F Proposed Form of Bond Counsel Opinion APPENDIX G Specimen Municipal Bond Insurance Policy ii

7 OFFICIAL STATEMENT $26,000,000 CITY OF REDWOOD CITY PUBLIC FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2006A INTRODUCTION This Official Statement, which includes the cover page and appendices hereto, provides certain information concerning the sale and delivery of the bonds captioned above (the "Bonds") being issued by the City of Redwood City Public Financing Authority (the "Authority"), a joint exercise of powers authority organized under the laws of the State of California. Capitalized terms used but not defined herein have the meanings set forth in the Indenture and the Installment Purchase Contract. See "APPENDIX C SUMMARY OF THE INDENTURE AND THE INSTALLMENT PURCHASE CONTRACT." Authority for Issuance The Bonds are being issued pursuant to (i) the laws of the State of California (the "State"), including the Marks-Roos Local Bond Pooling Act of 1985, constituting Article 4, Chapter 5, Division 7, Title 1 (commencing with Section 6584) of the California Government Code, as amended (the "Bond Law"), (ii) an Indenture of Trust, dated as of February 1, 2006 (the "Indenture"), by and between the City of Redwood City (the "City") and The Bank of New York Trust Company, N.A., San Francisco, California, as trustee (the "Trustee"), (iii) a resolution adopted by the Governing Board of the Authority on January 23, 2006, and (iv) a resolution adopted by the City Council of the City on January 23, Financing Purpose The proceeds of the sale of the Bonds will be used to (i) finance a portion of the City's recycled water project (the "Recycled Water Project") for the City s water system (the "Enterprise"), (ii) fund a reserve fund for the Bonds, and (iii) pay certain costs incurred in connection with issuing the Bonds. See "FINANCING PLAN." The portion of the Recycled Water Project being financed through the issuance of the Bonds is referred to herein as the "Project". Security for the Bonds The Bonds are payable from and secured by the Authority s pledge of "Revenues" under the Indenture, consisting generally of all payments ("Installment Payments") required to be paid by the City under the Installment Purchase Contract dated as of February 1, 2006, between the City and the Authority (the "Installment Purchase Contract"). The City will secure its obligation to pay Installment Payments with its pledge of all of the "Net Revenues" of the Enterprise, defined generally as all gross income and receipts derived by the City from the ownership and operation of the Enterprise, less operation and maintenance costs. The Bonds are also secured by amounts held in any fund or account established under the Indenture (other than the Project Fund and the Rebate Fund). See "SECURITY FOR THE BONDS." The City's obligation to make Installment Payments is on a parity with certain other obligations of the City. See "Outstanding Enterprise Debt" below. 1

8 Bond Insurance Concurrently with issuance of the Bonds, MBIA Insurance Corporation ("MBIA", or the "Insurer") will issue its Municipal Bond Insurance Policy (the "Policy") for the Bonds. The Policy unconditionally guarantees the payment of that portion of the principal of and interest on the Bonds which has become due for payment, but which is unpaid. See "MUNICIPAL BOND INSURANCE" and "APPENDIX G Specimen Municipal Bond Insurance Policy." Outstanding Enterprise Debt The City s obligation to make Installment Payments under the Installment Purchase Contract is on a parity with its obligation under an installment purchase contract (the "2005 Installment Purchase Contract") entered into in connection with the issuance of the Authority s $35,790,000 Water Revenue Bonds, Series 2005A (the "2005A Bonds"). Future Parity Debt The Installment Purchase Contract and the 2005 Installment Purchase Contract permit the City to issue bonds or incur other obligations payable from and secured by a pledge of and lien upon any of the Net Revenues on a parity with the Installment Payments, if the conditions contained in the Installment Purchase Contract are satisfied. See "SECURITY FOR THE BONDS Additional Debt." Rate Covenants The City is obligated under the Installment Purchase Contract (and the 2005 Installment Purchase Contract) to fix, prescribe and collect rates, fees and charges in connection with the Enterprise so as to yield Gross Revenues at least sufficient to pay operation and maintenance costs of the Enterprise, all Installment Payments and all payments of principal of and interest on any Parity Debt as they become due and payable, all amounts, if any, required to restore the balance in the Reserve Fund to the full amount of the Reserve Requirement, and all payments required to meet any other obligations of the City which are charges, liens, encumbrances upon, or which are otherwise payable from, the Gross Revenues. In addition, the City is required to fix, prescribe, revise and collect rates, fees and charges for the services and facilities furnished by the Enterprise during each Fiscal Year which are sufficient to yield estimated Net Revenues which are at least equal to 120% of the aggregate amount of the Installment Payments, and principal of and interest on any Parity Obligations (being all bonds, notes, loan agreements, installment sale agreements, leases or other obligations of the City, payable from and secured by a pledge of and lien upon any of the Net Revenues incurred on a parity with the payment of the Installment Payments) issued or incurred after the issuance of the Bonds, payable from Net Revenues coming due and payable during such Fiscal Year. See "SECURITY FOR THE BONDS - Rate Covenants; Collection of Rates and Charges." The Official Statement This Official Statement contains brief descriptions of, among other things, the City, the Enterprise, the Bonds, the Indenture and the Installment Purchase Contract. These descriptions do not purport to be comprehensive or definitive. All references in this Official Statement to documents are qualified in their entirety by reference to such documents, and references to the Bonds are qualified in their entirety by reference to the form of Bond included in the Indenture. During the offering period respecting the Bonds, copies of the Indenture and other documents 2

9 described in this Official Statement may be obtained at the City. Copies of these documents may be obtained from the Trustee or the City after issuance of the Bonds. The Recycled Water Project FINANCING PLAN The City is entirely reliant on one source of potable water San Francisco's Hetch Hetchy regional water system - and has, over the last six years, purchased water from the Hetch Hetchy system in excess of the amount San Francisco is obligated to deliver to the City. See "THE ENTERPRISE Water Supply and Demand." The City is undertaking the Recycled Water Project in order to eliminate its need to purchase more water than San Francisco is contractually obligated to sell to the City. The purpose of the Recycled Water Project is to provide tertiary treated non-potable, recycled waste water to appropriate customers of the Enterprise for landscape irrigation and industrial uses. Phase 1 of the Recycled Water Project consists of (i) improvements to the existing waste water treatment facilities owned and operated by the South Bayside System Authority ("SBSA"), a joint powers agency of which the City is a member, (ii) the construction of a disinfection facility (chlorine contact chamber) located at the site of the SBSA treatment facility, to be owned by the City and operated by SBSA, (iii) the construction of storage and pumping facilities located at the site of the SBSA treatment facility, to be owned and operated by the City, (iv) the acquisition and installation of new distribution pipelines throughout the water service areas of the City that are east of Highway 101, (v) customer site retrofits for each private or public site with a landscape irrigation meter and (vi) the installation of certain artificial surfaces for athletic fields in the City. Phase 2 of the Recycled Water Project consists of the acquisition and installation of new distribution pipelines throughout the water service areas of the City west of Highway 101, and the construction of related additional pumping facilities. The City and SBSA have entered into (i) an Agreement for Production and Delivery of Recycled Water dated August 1, 2004 (the "Production Agreement"), and (ii) a Lease Agreement (Recycled Water Treatment/Storage/Pumping Facility Site) dated August 1, 2004 (the "Lease"). Under the Production Agreement, SBSA will be responsible for the design and construction of Recycled Water Project facilities to be located on SBSA's property, including those owned by the City, and the City will be responsible for the design of Recycled Water Project facilities not located on SBSA's property. Upon completion of the Recycled Water Project, SBSA will be obligated to deliver recycled water to the City at the times and in the manner set forth in the Production Agreement. The City anticipates that SBSA will, as a result of the Phase 1 of the Recycled Water Project, be able to initially deliver approximately 1,690 to 2,000 acre feet of recycled water per annum to the City, although the City anticipates taking delivery of only 900 acre feet of recycled water per annum by Fiscal Year The Recycled Water Project will be designed and constructed so that SBSA and the City have the ability to modify the Recycled Water Project so that SBSA can increase its delivery of recycled water to the City to 3,238 acre feet of recycled water per annum, consistent with the certified CEQA Mitigated Negative Declaration for the Recycled Water Project. Under the Lease, which is scheduled to expire December 31, 2056, the City is leasing the real property from SBSA on which the disinfection facility and storage and pumping facilities described above of the Recycled Water Project will be constructed. The City expects that in addition to landscape irrigation users, some industrial users and commercial facilities will utilize the recycled water. In the Greater Bayfront area of the City these include concrete plants, materials recycling businesses and port-related activities, such as dust 3

10 control. Additionally, the City Council anticipates that it will, in accordance with California law, be adopting a "dual plumbing" ordinance for certain new commercial construction, such as office buildings, for internal toilet-flushing and self-contained cooling systems. The proceeds of the 2005 Bonds were used to finance (i) the accrued costs to date relating to the Recycled Water Project and which have been paid out of cash reserves of the Enterprise, and (ii) the additional costs of the portion of the Recycled Water Project located on the site of the SBSA treatment facility. The City currently expects that portion of the Recycled Water Project being constructed on the site of SBSA treatment facility to be completed between July and October, 2006, with the remainder of Phase 1 of the Recycled Water Project to be completed over the following three calendar years. The proceeds of the Bonds will be used to finance (i) the first two of three pipelines that will distribute recycled water to the Redwood Shores area of the City, (ii) retrofits for certain landscape irrigation customers, (iii) one-half of the artificial turf installations and (iv), as needed, system-wide repair and replacement of the Enterprise's facilities. The Authority and the City anticipate that, in addition to utilizing the proceeds of the Bonds and the 2005 Bonds and certain capital and operating reserves of the Enterprise, the Authority will issue additional bonds in several series over several years to finance the remainder of Phase 1 of the Recycled Water Project, and that the total costs of Phase 1 of the Recycled Water Project will be approximately $72.4 million, with $25.6 million being required to construct the facilities located at the SBSA site, $35.3 million being required to complete the acquisition and installation of the distribution system, $5 million being required for the installation of the artificial surfaces at the athletic playing fields, and $6.5 million required for customer retrofits. The City will proceed with Phase 2 of the Recycled Water Project, with an estimated cost of approximately $12.8 million, if it determines there is sufficient demand for recycled water west of Highway 101. The City has received all permits and approvals necessary for the Recycled Water Project. Estimated Sources and Uses of Funds The table below sets forth the estimated sources and uses of Bond proceeds: Sources of Funds Par Amount of Bonds $26,000, Less Net Original Issue Discount (58,476.45) Less Underwriter s Discount [1] (432,919.50) Total Sources $25,508, Uses of Funds Deposit to Project Fund $23,762, Reserve Fund 1,573, Costs of Issuance [2] 172, Total Uses $25,508, [1] Includes the municipal bond insurance premium. [2] Includes initial Trustee fees and expenses, financial advisor fees, legal fees, rating agency fees, printing costs, and other miscellaneous bond issuance and delivery costs. 4

11 THE BONDS Authority for Issuance Bond Terms The Bonds are being issued pursuant to the laws of the State, including the Bond Law, the Indenture, a resolution adopted by the Governing Board of the Authority on January 23, 2006, and a resolution adopted by the City Council on January 23, Dated Date and Maturities. The Bonds will be dated their date of delivery. Subject to the redemption provisions outlined below, the Bonds will mature on the dates and in the amounts set forth on the inside cover page of this Official Statement. Interest and Principal. Each Bond will bear interest at the rates set forth on the cover page of this Official Statement, payable semiannually on February 1 and August 1 of each year, beginning on August 1, 2006 (each, an "Interest Payment Date"). The Bonds will be dated as of their original date of delivery (the "Closing Date"), and bear interest from the Interest Payment Date immediately preceding the date of authentication thereof by the Trustee, unless such date of authentication is on or after the 15th day of the calendar month prior to an Interest Payment Date, in which case they shall bear interest from such Interest Payment Date, or unless such date of authentication is on or before July 15, 2006, in which case they shall bear interest from the Closing Date DTC and Book-Entry Only System. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered initially in the name of Cede & Co. (DTC s partnership nominee). So long as Cede & Co. is the registered owner of the Bonds, as nominee of DTC, references in this Official Statement to the "Owners" will mean Cede & Co., and will not mean the Beneficial Owners of the Bonds. See APPENDIX E "DTC AND THE BOOK-ENTRY ONLY SYSTEM." Method of Payment. Principal, premium, if any, and interest on the Bonds are payable directly to DTC by the Trustee in lawful money of the United States of America. Upon receipt of payments of principal, premium or interest, DTC is to remit such principal, premium or interest to the "DTC Participants" (as defined in APPENDIX E) for subsequent disbursement to the Beneficial Owners of the Bonds. See APPENDIX E "DTC AND THE BOOK-ENTRY ONLY SYSTEM." Redemption Optional Redemption. The Bonds maturing on or before February 1, 2015, are not subject to optional redemption prior to their respective stated maturities. The Bonds maturing on or after February 1, 2016, are subject to optional redemption on any date on or after February 1, 2015, in whole or in part, from prepayments of the Installment Payments made at the option of the City pursuant to the Installment Purchase Contract, at a redemption price equal to the principal 5

12 amount thereof to be redeemed together with accrued interest to the redemption date, without a premium. Extraordinary Casualty Redemption. The Bonds are subject to redemption, in whole or in part on any date, from the Net Proceeds of insurance or condemnation with respect to the Enterprise, which Net Proceeds are deposited in the Payment Fund (as established under the Indenture) and credited towards the prepayment of the Installment Payments made by the City pursuant to the Installment Purchase Contract, at a redemption price equal to the principal amount of the Bonds to be redeemed, together with accrued interest to the date fixed for redemption, without premium. Mandatory Sinking Fund Redemption. The Bonds maturing February 1, 2035 (the "Term Bonds") are subject to mandatory sinking fund redemption in part, by lot, commencing on February 1, 2032, from mandatory sinking fund payments set aside in the Payment Account, at a redemption price equal to the principal amount thereof to be redeemed, together with accrued interest to the date fixed for redemption, without premium, in the aggregate respective principal amounts and on the dates set forth below: Term Bonds Maturing February 1, 2035 Sinking Fund Principal Redemption Date Amount To Be (February 1) Redeemed 2032 $1,320, ,375, ,440, (Maturity) 1,505,000 If some but not all of such Bonds have been redeemed pursuant to optional redemption or purchased in lieu of redemption (as described following), the total amount of all future sinking fund payments shall be reduced by the aggregate principal amount of such Bonds so redeemed, to be allocated among such sinking fund payments on a pro rata basis as determined by the Authority. Purchase In Lieu of Redemption. In lieu, or partially in lieu, of mandatory sinking fund redemption of the Term Bonds, moneys of the Authority may be used to purchase Outstanding Bonds, in the manner provided in the Indenture. Purchases of Outstanding Bonds may be made by the Authority prior to the selection of Bonds for redemption by the Trustee, at public or private sale as and when and at such prices as the Authority may in its discretion determine but only at prices (including brokerage or other expenses) of not more than par plus applicable accrued interest and redemption premiums, and any accrued interest payable upon the purchase of Bonds may be paid from the amount in the Payment Fund for payment of interest on the following Interest Payment Date. Selection of Bonds for Redemption. In the event that part, but not all, of the Bonds are to be redeemed (except for mandatory sinking fund redemption), the Bonds to be redeemed will be selected by the Trustee pro rata among maturities (as nearly as practicable) and by lot within a maturity; provided, however, that the Bonds may be redeemed by any maturity or maturities selected by the City to correspond with Installment Payments prepaid by the City, and by lot within a maturity. 6

13 In the event of a redemption for which the Trustee does not have monies available to redeem the entire amount scheduled for redemption, the Trustee shall redeem Bonds of the applicable maturity or maturities by lot up to a principal amount equal to the available monies Notice of Redemption. The Trustee is required to give notice of the redemption of the Bonds, at the expense of the Authority, (i) at least 30 but not more than 45 days prior to the redemption date or (ii) immediately upon receipt of Net Proceeds from insurance or condemnation awards which are to be used to redeem Bonds. Notice must be given to the respective Owners of Bonds designated for redemption by first class mail, postage redeemed, at their addresses appearing on the Bond Register maintained by the Trustee. Such notice must specify: (a) the Bonds or designated portions thereof (in the case of redemption of the Bonds in part but not in whole) which are to be redeemed, (b) the date of redemption, (c) the place or places where the redemption will be made, including the name and address of any paying agent, (d) the redemption price, (e) the CUSIP numbers (if any) assigned to the Bonds to be redeemed, (f) if less than all the Bonds of a maturity are to be redeemed, the certificate numbers of the Bonds to be redeemed and, in the case of any Bond to be redeemed in part only, the amount of such Bond to be redeemed, and (g) the original issue date, interest rate and stated maturity date of each Bond to be redeemed in whole or in part. Such notice shall further state that on the specified date there will become due and payable upon each Bond or portion thereof being redeemed the redemption price, together with interest accrued to the redemption date, and that from and after such date interest with respect thereto shall cease to accrue and be payable. Such notice in respect of optional or extraordinary casualty redemption shall not be provided unless there has been deposited with the Trustee funds sufficient to pay such redemption price (except in the case of redemption resulting from the issuance of refunding obligations). Rescission of Redemption Notice. The Authority may rescind any optional redemption by written notice to the Trustee on or prior to the date fixed for redemption. Any notice of optional redemption will be cancelled and annulled if for any reason funds are not available on the date fixed for redemption for the payment in full of the Bonds then called for redemption, and such cancellation will not constitute an Event of Default under the Indenture. The Trustee will mail notice of rescission of redemption in the same manner notice of redemption was originally sent. Effect of Redemption. Once notice of redemption is duly given as provided in the Indenture, and the moneys for the redemption, including interest to the applicable redemption date of the Bonds to be redeemed, has been set aside in the Redemption Account or Payment Account, the portion of Bonds to be redeemed shall become due and payable on said redemption date, and, upon presentation and surrender thereof at the office or offices specified in said notice, said Bonds shall be paid at the unpaid principal amount and premium, if any, with respect thereto, plus any unpaid and accrued interest to the redemption date. Debt Service Schedule The following table sets forth the annual debt service on the Bonds and the 2005 Bonds (assuming no optional redemption or mandatory redemption from proceeds of insurance, sale and condemnation). The obligation of the City to make Installment Payments under the Installment Purchase Contract is on a parity with the obligation of the City to make installment payments under the 2005 Installment Purchase Contract. 7

14 Bond Year (February 1) 2005 Bonds Debt Service 2006 Bonds Principal 2006 Bonds Interest Total Debt Service 2007 $2,144, $ 590, $ 982, $3,716, ,143, , ,051, ,715, ,146, , ,033, ,719, ,145, , ,014, ,715, ,144, , , ,714, ,146, , , ,716, ,147, , , ,721, ,147, , , ,719, ,146, , , ,715, ,144, , , ,713, ,143, , , ,717, ,146, , , ,718, ,147, , , ,719, ,148, , , ,719, ,148, , , ,721, ,144, , , ,713, ,143, , , ,717, ,144, , , ,715, ,148, , , ,718, ,153, ,025, , ,727, ,156, ,065, , ,726, ,162, ,110, , ,731, ,162, ,160, , ,734, ,164, ,210, , ,736, ,158, ,260, , ,727, ,156, ,320, , ,730, ,156, ,375, , ,726, ,157, ,440, , ,730, ,505, , ,572, TOTAL $60,202, $26,000, $19,569, $105,772,

15 SECURITY FOR THE BONDS This section provides summaries of the provisions of the Indenture and the Installment Purchase Contract. See "APPENDIX C" for a more complete summary of the Indenture and the Installment Purchase Contract. Revenues; Pledge of Revenues Pledge of Revenues and Other Amounts. The Bonds are special limited obligations of the Authority, payable (on a parity with the installments due under the 2005 Installment Purchase Contract) solely from and secured by Revenues (as defined below) of the Authority consisting primarily of Installment Payments received by the Authority from the City. In the Indenture, the Authority transfers in trust, grants a security interest in and assigns to the Trustee, for the benefit of the Owners from time to time of the Bonds, all of the Revenues and all of the right, title and interest of the Authority in the Installment Purchase Contract (except for certain rights to indemnification set forth therein). The Bonds are also secured by amounts on deposit in the funds and accounts established under the Indenture, other than the Project Fund and the Rebate Fund. Definition of Revenues. "Revenues" are defined in the Indenture as follows: (a) all amounts received by the Authority or the Trustee pursuant to or with respect to the Installment Purchase Contract, including, without limiting the generality of the foregoing, all of the Installment Payments (including both timely and delinquent payments and any late charges), prepayments of Installment Payments, insurance proceeds and condemnation proceeds deposited in the Insurance and Condemnation Fund, and (b) all interest, profits or other income derived from the investment of amounts in any fund or account established pursuant to the Indenture. Assignment to Trustee. The Authority, in the Indenture, transfers in trust, grants a security interest in and assigns to the Trustee, for the benefit of the Owners from time to time of the Bonds, all of the Revenues and all of the right, title and interest of the Authority in the Installment Purchase Contract (except for certain rights to indemnification set forth therein). The Trustee is entitled to all of the protections, limitations from liability and indemnities provided it under the Indenture. The Trustee shall be entitled to and shall collect and receive all of the Revenues, and any Revenues collected or received by the Authority shall be deemed to be held, and to have been collected or received, by the Authority as the agent of the Trustee and shall forthwith be paid by the Authority to the Trustee. The Trustee also shall be entitled to and shall, subject to the provisions of the Indenture, take all steps, actions and proceedings which the Trustee determines to be reasonably necessary in its judgment to enforce, either jointly with the Authority or separately, all of the rights of the Authority and all of the obligations of the City under the Installment Purchase Contract. Installment Sale Payments; Application of Systems Revenues Installment Sale Payments. Under the Installment Purchase Contract (and the 2005 Installment Purchase Contract), the City will irrevocably pledge all of the Net Revenues to the punctual payment of the Installment Payments, and the interest thereon. This pledge constitutes a first lien on the Net Revenues and such other moneys for the payment of the Installment 9

16 Payments in accordance with the Installment Purchase Contract, on a parity with the pledge and lien which secures any Parity Debt, including the installment payments due under the 2005 Installment Purchase Contract. The City is obligated to make Installment Payments to the Trustee, on behalf of and as assignee of the Authority. "Net Revenues" means, for any period, all of the Gross Revenues during such period less all of the Maintenance and Operation Costs during such period. "Gross Revenues" means all gross income and revenue received or receivable by the City from the ownership and operation of the Enterprise, calculated in accordance with Generally Accepted Accounting Principles, including: all rates, fees and charges (including connection fees) received by the City for Water Service, all other income and revenue howsoever derived by the City from the Enterprise or arising from the Enterprise, and transfers from the Rate Stabilization Fund to the Revenue Fund. "Gross Revenues" does not include (i) any specific charges levied for the express purpose of reimbursing others for all or a portion of the cost of the acquisition or construction of specific facilities, or (ii) customers deposits or any other deposits subject to refund until such deposits have become the property of the City. "Maintenance and Operation Costs" means the reasonable and necessary costs and expenses paid by the City for maintaining and operating the Enterprise, as determined in accordance with Generally Accepted Accounting Principles, including but not limited to (a) the reasonable expenses of management and repair and other costs and expenses necessary to maintain and preserve the Enterprise in good repair and working order, and (b) administrative costs of the City attributable to the Enterprise and the financing thereof. Maintenance and Operation Costs does not include depreciation, replacement and obsolescence charges or reserves therefor, in any Fiscal Year, prior to setting aside an amount equal to the Installment Payments for such Fiscal Year, capital expenditures other than as set forth in subsection (a) above, amortization of intangibles or other bookkeeping entries of a similar nature. Application of Revenues. The City is required to deposit all of the Gross Revenues of the Enterprise immediately upon receipt in the Revenue Fund, which has been established and is held and maintained by the City with respect to the Enterprise. Amounts on deposit in the Revenue Fund will be applied by the City to pay when due the following amounts in the following order of priority: (i) all Maintenance and Operation Costs of the Enterprise; (ii) the Installment Payments, and payment of all other Parity Obligations, including the installment payments due under the 2005 Installment Purchase Contract; and 10

17 (iii) the amount of any deficiency in the Reserve Fund established for the Bonds and in any reserve fund established for Parity Obligations. All Net Revenues remaining after paying all of the sums listed above, or in connection with any Parity Obligation, may be withdrawn by the Finance Officer for expenditure for any lawful purpose of the City. From time to time the City may deposit in the Rate Stabilization Fund from remaining Net Revenues or other available funds of the City such amounts as the City shall determine. The City may withdraw amounts from the Rate Stabilization Fund (i) for transfer to the Revenue Fund for inclusion in Gross Revenues for any Fiscal Year, or (ii) for any other lawful use of the City. All interest or other earnings upon deposits in the Rate Stabilization Fund shall be withdrawn therefrom and accounted for as Gross Revenues. Rate Stabilization Fund. The City may withdraw amounts from the Rate Stabilization Fund (i) for transfer to the Revenue Fund for inclusion in Gross Revenues for any Fiscal Year, or (ii) for any other lawful use of the City. All interest or other earnings upon deposits in the Rate Stabilization Fund shall be withdrawn therefrom and accounted for as Gross Revenues Deposits to Payment Fund. On the third (3 rd ) Business Day next preceding each Interest Payment Date (each an "Installment Payment Date"), the City shall deposit with the Trustee, for deposit in the Payment Fund, from amounts legally available therefor on deposit in the Revenue Fund, a sum equal to the amount of interest and principal becoming due under the Installment Purchase contract on the next Interest Payment Date. The City shall be entitled to receive as a credit against Installment Payments an amount equal to the amount of any balance contained in the Payment Fund prior to the Installment Payment Date for such Installment Payments (excluding money designated for the prepayment of Bonds). All money in the Payment Fund will be used and withdrawn by the Trustee in accordance with the Indenture. Covenant to Maintain and Budget During the Term of the Installment Purchase Contract, the City will maintain and preserve the Enterprise in good repair and working order at all times and will operate the Enterprise in an efficient and economical manner and will pay all Maintenance and Operation Costs of the Enterprise as they become due and payable. Promptly upon the adoption of its budget for each Fiscal Year, the City will file with the Trustee a budget setting forth the estimated Maintenance and Operation Costs of the Enterprise for such Fiscal Year. Reserve Fund General. Under the Indenture, a Reserve Fund is established for the Bonds (the "Reserve Fund"), and will be held in trust by the Trustee. The Reserve Fund shall initially be funded, and will continue to be funded, in an amount equal to the Reserve Requirement. The Indenture defines the term "Reserve Requirement" to mean, as of any date of calculation, the lesser of (i) 10% of the original principal amount of the Bonds, (ii) an amount equal to maximum annual Debt Service payable by the Authority between the date of such calculation and the final maturity of the Bonds, or (iii) 125% of average annual Debt Service payable under the Indenture. Application of Reserve Fund. If, two Business Days prior to any Interest Payment Date, the money in the Payment Fund does not equal the amount required to be paid to the Bond 11

18 Owners on such date, the Trustee shall transfer from the Reserve Fund to the Payment Fund the amount of such insufficiency to make delinquent Installment Payments on behalf of the City. If the Reserve Fund is funded with a letter of credit, surety bond, insurance policy or other comparable credit facility as described below, the Trustee shall take such action as is necessary to either (i) make a drawing under the letter of credit or (ii) make a claim under the surety bond or insurance policy, respectively, so that the amount of such insufficiency is paid or available to the Trustee on such Interest Payment Date under the terms of such instrument. Upon receipt of any delinquent Installment Payment or portion thereof with respect to which moneys have been advanced from the Reserve Fund, such Installment Payment or portion thereof shall be deposited in the Reserve Fund to the extent of such advance. Transfer of Excess Amounts. If, following valuation or calculation thereof, the amount available and contained in the Reserve Fund (valued as provided in the Indenture) exceeds the Reserve Requirement and if the Trustee does not have actual knowledge of an Event of Default under the Indenture, the Trustee shall withdraw the amount of such excess from the Reserve Fund. The Trustee shall deposit such amount in the Payment Account. Substitution of Reserve Fund Credit Instrument. If at any time the Reserve Fund is funded with cash, the Authority may deliver to the Trustee an irrevocable letter of credit issued by a financial institution having unsecured debt obligations rated in the highest rating categories of Moody s and S&P, in an amount, together with moneys, or surety bonds or insurance policies (as described below) on deposit in the Reserve Fund, equal to the Reserve Requirement. Such letter of credit shall have an original term of no less than three (3) years or, if less, the final maturity of the Bonds and such letter of credit shall provide by its terms that it may be drawn upon as provided herein. At least one year prior to the stated expiration of such letter of credit, the Authority shall either (i) deliver a replacement letter of credit, (ii) deliver an extension of the letter of credit for at least an additional year or, if less, the final maturity of the Bonds, or (iii) deliver to the Trustee a surety bond or an insurance policy satisfying the requirements set forth below. Upon delivery of such replacement letter of credit, extended letter of credit, or surety bond or insurance policy, the Trustee shall deliver the then-effective letter of credit to or upon the written order of the Authority. If the Authority shall fail to deposit a replacement letter of credit, extended letter of credit or surety bond or insurance policy with the Trustee, the Authority shall immediately commence to make monthly deposits with the Trustee so that an amount equal to the Reserve Requirement will be on deposit in the Reserve Fund no later than the stated expiration date of the letter of credit. If an amount equal to the Reserve Requirement as of the date following the expiration of the letter of credit is not on deposit in the Reserve Fund one week prior to the stated expiration date of the letter of credit, the Trustee shall draw on the letter of credit to fund the deficiency resulting therefrom in the Reserve Fund. Additionally, the Authority may, with an opinion of nationally recognized bond counsel that such delivery complies with the provisions of the Indenture, deliver to the Trustee a surety bond or an insurance policy securing an amount, together with moneys or letters of credit on deposit in the Reserve Fund, equal to the Reserve Requirement. Such surety bond or insurance policy shall be issued by an insurance company whose unsecured debt obligations (or for which obligations secured by such insurance company s insurance policies) at the time of delivery of such surety bond or insurance policy are rated in the highest rating category of Moody s and S&P. Such surety bond or insurance policy shall have a term of no less than the final maturity of the Bonds. In the event that such surety bond or insurance policy for any reason lapses or expires, the Authority shall immediately deliver a replacement surety bond, insurance policy or letter of credit meeting the requirements of the Indenture for deposit in the Reserve Fund. 12

19 Special Obligation; Obligations Absolute Special, Limited Obligation. The City s obligation to pay the Installment Payments and any other amounts coming due and payable, on a parity with the installment payments due under the 2005 Installment Purchase Contract and any other Parity Obligations, under the Installment Purchase Contract is a special obligation of the City limited solely to the Net Revenues. Under no circumstances is the City required to advance moneys derived from any source of income other than the Net Revenues and other sources specifically identified in the Installment Purchase Contract for the payment of the Installment Payments and such other amounts. No other funds or property of the City are liable for the payment of the Installment Payments and any other amounts coming due and payable under the Installment Purchase Contract. Absolute and Unconditional Obligations. The obligation of the City to make the Installment Payments and to pay the interest thereon is absolute and unconditional, whether or not the Project is acquired, and until such time as all Installment Payments and the interest thereon shall have been fully paid and the Bonds are no longer Outstanding, the City will not, under any circumstances, discontinue, abate or suspend any Installment Payments or any interest thereon required to be made by it under the Installment Purchase contract when due, whether or not the Enterprise or any part thereof is operating or operable or has been completed, or whether or not the Enterprise is condemned, damaged, destroyed or seized or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such payments shall not be subject to reduction whether by offset, counterclaim, defense, recoupment, abatement, suspension, deferment or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement or covenant contained herein for any cause whatsoever. Rate Covenants; Collection of Rates and Charges Sum Sufficient. The City will fix, prescribe, revise and collect rates, fees and charges for the services and facilities furnished by the Enterprise during each Fiscal Year, which are at least sufficient, after making allowances for contingencies and error in the estimates, to yield Gross Revenues sufficient to pay the following amounts in the following order of priority: (a) All Maintenance and Operation Costs of the Enterprise; (b) The Installment Payments and interest thereon and all payments (including payments of interest and under reimbursement agreements) with respect to related Parity Obligations (including the installment payments due under the 2005 Installment Purchase Contract) as they become due and payable; (c) Amounts necessary to bring the amount of funds in the Reserve Fund up to the Reserve Requirement within one year of a draw thereon; and (d) All payments required to meet any other obligations of the City which are charges, liens, encumbrances upon, or which are otherwise payable from the Gross Revenues during such Fiscal Year. 120% Coverage. The City is required to fix, prescribe, revise and collect rates, fees and charges for the services and facilities furnished by the Enterprise during each Fiscal Year which are sufficient to yield estimated Net Revenues which are at least equal to one hundred twenty percent (120%) of the aggregate amount of the Installment Payments, and principal of and interest on any Parity Obligations (including the installment payments due under the 2005 Installment Purchase Contract) issued or incurred payable from Net Revenues coming due and 13

20 payable during such Fiscal Year. The City may make adjustments, from time to time, in its rates, fees and charges as it deems necessary, but shall not reduce its rates, fees and charges below those in effect unless the Net Revenues resulting from such reduced rates, fees and charges shall at all times be sufficient to meet the requirements described in this paragraph. If the City violates the rate covenant described in the preceding paragraph, such violation shall not, in and of itself, be a default under the Installment Purchase Contract and shall not give rise to a declaration of an Event of Default if the coverage calculated in accordance with the Installment Purchase Contract does not decrease below 1.00 times annual Debt Service on the Bonds and Parity Obligations, amounts sufficient to maintain the Reserve Fund at the Reserve Requirement, and Maintenance and Operation Costs of the Enterprise and, within 120 days after the date such violation is discovered, the City hires an Independent Financial Consultant to review the revenues and expenses of the Enterprise and abides by such consultant s recommendations to revise the schedule of rates, fees and charges and to revise any Maintenance and Operation Costs of the Enterprise insofar as practicable and to take such other actions as are necessary so as to produce Net Revenues to cure such violation for future compliance; provided, however, that if the City does not cure such violation within twelve (12) months succeeding the date such violation is discovered, an Event of Default shall be deemed to have occurred under the Installment Purchase Contract. Additional Debt No Senior Obligations Payable from Net Revenues. So long as any Bonds are Outstanding, the City may not issue or incur any obligations payable from Net Revenues or the Revenue Fund senior or superior to the Installment Payments and interest thereon. Additional Bonds. In addition to the Bonds, the Authority may, by Supplemental Indenture, issue one or more series of Additional Bonds secured by Revenues on a parity with the Bonds, and may issue and deliver such Additional Bonds in such principal amount as shall be determined by the Authority, but only upon compliance by the Authority with the following specific conditions, among others: (a) Supplemental Indenture. The Authority and the Trustee shall have executed a Supplemental Indenture which (i) sets forth the terms and provisions of such Additional Bonds, including the establishment of such funds and accounts, which may be separate and apart from the funds and accounts established hereunder for the Bonds, as shall be necessary or appropriate, and (ii) requires that prior to the delivery of such Additional Bonds the Reserve Requirement with respect to such Additional Bonds shall be on deposit in the Reserve Fund established under the Indenture or in a reserve fund established under such Supplemental Indenture. (b) Payment Dates. The scheduled principal and interest payable with respect to such Additional Bonds shall be payable only on Interest Payment Dates applicable to the Bonds. (c) Amendment of Installment Purchase Contract. The Installment Purchase Contract shall have been amended, if necessary, to (i) increase or adjust the Installment Payments due and payable on each Installment Payment Date to an amount sufficient to pay the principal, premium (if any) and interest payable with respect to all Outstanding Bonds, including all Additional Bonds as and when, if any, the same mature or become due and payable (except to the extent such principal, premium and interest may be payable out of moneys then in the Reserve Fund or otherwise on deposit with the Trustee in accordance with this Indenture), (ii) if appropriate, amend the definition of the Project to include as part of the Project all or any portion of additions, betterments, extensions, improvements or replacements, or such other real or personal property, to be financed, acquired or constructed or otherwise made subject to the 14

21 Installment Purchase Contract, by the preparation, execution and delivery of such Additional Bonds, and (iii) make such other revisions to the Installment Purchase Contract as are necessitated by the issuance of such Additional Bonds (provided, however, that such other revisions shall not prejudice the rights of the Owners of Outstanding Bonds as granted them under the terms of this Indenture). (d) No Default of Authority. The Trustee shall have received a Certificate of the Authority that no Event of Default under the Indenture relating to the Authority exists (or any event which, once all notice or grace periods have passed, would constitute an Event of Default). (e) No Default of City. The Trustee shall have received a certificate of the City that no Event of Default under the Indenture relating to the City, which includes an Event of Default under the Installment Purchase Contract, exists (or any event which, once all notice or grace periods have passed, would constitute an Event of Default). (f) Opinion Regarding Supplemental Indenture. The Trustee shall have received an opinion of Bond Counsel substantially to the effect that (i) the Supplemental Indenture and the amendments to the Installment Purchase Contract comply in all respects with the requirements of the Indenture, (ii) the Supplemental Indenture and said amendments to the Installment Purchase Contract have been duly authorized, executed and delivered by each of the respective parties thereto (provided that said opinion of Bond Counsel, in rendering the opinions set forth in this clause (ii), shall be entitled to rely upon one or more other opinions of counsel, including counsel to any of the respective parties to said Supplemental Indenture or said amendments to the Installment Purchase Contract), (iii) assuming that no Event of Default has occurred and is continuing, the Indenture, as amended by the Supplemental Indenture, and the Installment Purchase Contract, as amended by the respective amendments thereto, constitute the legal, valid and binding obligations of the respective parties thereto, enforceable against said parties in accordance with their respective terms (except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, moratorium, debt adjustment or other laws affecting creditors rights generally, and except to the extent that enforcement thereof may be limited by general principles of equity, regardless of whether enforcement is sought in a legal or equitable proceeding) and (iv) the execution of the Supplemental Indenture and the amendments to the Installment Purchase Contract, and performance by the parties thereunder, will not result in the inclusion of the interest on any Bonds in the gross income of the Owners of the Bonds for purposes of federal income taxation. (g) Reserve Requirement. Upon the execution and delivery of such Additional Bonds, the amount on deposit in the Reserve Fund, or in a reserve fund established under such Supplemental Indenture taking into account the execution of the Additional Bonds, shall be at least equal to the Reserve Requirement. Parity Obligations. In addition to Additional Bonds described above and the installment payments due under the 2005 Installment Purchase Contract, the City may also issue or incur Parity Obligations payable from Net Revenues on a parity with the Installment Payments to provide financing for the Enterprise, subject to the following specific conditions: (a) No Default. No Event of Default may occur and be continuing under the Installment Purchase Contract. (b) Debt Service Coverage. The Net Revenues, calculated in accordance with Generally Accepted Accounting Principles, either (i) as shown by the books of the City for the latest Fiscal Year, as verified by a certificate of a Finance Officer, or (ii) as shown by the books of the City for any more recent twelve (12) month period selected by the City and verified by a 15

22 certificate or opinion of an Independent Certified Public Accountant employed by the City, plus, in either case, (at the option of the City) the Additional Revenues, shall be at least equal to one hundred twenty percent (120%) of the amount of Maximum Annual Debt Service. (c) Reserve Fund. Except with respect to Governmental Loans, there shall be established from the proceeds of such Parity Obligations a reserve fund for the security of such Parity Obligations, in an amount equal to the lesser of (i) the maximum amount of debt service required to be paid by the City with respect to such Parity Obligations during any Fiscal Year, or (ii) the maximum amount then permitted under the Internal Revenue Code of 1986, as amended, in either event as certified in writing by the City. With respect to Governmental Loans, the City may, in its sole discretion, establish a reserve fund in an amount not to exceed the limits for other Parity Obligations. The term "Additional Revenues" means, with respect to the issuance of any Parity Obligations, an allowance for Net Revenues (i) arising from any increase in the charges made for service from the Enterprise adopted prior to the incurring of such Parity Obligations and effective within eighteen (18) months following the date of incurring such Parity Obligations, in an amount equal to the total amount by which the Net Revenues would have been increased if such increase in charges had been in effect during the whole of the most recent completed Fiscal Year or during any more recent twelve (12) month period selected by the City, and (ii) arising from any increase in service connections to the Enterprise prior to the incurring of such Parity Obligations, in an amount equal to the total amount by which the Net Revenues would have been increased if such connections had been in existence during the whole of the most recent completed Fiscal Year or during any more recent twelve (12) month period selected by the City, all as shown by the certificate or opinion of an Independent Financial Consultant. The term "Governmental Loan" means a loan from the State or the United States of America, acting through any of its agencies, to finance improvements to the Enterprise, and the obligation of the City to make payments to the State or the United States of America under the loan agreement memorializing said loan on a parity basis with the payment of Installment Payments. Insurance; Net Proceeds; Condemnation Awards Insurance. Under the Installment Purchase Contract the City is required to procure and maintain insurance on the Enterprise with commercial insurers or through participation in a joint powers insurance authority, in such amounts, with such deductibles and against such risks (including accident to or destruction of the Enterprise) as are usually insurable in connection with similar enterprises. In the event of any damage to or destruction of the Enterprise caused by the perils covered by such insurance, the proceeds of such insurance shall be applied to the repair, reconstruction or replacement of the damaged or destroyed portion of the Enterprise. The City shall cause such repair, reconstruction or replacement to begin promptly after such damage or destruction shall occur and to continue and to be properly completed as expeditiously as possible, and shall pay out of the proceeds of such insurance all costs and expenses in connection with such repair, reconstruction or replacement so that the same shall be completed and the Enterprise shall be free and clear of all liens and claims. If the proceeds received by reason of any such loss shall exceed the costs of such repair, reconstruction or replacement, the excess shall be applied to the prepayment of Installment Payments. Alternatively, if the proceeds of such insurance are sufficient to enable the City to retire all outstanding Parity Obligations and the Bonds and all other amounts due hereunder and under the Indenture, the City may elect not to repair, reconstruct or replace the damaged or destroyed 16

23 portion of the Enterprise, and thereupon such proceeds shall be applied to the prepayment of the Installment Payments as provided in the Installment Payment Contract and to the payment of all other amounts due thereunder and under the Indenture, and as otherwise required by the documents pursuant to which such Parity Obligations were issued. The City will also procure and maintain commercial general liability insurance covering claims against the City for bodily injury or death, or damage to property and worker s compensation insurance to cover all persons employed in connection with the Enterprise. Any policy of insurance required under the Installment Purchase Contract may be maintained by the City in the form of self-insurance, subject to the conditions set forth in the Installment Purchase Contract. Condemnation Awards. If all or any part of the Enterprise shall be taken by eminent domain proceedings, the Net Proceeds thereof shall be applied as follows: (a) If (1) the City prepares a report showing (i) the estimated loss of annual Net Revenues, if any, suffered or to be suffered by the City by reason of such eminent domain proceedings, (ii) a general description of the additions, betterments, extensions or improvements to the Enterprise proposed to be acquired by the City from any Net Proceeds, and (iii) an estimate of the additional annual Net Revenues to be derived from such additions, betterments, extensions or improvements, and (2) on the basis of such certificate, the City determines that the estimated additional annual Net Revenues will sufficiently offset the estimated loss of annual Net Revenues resulting from such eminent domain proceedings so that the ability of the City to meet its obligations under the Installment Purchase Contract will not be substantially impaired (which determination shall be final and conclusive); then the City shall promptly proceed with the acquisition of such additions, betterments, extensions or improvements substantially in accordance with such report and such Net Proceeds shall be applied for the payment of the costs of such acquisition, and any balance of such Net Proceeds not required by the City for such purpose shall be applied to prepay the Installment Payments and any Parity Obligations, on a pro rata basis in the manner provided in the Installment Purchase Contract and in the instruments authorizing such Parity Obligations. (b) If the conditions described above are not met, then such Net Proceeds shall be applied to the prepayment of Installment Payments. 17

24 MUNICIPAL BOND INSURANCE The following information has been furnished by the Insurer for use in this Official Statement. No representation is made by the Authority or the City as to the accuracy or completeness of such information, or the absence of material adverse changes therein at any time subsequent to the date hereof. Reference is made to APPENDIX G for a specimen of the Insurer s policy. MBIA does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding the Policy and MBIA set forth under the caption "MUNICIPAL BOND INSURANCE. " Additionally, MBIA makes no representation regarding the Bonds or the advisability of investing in the Bonds. The Municipal Bond Insurance Policy The MBIA policy unconditionally and irrevocably guarantees the full and complete payment required to be made by or on behalf of the Authority to the Trustee, as paying agent (the "Paying Agent") or its successor of an amount equal to (i) the principal of (either at the stated maturity or by an advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Bonds as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed by MBIA's policy shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner of the Bonds 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 (a "Preference"). MBIA's policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Bonds. MBIA's policy does not, under any circumstance, insure against loss relating to: (i) optional or mandatory redemptions (other than mandatory sinking fund redemptions); (ii) any payments to be made on an accelerated basis; (iii) payments of the purchase price of Bonds upon tender by an owner thereof; or (iv) any Preference relating to (i) through (iii) above. MBIA's policy also does not insure against nonpayment of principal of or interest on the Bonds resulting from the insolvency, negligence or any other act or omission of the Paying Agent or any other paying agent for the Bonds. Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by MBIA from the Paying Agent or any owner of a Bond the payment of an insured amount for which is then due, that such required payment has not been made, MBIA on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment of any such insured amounts which are then due. Upon presentment and surrender of such Bonds or presentment of such other proof of ownership of the Bonds, together with any appropriate instruments of assignment to evidence the assignment of the insured amounts due on the Bonds as are paid by MBIA, and appropriate instruments to effect the appointment of MBIA as agent for such owners of the Bonds in any legal proceeding related to payment of insured amounts on the Bonds, such instruments being in a form satisfactory to U.S. Bank Trust National Association, 18

25 U.S. Bank Trust National Association shall disburse to such owners or the Paying Agent payment of the insured amounts due on such Bonds, less any amount held by the Paying Agent for the payment of such insured amounts and legally available therefor. MBIA Insurance Corporation MBIA Insurance Corporation ("MBIA") is the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed company (the "Company"). The Company is not obligated to pay the debts of or claims against MBIA. MBIA is domiciled in the State of New York and licensed to do business in and subject to regulation under the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United States and the Territory of Guam. MBIA, either directly or through subsidiaries, is licensed to do business in the Republic of France, the United Kingdom and the Kingdom of Spain and is subject to regulation under the laws of those jurisdictions. The principal executive offices of MBIA are located at 113 King Street, Armonk, New York and the main telephone number at that address is (914) Regulation As a financial guaranty insurance company licensed to do business in the State of New York, MBIA is subject to the New York Insurance Law which, among other things, prescribes minimum capital requirements and contingency reserves against liabilities for MBIA, limits the classes and concentrations of investments that are made by MBIA and requires the approval of policy rates and forms that are employed by MBIA. State law also regulates the amount of both the aggregate and individual risks that may be insured by MBIA, the payment of dividends by MBIA, changes in control with respect to MBIA and transactions among MBIA and its affiliates. The Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. Financial Strength Ratings of MBIA Moody's Investors Service, Inc. rates the financial strength of MBIA "Aaa." Standard & Poor's, a division of The McGraw-Hill Companies, Inc. rates the financial strength of MBIA "AAA." Fitch Ratings rates the financial strength of MBIA "AAA." Each rating of MBIA should be evaluated independently. The ratings reflect the respective rating agency's current assessment of the creditworthiness of MBIA and its ability to pay claims on its policies of insurance. Any further explanation as to the significance of the above ratings may be obtained only from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold the Bonds, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of the Bonds. MBIA does not guaranty the market price of the Bonds nor does it guaranty that the ratings on the Bonds will not be revised or withdrawn. 19

26 MBIA Financial Information As of December 31, 2004, MBIA had admitted assets of $10.3 billion (unaudited and restated), total liabilities of $7.0 billion (unaudited and restated), and total capital and surplus of $3.2 billion (unaudited and restated) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of September 30, 2005 MBIA had admitted assets of $10.8 billion (unaudited), total liabilities of $7.1 billion (unaudited), and total capital and surplus of $3.7 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. For further information concerning MBIA, see the consolidated financial statements of MBIA and its subsidiaries as of December 31, 2004 and December 31, 2003 and for each of the three years in the period ended December 31, 2004, prepared in accordance with generally accepted accounting principles, included in the Annual Report on Form 10-K/A of the Company for the year ended December 31, 2004 and the consolidated financial statements of MBIA and its subsidiaries as of September 30, 2005 and for the nine month periods ended September 30, 2005 and September 30, 2004 included in the Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2005, which are hereby incorporated by reference into this Official Statement and shall be deemed to be a part hereof. Copies of the statutory financial statements filed by MBIA with the State of New York Insurance Department are available over the Internet at the Company s web site at and at no cost, upon request to MBIA at its principal executive offices. Incorporation of Certain Documents by Reference The following documents filed by the Company with the Securities and Exchange Commission (the "SEC") are incorporated herein by reference: (1) The Company s Annual Report on Form 10-K for the year ended December 31, 2004; and (2) The Company s Quarterly Report on Form 10-Q for the quarter ended September 30, Any documents, including any financial statements of MBIA and its subsidiaries that are included therein or attached as exhibits thereto, filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the Company s most recent Quarterly Report on Form 10-Q or Annual Report on Form 10-K/A, and prior to the termination of the offering of the Bonds offered hereby shall be deemed to be incorporated by reference in this Official Statement and to be a part hereof from the respective dates of filing such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein, or contained in this Official Statement, shall be deemed to be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement. The Company files annual, quarterly and special reports, information statements and other information with the SEC under File No Copies of the Company s SEC filings (including (1) the Company s Annual Report on Form 10-K/A for the year ended December 31, 2004, and (2) the Company s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005, June 30, 2005 (included as restated in third quarter 10-Q) and September 30, 2005) are 20

27 available (i) over the Internet at the SEC s web site at (ii) at the SEC s public reference room in Washington D.C.; (iii) over the Internet at the Company s web site at and (iv) at no cost, upon request to MBIA at its principal executive offices. In the event the Insurer were to become insolvent, any claims arising under a policy of financial guaranty insurance are excluded from coverage by the California Insurance Guaranty Association, established pursuant to Article 14.2 (commencing with Section 1063) of Chapter 1 of Part 2 of Division 1 of the California Insurance Code. CITY OF REDWOOD CITY PUBLIC FINANCING AUTHORITY The Authority is a joint exercise of powers authority duly organized and existing under the laws of the State of California and a Joint Exercise of Powers Agreement dated as of June 18, The Authority was formed for the purpose of implementing the construction, acquisition, maintenance and improvement of public facilities and infrastructure within the City. Among the powers expressly granted to the Authority is the power to acquire property and to borrow money to provide funds for the construction, acquisition, maintenance or improvement of public facilities and infrastructure and to issue in its name revenue bonds to evidence the indebtedness created by such borrowing. The City Council of the City acts as the governing body of the Authority, and the Mayor acts as its Chairperson. General Background THE ENTERPRISE The City of Redwood City (the "City") is located in southern San Mateo County (the "County") and, through its water utility, supplies water to the City, unincorporated areas of the County, and portions of the City of San Carlos and the Town of Woodside. The City is a fullservice city and owns and operates its own water utility. Operation and maintenance of the City s water utility is financed through the Water Enterprise Fund. The City is one of 28 agencies in San Mateo, Santa Clara, and Alameda Counties which purchase water from the City and County of San Francisco's Hetch Hetchy system. In 1984 the City entered into a Master Water Sales Contract with the City and County of San Francisco and certain other suburban purchasers which provides certain water supply assurance for the City. The City currently receives virtually all of its water, and all of its potable water, from the City and County of San Francisco's Hetch Hetchy system. Management The maintenance and operation of the City's water utility (the "Enterprise") is the responsibility of the Public Works Service Department. The Public Works Services Director has responsibility for the Department, and one of the four superintendents reporting to him has the responsibility of maintaining and operating the Enterprise. The Water Utilities Services Division is staffed by a Public Works superintendent along with two supervisors, who manage the operations and maintenance of the water system including transmission, storage, distribution, meter reading, regulatory compliance sampling and analyses, cross-connection control, longrange planning and asset management/mapping. The Division has thirty-four employees involved in the Enterprise. The Engineering and Construction Division of the Community Development Services Department is responsible for the design and construction of water system projects, primarily system replacement, and regulatory compliance improvements. 21

28 The Revenue Services Division of the Finance Department is responsible for all City utility billing and collections, as well as processing connection and facilities fees. Service Area The Enterprise serves most of the corporate area of the City and portions outside the corporate limits, including Cañada College, portions of the City of San Carlos and the Town of Woodside, and the unincorporated Emerald Hills area of the County. The Enterprise's service area presently covers approximately 14 square miles. Service is provided to areas between Highways 280 and 101, and between Whipple Avenue and Marsh Road in the area east of Highway 101, and in the Redwood Shores development. The Enterprise serves domestic water to approximately 76,000 people through 22,975 active service connections. Residential connections account for 90 percent of the total service connections. Commercial connections account for eight percent. The remaining two percent are mostly fire connections, and some municipal and institutional connections. The Enterprise's service area is substantially built out, with a relatively stable customer base. See "Customer Base" below. Water Supply and Demand Background. The water supply delivered to Redwood City and 27 other retail water agencies by the San Francisco regional water system originates in the Hetch Hetchy reservoir and surrounding watershed located in and around Yosemite National Park. Water flows by gravity across the California central valley, across the Hayward Fault and through the Irvington Tunnel, where four pipelines carry water across, and around the southern end of San Francisco Bay and feed the City s 13 connections to the regional water system. Hetch Hetchy water represents approximately 85% of the total water supply, with 15% provided by local reservoirs also operated by the San Francisco system. Water Supply Agreements. The City has entered into two contractual arrangements with the City and County of San Francisco, both of which expire in June 2009: (i) a "Master Water Sales Contract," which the City co-signed in 1984 with 29 (now 27) other suburban water purchasers, and (ii) an "Individual Contract," which went into effect in The City plans to participate in the renegotiation and extension of the Master Water Sales Contract, and to renegotiate or extend the Individual Contract, prior to the expiration of each Contract in Despite the expiration of these two contractual arrangements in 2009, the City believes that, under the Master Water Sales Contract, it is guaranteed an ongoing water supply assurance at approximately its current level. Water Supply Assurance. The Master Water Sales Contract assures a maximum supply of 184 million gallons per day collectively to all of the suburban purchasers. The City s water supply assurance is million gallons per day, or approximately 12,243 acre feet per year. If additional water is available to the wholesale water purchasers within the 184 million gallon per day limit, the City s average annual water usage may increase, but in case of rationing due to drought, the City s usage may be limited pursuant to the Interim Water Shortage Allocation Plan ("IWSAP"), approved by City Council of the City in May The IWSAP was also adopted by San Francisco. In Fiscal Year , San Francisco delivered an average of million gallons per day to the City, or approximately 12,450 acre feet for the Fiscal Year. The six-year average ( to ) delivery was million gallons per day, or 13,060 acre feet per year. 22

29 San Francisco Water Capital Improvement Plan and Long-Range Financial Plan. The San Francisco Public Utilities Commission has adopted and begun to implement a long-range financial plan and capital improvement plan to identify capital improvement needs and priorities for its water enterprise, which are intended to replace old systems or upgrade systems to improve reliability and meet future customer needs. The capital improvement plan encompasses 77 water infrastructure projects divided into two programs, the local water system projects (which are designed to benefit the water system within the city of San Francisco) and the regional water system projects (which are designed to benefit the larger infrastructure carrying water from Hetch Hetchy to both San Francisco and the suburban purchasers, including the City). The long-range financial plan recommends that capital improvement projects be funded from the issuance of revenue bonds by San Francisco. The total estimated construction and financing costs of the regional water system component of the San Francisco s capital improvement plan is approximately $3.25 billion (in 2005 dollars), substantially all of which is currently anticipated to be paid with revenue bonds. Under the Master Water Sales Contract, the costs of capital improvements to the regional water system will be allocated to each suburban water purchaser based on its annual proportional usage of water. The City's share of the costs of these capital improvements will be paid as Maintenance and Operation Costs of the Enterprise and, accordingly, will be paid prior to the payment of Installment Payments. San Francisco has not finalized its financing plans for these future projects, or the time frame for issuing the bonds. Therefore, it is not possible to predict what share of these infrastructure costs will be borne by the City and the 27 other suburban purchasers. However, the City anticipates that its cost of acquiring water from San Francisco will increase in the future as San Francisco continues to implement its capital improvement plan. Further information regarding the San Francisco capital improvement plan and long-range financial plan, including periodic updates and status reports, is available at Recycled Water. The Enterprise currently receives a small amount of recycled water from the South Bayside System Authority ("SBSA"). In Fiscal Year , deliveries of recycled water from SBSA totaled 30 acre feet, or approximately 0.24% of the Enterprise's total water supply. After completion of Phase 1 of the Recycled Water Project, the City expects recycled water deliveries from SBSA of approximately 1,300 acre feet per year by Fiscal Year which, based on Fiscal Year total water deliveries, would constitute approximately 10.44% of the Enterprise's total water deliveries. Table 1 below shows water supplies and water demand for the Enterprise for Fiscal Years through , the City's assured supply under the Master Water Sales Contract and the City's water surplus or deficit based solely on the assured water supply. 23

30 Table 1 Historical Water Supply and Demand Annual Production (acre-feet) Source of Water FY FY FY FY FY FY Hetch Hetchy System 13,271 13,193 13,031 12,767 13,653 12,450 SBSA TOTALSUPPLY: 13,271 13,201 13,048 12,788 13,682 12,480 DEMAND 13,271 13,193 13,037 12,767 13,653 12,450 ASSURED SUPPLY[1] 12,243 12,243 12,243 12,243 12,243 12,243 SURPLUS/(DEFICIT)[2] (1,028) (950) (794) (524) (1,410) (207) [1] Does not include recycled water purchased from SBSA. [2] Assured Supply less Demand. Source: City of Redwood City Public Works Services Department; 2005 Urban Water Management Plan. Although the Enterprise has experienced a relatively stable customer base and demand pattern, the recently adopted 2005 Urban Water Management Plan for the Enterprise predicts that Hetch Hetchy water use will decrease from its Fiscal Year level of 13,653 acre feet per year to 11,453 acre feet per year in Table 2 below shows projected water supply and demand from Fiscal Year through Fiscal Year , the City's assured supply under the Master Water Sales Contract and the City's water surplus of deficit based solely on the assured water supply. This table also reflects anticipated reductions in water demand due to the City's water conservation program. See "Water Conservation Program". Table 2 Projected Water Supply and Demand Annual Production (acre-feet) Source of Water FY FY FY FY FY FY Hetch Hetchy System 12,428 12,223 11,956 11,996 11,983 11,271 SBSA TOTAL SUPPLY: 12,458 12,523 12,630 12,754 12,883 12,193 DEMAND 12,428 12,223 11,956 11,996 11,983 11,271 ASSURED SUPPLY[1] 12,243 12,243 12,243 12,243 12,243 12,243 SURPLUS/(DEFICIT)[2] (185) [1] Does not include recycled water purchased from SBSA. [2] Assured Supply less Demand. Source: City of Redwood City - Public Works Services Department; 2005 Urban Water Management Plan. Commencing in Fiscal Year , the Enterprise has been allowed to receive in excess of its allotment under the Master Water Sales Supply Contract with San Francisco either because other suburban users did not utilize their full allocation or there otherwise was sufficient water in the Hetch Hetchy system. However, there can be no assurance that the 24

31 Enterprise will be able to continue to receive water deliveries in excess of its allocation under the Master Water Sales Contract. Further, in the event that San Francisco declares a system shortage, the Enterprise's water deliveries would be reduced based on its allocation under the IWASP, and not on San Francisco's actual prior water deliveries to the Enterprise. Based on the City s current water allocation and the IWSAP, a 20% water shortage in the Hetch Hetchy System would reduce water deliveries to the Enterprise by 28.5%. See "RISK FACTORS Risks Relating to Water Supply." Historical Wholesale Water Cost The table below sets forth the history of wholesale water cost increases under the Master Water Sales Contract since Fiscal Year and projected wholesale water cost increases through Fiscal Year See Table 9 and Table 10 for historical and projected water rate increases for the Enterprise. Table 3 Historical and Projected Wholesale Water Cost Change Fiscal Year Wholesale Water Rate Changes Cost Per Acre Foot Cost Per CCF (13.0)% $261 $ (9.7) , , , Source: Bay Area Water Supply and Conservation Agency. The Master Water Sales Contract contains a rate setting formula that allocates the cost of operating the Hetch Hetchy system among San Francisco and the suburban water purchasers based on their respective water deliveries. This formula, together with the actual amount of water deliveries to the City, determines the amount that the City pays under the Master Water Sales Contract. The City anticipates that its cost of acquiring water from San Francisco will increase in the future as San Francisco continues to implement its capital improvement plan for the Hetch Water System and the resulting costs of operating the Hetch Hetchy system continue to increase. See "RISK FACTORS Wholesale Water Costs." Water Conservation Program In order to address the Enterprise s water supply concerns, the City has developed an extensive water conservation program. This conservation program includes several of the Best 25

32 Management Practices developed by the California Urban Water Conservation Council ( The City projects that this conservation program will reduce water use by customers of the Enterprise by 632 acre feet per year by Water Storage and Distribution System General. The Enterprise's distribution system consists of distribution mains, 12 storage facilities, ten pump stations, and 26 pressure reducing valves ranging from two to six inches in diameter. Water Storage Facilities. The Enterprise's 12 storage facilities range in size from 0.09 million gallons to 4.00 million gallons with a total storage capacity of million gallons. Typically, the storage tanks are filled to 50% of capacity, which would provide two days' supply to the customers of the Enterprise in an emergency situation. Table 4 Existing Potable Water Storage Facilities Pressure Zone Storage Facility Capacity (million gallons) Easter Cross Easter Cross 1 Tank 0.10 Easter Bowl Easter Bowl 1 Tank 1.20 Glenloch Glenloch 1 Tank 0.09 Wilmington South Wilmington 1 Tank 0.25 Cambridge Cambridge 2 Tanks 0.65 Lakeview Lakeview 1 Reservoir 1.00 Main City Zone Sequoia 2 Tanks 8.00 Main City Zone Carson 1 Reservoir 3.75 Redwood Shores Peninsula 1 1 Tank 3.20 Redwood Shores Peninsula 2 1 Tank 3.00 Total Domestic Source: City of Redwood City - Public Works Services Department ("A Technical Report on the City Water Storage Capability" and Redwood City Pressure Zone Map). Distribution System. The Enterprise currently contains approximately 265 miles of pipeline, in following sizes: Size Miles 24 inches inches inches inches inches inches inches inches inches inches inches inches _19.0 Total: Source: City of Redwood City - Public Works Services Department. 26

33 Water Quality and Environmental Issues and Regulatory Requirements Monitoring of the imported Hetch Hetchy supply is conducted by the San Francisco Public Utility Commission ("SFPUC"). The SFPUC treats the Hetch Hetchy supply by lime addition at Rock River for corrosion control and chloramination at Tesla Portal for disinfection, but does not filter prior to delivery. Bay Area reservoir waters receive complete treatment of filtration and disinfection at either the Sunol or the Harry Tracy filtration plants of the Hetch Hetchy system. Filtered water from these treatment plants may be co-mingled with unfiltered Hetch Hetchy water in Bay Area transmission pipelines. The SFPUC and the agencies that serve water from the SFPUC Hetch Hetchy supply previously applied for and were granted filtration avoidance for that supply under the Federal regulations. The City routinely monitors and conducts tests relating to water quality within the distribution system. The water quality currently meets all primary and secondary drinking water standards. Capital Improvement Program The City s projected capital improvement plan for the Enterprise for Fiscal Year through Fiscal Year is set forth below. The City intends to fund its capital improvement plan through fund balances, current revenues and bond proceeds. Through Fiscal Year , the City had expended or committed a total of $32,621,500 of Recycled Water Project costs, $30,516,536 of which were expended or committed in Fiscal Year and $2,104,964 of which were expended or committed in prior fiscal years. Additionally, the City expended or committed $1,500,000 for its water conservation program in Fiscal Year Table 5 Capital Improvement Program Summary (In $ Millions) FY FY FY FY Total Repair & Replacement $2,000,000 $2,000,000 $2,000,000 $2,000,000 $8,000,000 Water Conservation 900, , , ,000 1,650,000 Recycled Water Project [1] 16,477,000 17,000,000 6,270,000 12,774,500 52,521,500 Total $19,377,000 $19,250,000 $8,520,000 $15,024,500 $62,171,500 [1] $32,621,500 of Recycled Water Project expenses were incurred in prior fiscal years. Total Recycled Water Project costs are estimated at $85,143,000. Source: City of Redwood City Public Works Services; 2005 Urban Water Management Plan. For the past 12 years, the City has spent $2,000,000 per year from fund balances and current revenue in order to replace aging facilities and equipment of the Enterprise. 27

34 The City's projected schedule of expenditures for its Recycled Water Project is set forth in Table 6 below. The City expects that it will finance these expenditures, starting in Fiscal through Fiscal , with multiple bond issues. Table 6 City of Redwood City Recycled Water Project Capital Expenditure Schedule Estimated Cost Phase 1 Planning $ 1,736,000 US 101 Bike Path Distribution Pipeline Project 1,892,000 Redwood Shores Distribution Pipeline Project Design 2,084,000 Treatment Facility Improvements 24,437,500 Customer Retrofits 2,472,000 Sub-Total $32,621,500 Redwood Shores Distribution Pipeline Projects (Bid Packages 1 and 2) $11,077,000 Landscape Irrigation Customer Site Retrofits 810,000 City Overhead 680,000 Artificial Turf 2,500,000 Skyway Distribution Pipeline Project Design 590,000 Seaport Distribution Pipeline Project Design 820,000 Sub-Total $16,477,000 Artificial Turf $2,500,000 Redwood Shores Distribution Pipeline Projects (Bid Package 3) 4,500,000 Skyway Distribution Pipeline Project (Bid Package 4) 3,000,000 Westport Loop Pipeline Project 2,000,000 Seaport Distribution Pipeline Project Seaport Blvd. East (Bid Pkg 5) 2,000,000 City Overhead 500,000 Bayfront Area Pipeline Projects Design 750,000 Landscape Irrigation Customer Site Retrofits 1,750,000 Sub-Total $17,000,000 Seaport Distribution Pipeline Project Seaport Blvd. West and Seaport Center Loop (Bid Pkg 6) $2,500,000 Blomquist Bridge Distribution Pipeline Project 1,200,000 Blomquist and Maple Streets Distribution Pipeline Project 1,100,000 Landscape Irrigation Customer Site Retrofits 1,170,000 City Overhead 300,000 Sub-Total $6,270,000 Phase 1 Total $72,368,500 Phase 2 $12,774,500 Project Total $85,143,000 Source: City of Redwood City Public Works Services Department. 28

35 Billing and Collection Procedures The City of Redwood City issues a combined utility bill to each of its customers for water, sewer, and solid waste collection services (the City acts as the billing and collection agent for the private company, Allied Waste, which performs solid waste collection services under a franchise agreement with the City) on a bi-monthly basis for residential customers and monthly basis for commercial customers. The utility bills are due and payable within 30 days of the bill date. If not paid within 30 days, the utility bill is delinquent and assessed a 1.5% interest charge, and if still unpaid 40 days after the initial bill has been issued, another 5% interest charge is assessed. If the utility bill continues to be unpaid after the 5% interest charge, water service will be disconnected until payment is made. Prior to disconnecting water service, the City sends a reminder of the unpaid bill to the affected customer. Current Water Rates, Fees and Charges Water rates are based on the City s costs for operating and maintaining the Enterprise, and on projected amounts required for the Enterprise capital improvement program. Current Water Rate Structure. There are two components of the water utility bill for all customers, which work independently of each other: A fixed, monthly basic service charge that provides the financial support for the operations and maintenance of the City s water system, i.e.; salaries, benefits, equipment, supplies and services, which are within the direct control of the City Council. A variable usage rate has been in existence since the drought of 1989, created for the purpose of promoting conservation. This component provides the financial support for purchase of wholesale water, electrical power from PG&E, capital improvements, conservation rebate programs and the City s rights-of-way compensation charge. The following tables set forth both components of the Enterprise current rate structure, which became effective as of July 1, Table 7 Current Water Rate Structure RESIDENTIAL (Billed Bi-Monthly) Residential Basic Service Charge $24.00 (Monthly $12.00) Quantity Charge (1) (Unit = 100 cubic feet) 0-10 Units (Lifeline) $ Units $ Units $ Units $ Units $4.32 (1) Per Billing Period. Source: City of Redwood City - Public Works Services Department. 29

36 COMMERCIAL (Billed Monthly) Commercial Monthly Service Charge Meter Size Charge 5/8 inch $ /4 inch inch /2 inch inch inch inch inch inch inch inch Quantity Charge (Unit = 100 cubic feet) 0-15 Units $ Units Units 3.53 Source: City of Redwood City - Public Works Services Department. Connection and Facilities Fees. The following table sets forth the current Water System schedule of connection and facilities fees for the Enterprise, which was approved in Table 8 Current Connection and Facilities Fees Meter Installation Fee Service Line Installation Fee Water Facilities Fee Meter Size 5/8 inch $ $2, $1, /4 inch , , inch , , /2 inch , , inch , , inch TBD-per detailed estimate 4 inch 1, TBD-per detailed 6 inch TBD-per detailed estimate estimate TBD-per detailed estimate 26, , , Source: City of Redwood City - Public Works Services Department. The City is currently developing a new water capacity charge that is intended to be added to the existing schedule of water connection and facilities fees. The new charge is expected to be designed so that new development pays its proportionate share of infrastructure costs, including that associated with the Recycled Water Program. City Council consideration of the proposed water capacity charge is anticipated to occur in the first six months of calendar 30

37 year See Table 16 under the caption "ENTERPRISE FINANCIAL INFORMATION Enterprise Historical and Projected Operating Results" below. Water Rate Increases Historical Rates Increases. The City s most recent rate increase took effect in July, The City s practice since 1993 has been to adjust rates and service charges annually, at the beginning of the City s fiscal year, based on changes in the wholesale rates paid under the Master Water Sale Contract and approved Enterprise budgets. The table below sets forth historical water rate increases since Fiscal Year Table 9 Historic Water Rate Increases Fiscal Year Rate Increase % Source: City of Redwood City - Public Works Services Department. Proposed Rate Increases. The following table sets forth projected water rate increases of the Enterprise. The projected rates reflect projected San Francisco wholesale water rate increases (see Table 3), the projected costs of financing of the Project, and the implementation of the water conservation program described above. Comparative Bi-Monthly Water Bills Table 10 Proposed Water Rate Increases Proposed Rate Fiscal Year Increase % Source: City of Redwood City - Public Works Services Department. The table following shows comparative residential bi-monthly water bills for neighboring communities for Fiscal Year , based on customers with 5/8-inch meters consuming water at a rate of 15 units per billing period. 31

38 Table 11 Average Bi-Monthly Residential Bills Fiscal Year Base Level Quantity Rate Per Unit Community Bi-Monthly Fixed Rate Menlo Park $10.00 $1.15 $28.25 Foster City S. San Francisco (Cal Water) Redwood City (existing rates) San Mateo (Cal Water) San Carlos (Cal Water) Palo Alto N/C Mid-Peninsula Water District San Bruno Millbrae Hillsborough Bear Gulch (Cal Water) Brisbane Burlingame Calculated Bi- Monthly Bill Community Average Community Median Source: City of Redwood City - Public Works Services Department (Annual Water Bill Benchmarking Study). Customer Base Number of Accounts. The Enterprise has a relatively stable customer base, and does not anticipate its customer base will grow substantially in the near future. The following table sets forth a five-year history of the number of accounts for the Enterprise. Table 12 Number of Accounts (As of June 30) Residential Single-family 18,652 18,852 18,759 18,872 18,914 Multi-family 1,548 1,563 1,554 1,582 1,587 Sub-total 20,200 20,415 20,313 20,454 20,501 Non-Residential Commercial 2,245 2,373 2,340 2,374 2,384 Industrial Sub-total 2,334 2,462 2,430 2,464 2,474 Total 22,534 22,877 22,743 22,918 22,975 Source: City of Redwood City - Public Works Services Department. 32

39 Largest Water Customers. The following are the ten largest customers of the Enterprise for the Fiscal Year Table 13 Ten Largest Customers Fiscal Year Primary Business Activity Percent of Total Revenues Percent of Total Use Customers City of Redwood City Municipal Government 2.68% 2.74% Oracle USA, Inc. Software Development San Mateo County County Government Westport Joint Venture Property Management Sequoia Hospital District Health Care Kaiser Permanente Health Care Redwood Shores Apt Apartment Complex RWC School District School District Electronic Arts Computer Games Insignia ESG. Inc Software Development Total: 9.23% 9.91% Source: City of Redwood City - Public Works Services Department. Water Customers and Revenues. The following table sets forth a breakdown of revenues of the Enterprise by customer type for Fiscal Year (excluding revenues derived from connection fees, late payment penalties and shut-off fees). Table 14 Revenues by Customer Type Fiscal Year Number of Accounts Consumption (CCF) Percent of Total Consumption Total Revenues Percent of Total Revenue Single-family 18,622 2,707,156 52% $7,746,560 48% Muliti-family 1, ,492 17% 2,717,723 17% Irrigation-Residential ,980 4% 730,836 5% Sub-total 20,379 3,808,628 73% 11,195,119 70% Non-Residential Comercial 1, ,069 17% 3,039,512 19% Irrigation-Commercial ,227 9% 1,407,204 9% Sub-total 1,927 1,382,296 26% 4,446,716 28% Other Fire Services & other ,707 1% 316,902 2% Total 22,975 5,252, % $15,958, % Source: City of Redwood City - Finance Department. The following table sets forth the revenues of the Enterprise derived from water connection and facilities fees since Fiscal Year

40 Table 15 Revenues from Connection and Facilities Fees FY FY FY FY FY FY Connection Fees $193,729 $225,495 $111,329 $48,826 $125,097 $89,485 Facilities Fees 452, , , , , ,679 Total $646,491 $701,194 $378,775 $288,204 $470,991 $388,164 Source: City of Redwood City - Finance Department. Budgetary Process ENTERPRISE FINANCIAL INFORMATION The fiscal year of the City begins on the first day of July of each year and ends on the thirtieth day of June the following year. Formal budgetary integration is employed as a management control device during the year for the general fund, special revenue funds, debt service funds, capital project funds, and proprietary funds (including the water enterprise fund). Budgets for the general, special revenue, debt service and capital projects funds (except the General Improvement District 1-64 construction fund) are adopted on a basis consistent with generally accepted accounting principles, except for capital outlay in special revenue and capital projects funds which is budgeted on a project length basis. Budget requests are submitted by departmental managers to the City Manager for review. The City Manager and the Finance Director meet with department heads to review the requests and establish program objectives for the coming year. The City Manager then prepares his recommendations to the City Council and the Finance Director submits the financing plan to fund the recommended budget. Each year the City adopts a resolution specifying the dates by which it must receive a proposed budget and adopt a final budget. The City Council usually receives the proposed budget by the first week of June and thereafter schedules one or two public study sessions to review the recommendations and obtain public comments. The Finance Director usually submits the City Council approved budget for final public hearing and adoption in mid-july.from the effective date of the budget, the several amounts adopted as expenditures become appropriated to the several departments offices and agencies for the objects and purposes named. All appropriations lapse at the end of the fiscal year to the extent that they have not been expended or lawfully encumbered. At any public meeting after the adoption of the budget, the City Council may amend or supplement the budget pursuant to a resolution (rather than an ordinance) adopted by a majority vote of the members of the Council. Each fiscal year the City Council employs an independent certified public accounting firm which examines the accounting records, internal controls and the financial statements. As soon as practicable after the end of each fiscal year, these financial statements and the independent accountant s report are submitted to the City Council.At the request of the department head through the City Manager, the City Council may, by resolution, transfer appropriations between subprograms and funds, but shall not change total appropriations. Any increase or decrease to the total appropriations provided for in the budget must be carried through by ordinance passed by the City Council. The City Manager may authorize the transfer of funds between object categories within a subprogram of a department. Financial Statements Attached as APPENDIX B are portions of the audited financial statements of the City (the "Financial Statements") for Fiscal Year , which include financial statements for the 34

41 Enterprise, prepared by the City Department of Finance and audited by Caporicci & Larson of Oakland, California (the "Auditor"). The Auditor s letter concludes that the Financial Statements present fairly, in all material respects, the financial position of the City as of June 30, 2005, and the results of its operations and the cash flows of its proprietary fund type for the Fiscal Year then ended in conformity with accounting principles generally accepted in the United States of America. The Financial Statements should be read in their entirety. The City has not requested nor did the City obtain permission from the Auditor to include the audited financial statements as an appendix to this Official Statement. Accordingly, the Auditor has not performed any post-audit review of the financial condition or operations of the City. In addition, the Auditor has not reviewed this Official Statement. Enterprise Accounting The Enterprise is accounted for as an enterprise fund with a separate set of selfbalancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures or expenses, as appropriate. The enterprise funds are used to account for operations (a) that are financed and operated in a manner similar to private business enterprises--where the intent of the governing body is that the costs of providing goods or services to the general public on a continuing basis are to be financed or recovered primarily through user charges, or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes. Revenues are fully accrued to include unbilled services at year end. The City uses the accrual basis of accounting for its "proprietary funds," including the City's water enterprise fund. Revenues are recognized when earned and expenses are recognized when the related liabilities are incurred. All assets and liabilities for these funds are included on the balance sheet with this measurement focus. Fund equity (i.e., net total assets) is segregated into restricted and unrestricted. The proprietary funds apply all applicable Governmental Accounting Standard Board ("GASB") pronouncements as well as applicable pronouncements of the Financial Accounting Standard Board, Accounting Principles Board and any Accounting Research Bulletins issued on or before November 30, 1989, unless they conflict with or contradict GASB pronouncements. See "APPENDIX B CITY OF REDWOOD CITY AUDITED FINANCIAL STATEMENTS" for a more complete summary of the City s accounting policies. Outstanding Enterprise Obligations Other than the installment payments relating to the 2005 Installment Purchase Contract in the original principal amount of $35,790,000, the City currently does not have any other outstanding debt secured by Net Revenues. Enterprise Historical and Projected Operating Results The following table presents historical and projected operating results of the Water Enterprise. The projections are based on the City s Water Financing Plan dated January 2006, and include projected debt service on the Bonds and the additional series of Bonds expected to be issued in subsequent Fiscal Years. 35

42 Expenses Employee Costs 2,794,861 3,154,037 3,381,704 4,182,505 4,329,000 4,481,000 4,638,000 4,800,000 4,968,000 5,142,000 Supplies and Services 1,494,898 1,636,701 1,566,211 1,748,841 1,810,000 1,873,000 1,939,000 2,007,000 2,077,000 2,150,000 SFPUC Water Purchase 5,100,175 6,815,529 6,252,865 6,134,764 6,439,000 6,439,000 6,786,000 6,714,000 7,917,000 9,979,000 SBSA Water Purchases , , , , , ,000 Internal Services (net) 2,715,494 2,670,807 3,111,606 3,383,465 2,939,000 3,042,000 3,148,000 3,258,000 3,372,000 3,490,000 Less Transfers in for Revenue Services (469,891) (493,385) (518,054) (543,956) Minor Operating Capital Outlay 37,327 21,432 43,876 32,050 40,000 40,000 40,000 40,000 40,000 40,000 SBSA Lease ,000 20,000 25,000 25,000 26,000 27,000 28,000 Recycling Project O&M , , , , , ,000 Subtotal Operating Expenses 11,672,864 13,805,121 13,838,208 14,948,669 15,911,000 16,517,000 17,245,000 17,588,000 19,174,000 21,641,000 Non Operating Expenses (Transfers In) Debt Serivce, 2005 Bonds ,142,585 2,142,585 2,142,585 2,142,585 2,142,585 2,142,585 2,142,585 Debt Service, 2006 Bonds ,572,556 1,571,229 1,573,029 1,569,129 1,569,704 1,569,579 Debt Service, 2007 Bonds , , , , ,148 Debt Service, 2008 Bonds , , , ,894 Debt Service, 2009 Bonds , , ,853 Capitalized Interest Adjustment (163,092) Bond Reimbursement for Prior Expenses - - (8,300,000) Capital Asset Acquisition 5,185 6, Cash-Funded Capital - Recycled 5,000,000 2,000, Cash-Funded Capital - Potable 2,750,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 Conservation Program Capital 188,163 1,400,000 1,500, , , , , , , ,000 Subtotal Non-Operating Expenses/Transfers In 7,943,348 5,406,257 (4,963,092) 5,042,585 5,965,141 6,729,962 7,221,656 8,049,609 8,050,184 8,050,059 Total Expenses 19,616,212 19,211,378 8,875,116 19,991,254 21,876,141 23,246,962 24,466,656 25,637,609 27,224,184 29,691,059 Revenues Less Expenses (5,111,792) (2,738,701) 7,789,370 (70,154) (102,141) 242, , , , ,941 Ending Operating Reserve 6,574,256 3,835,555 11,624,925 11,554,771 11,452,630 11,694,669 12,177,013 12,982,404 13,947,219 14,669,160 Key Operating Statistics Operating Reserve as % of Operating Expenses 56% 28% 84% 77% 72% 71% 71% 74% 73% 68% Net Operating Revenues 2,831,556 2,667,556 2,826,278 4,972,431 5,863,000 6,972,000 7,704,000 8,855,000 9,015,000 8,772,000 Debt Service ,142,585 3,715,141 4,479,962 4,971,656 5,949,609 5,950,184 5,950,059 Debt Service Coverage N/A N/A N/A Table 16 Redwood City Water Enterprise Historical and Projected Operating Results $ Actual Actual Actual Budget Projected Projected Projected Projected Projected Projected Water Enterprise Operating Fund FY 2002/03 FY 2003/04 FY 2004/05 FY 2005/06 FY 2006/07 FY 2007/08 FY 2008/09 FY 2009/10 FY 2010/11 FY 2011/12 Beginning Operating Reserve $ 11,686,048 $ 6,574,256 $ 3,835,555 $ 11,624,925 $ 11,554,771 $ 11,452,630 $ 11,694,669 $ 12,177,013 $ 12,982,404 13,947,219 Revenues Water Meter Charges 4,794,905 5,148,205 5,353,895 5,837,000 6,552,000 7,224,000 7,820,000 8,465,000 9,163,000 9,919,000 Water Sales Charges 8,631,101 10,508,602 10,377,455 13,082,000 14,409,000 15,578,000 16,523,000 17,520,000 18,566,000 20,054,000 Less Recycled Water Discount - (10,000) (10,000) (134,000) (227,000) (396,000) (428,000) (488,000) Facility Fees 239, , , , , , , , , ,000 Connection Fees 48, ,097 89, , , , , , , ,000 Interest Income & Investment Gains 634, , , , , , , , , ,000 Other 155, , ,577 45,000 45,000 45,000 45,000 45,000 45,000 45,000 Total Revenues 14,504,420 16,472,677 16,664,486 19,921,100 21,774,000 23,489,000 24,949,000 26,443,000 28,189,000 30,413,000 36

43 RISK FACTORS The following discussion of risks is not meant to be an exhaustive list of the risks associated with the purchase of the Bonds and does not necessarily reflect the relative importance of the various risks. Payment of principal of and interest on the Bonds depends primarily upon the City's payments of the Installment Payments pursuant to the Installment Purchase Contract. Some of the events which could prevent the City from making the Installment Payments are set forth below. Risks Relating to Water Supplies As described above under "THE ENTERPRISE Water Supply and Water Demand", the Enterprise currently receives virtually all of its water, and all of its potable water, from San Francisco s Hetch Hetchy water system pursuant to the Master Water Sales Contract and its Individual Contract. Accordingly, an interruption in the delivery of water from San Francisco for any reason would severely impact the ability of the Enterprise to deliver water to its customers, thereby reducing the amount of Gross Revenues available to the Enterprise to pay its Maintenance and Operation Costs and its obligations under the Installment Purchase Contract. The City estimates, for example, that a 20% water shortage of the Hetch Hetchy system would reduce water deliveries to the Enterprise by 28.5%. Additionally, as the demands on the Hetch Hetchy system grow, the possibility of water shortages will increase. Although the Master Water Sales Contract expires in 2009 and the City cannot predict the outcome of negotiations involving a new water sales contract with San Francisco, the City believes that it will be subject, at most, to only an immaterial reduction in its supply assurance under the new water sales contract. Wholesale Water Costs San Francisco is expected to substantially raise wholesale water rates for the Suburban Customers, including the Enterprise, due to the costs of San Francisco's capital improvement program, which is described above under "THE ENTERPRISE Water Supply San Francisco Capital Improvement Plan and Long-Range Financial Plan" above. The City projects that these rates may increase by up to 240% through Fiscal Year , from $444 per acre foot to1,507 per acre foot. The City has covenanted in the Installment Purchase Contract to prescribe and collect rates, fees and charges in connection with the Enterprise in an amount sufficient to allow the Enterprise to pay Operation and Maintenance Costs and amounts due under the Installment Purchase Contract and any Parity Obligations, and to replenish, if necessary, the Reserve Fund to the Reserve Requirement. Further, the Enterprise has agreed, in the Installment Purchase Contract, to prescribe and collect rates, fees and charges in connection with the Enterprise during each Fiscal Year which are sufficient to yield estimated Net Revenues which are at least equal to one hundred twenty percent (120%) of the aggregate amount of the Installment Payments, and principal of and interest on any Parity Obligations (including the installment payments due under the 2005 Installment Purchase Contract) payable from Net Revenues coming due and payable during such Fiscal Year. In order to issue Parity Obligations in the amounts currently anticipated based on future expected operating and non-operating expenses (see Table 16), the City will be required to raise its rates and charges by the percentages set forth above under the caption "THE ENTERPRISE - Water Rate Increases Proposed Rate Increases." See Table 10 above. 37

44 Seismic Considerations The City, like much of California, is subject to seismic activity that could result in interference with the delivery of water from the Hetch Hetchy water system or the City's operation of the Enterprise. San Francisco's capital improvement program for the Hetch Hetchy water system (see "THE ENTERPRISE Water Supply San Francisco Capital Improvement Plan and Long-Range Financial Plan" above) is intended, in part, to make seismic upgrades to the Hetch Hetchy system. However, a major seismic event could result in water deliveries from the Hetch Hetchy system to the Enterprise being interrupted for a significant period of time. As a result, no assurance can be given that a future seismic event will not materially adversely affect the operation of the Enterprise. Environmental Regulation The kind and degree of water treatment effected through the Enterprise is regulated, to a large extent, by the federal government and the State of California. Treatment standards set forth in federal and state law control the operations of the Enterprise and mandate the use of water treatment technology. In the event that the federal government, acting through the Environmental Protection Agency, or the State of California, acting through the Department of Health Services, or additional federal or state agencies, should impose stricter water quality standards upon the Enterprise, the City s expenses could increase accordingly and rates and charges would have to be increased to offset those expenses. It is not possible to predict the direction federal or state regulation will take with respect to water quality standards, although it is likely that, over time, both will impose more stringent standards with attendant higher costs. Limited Obligations The Bonds are limited obligations of the City and are not secured by a legal or equitable pledge or charge or lien upon any property of the City or any of its income or receipts, except the Net Revenues of the Enterprise. The obligation of the City to make the Installment Payments does not constitute an obligation of the City to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The City is obligated under the Installment Purchase Contract to pay the Installment Payments solely from Net Revenues. There is no assurance that the City can succeed in operating the Enterprise such that the Net Revenues in the future amounts projected in this Official Statement will be realized. Limitations on Remedies and Limited Recourse on Default The ability of the City to comply with its covenants under the Installment Purchase Contract and to generate Net Revenues sufficient to pay principal of and interest with respect to the Bonds may be adversely affected by actions and events outside of the control of the City and may be adversely affected by actions taken (or not taken) by voters, property owners, taxpayers or persons obligated to pay assessments, fees and charges. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS Proposition 218" below. Failure by the City to pay the Installment Payments required to be made under the Installment Purchase Contract constitutes an event of default under the Installment Purchase Contract and the Trustee is permitted to pursue remedies at law or in equity to enforce the City's obligation to make such Installment Payments. Although the Trustee has the right to accelerate the total unpaid principal amount of the Installment Payments, there is no assurance that the City would have sufficient funds to pay the accelerated Installment Payments. 38

45 Furthermore, the remedies available to the owners of the Bonds upon the occurrence of an event of default under the Installment Purchase Contract are in many respects dependent upon judicial actions which are often subject to discretion and delay and could prove both expensive and time consuming to obtain. In addition to the limitations on remedies contained in the Installment Purchase Contract and the Indenture, the rights and obligations under the Installment Purchase Contract and the Indenture 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 limitations on legal remedies against cities in the State of California. The opinion to be delivered by Bond Counsel concurrently with the issuance of the Bonds will be subject to such limitations and the various other legal opinions to be delivered concurrently with the issuance of the Bonds will be similarly qualified. See "APPENDIX F PROPOSED FORM OF BOND COUNSEL OPINION." If the City fails to comply with its covenants under the Installment Purchase Contract or fails to pay principal of and interest due on the Bonds, there can be no assurance of the availability of remedies adequate to protect the interest of the holders of the Bonds. Initiatives In recent years several initiative measures have been proposed or adopted which affect the ability of local governments to increase taxes and rates. There is no assurance that the electorate or the State Legislature will not at some future time approve additional limitations which could affect the ability of the City to implement rate increases which could reduce Net Revenues and adversely affect the security for the Bonds. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218" below. Tax Exemption of the Bonds The City has covenanted in the Installment Purchase Contract that it will take all actions necessary to assure the exclusion of interest with respect to the Bonds from the gross income of the Owners of the Bonds to the same extent as such interest is permitted to be excluded from gross income under the Internal Revenue Code of If the City fails to comply with this tax covenant, the interest component of the Installment Payments evidenced by the Bonds may be includable in the gross income of the Owners thereof for federal tax purposes. See "OTHER INFORMATION Tax Matters." Secondary Market for Bonds There can be no guarantee that there will be a secondary market for the Bonds or, if a secondary market exists, that any Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon then-prevailing circumstances. Such prices could be substantially different from the original purchase price. 39

46 CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING CITY REVENUES AND APPROPRIATIONS Article XIIIA of the California Constitution Article XIIIA of the State Constitution, also known as Proposition 13, limits the amount of ad valorem taxes on real property to 1% of "full cash value" as determined by the county assessor. Article XIIIA defines "full cash value" to mean "the county assessor s valuation of real property as shown on the tax roll under full cash value, or thereafter, the appraised value of real property when purchased, newly constructed or a change in ownership has occurred after the 1975 assessment period", subject to exemptions in certain circumstances of property transfer or reconstruction. The "full cash value" is subject to annual adjustment to reflect increases, not to exceed 2% per year, or decreases in the consumer price index or comparable local data, or to reflect reductions in property value caused by damage, destruction or other factors. Article XIIIA requires a vote of two-thirds of the qualified electorate of a city, county, special district or other public agency to impose special taxes, while totally precluding the imposition of any additional ad valorem, sales or transaction tax on real property. Article XIIIA exempts from the 1% tax limitation any taxes above that level required to pay debt service (a) on any indebtedness approved by the voters prior to July 1, 1978, and (b) as a result of an amendment approved by California voters on June 3, 1986, on any bonded indebtedness approved by two-thirds of the votes cast by the voters for the acquisition or improvement of real property on or after July 1, In addition, Article XIIIA requires the approval of two-thirds of all members of the State legislature to change any State taxes for the purpose of increasing tax revenues. The above discussion of Article XIIIA does not imply that the Bonds are payable from taxes; it is presented only to demonstrate that the Gross Revenues are not subject to any of the provisions of Article XIIIA and to describe a prime example of the power of the voters of California to dramatically impact matters relating to government finance through the initiative process. Article XIIIB of the California Constitution Article XIIIB of the State Constitution, as amended by Proposition 111 approved by the voters on June 5, 1990, limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living, population and services rendered by the governmental entity. The "base year" for establishing such appropriation limit was originally the fiscal year. Following the approval of Proposition 111, for fiscal years beginning on or after July 1, 1990, the appropriations limit of each entity of government will be the appropriations limit for the fiscal year adjusted for the changes made from that fiscal year under the provisions of Article XIIIB, as amended by Proposition 111. Appropriations subject to Article XIIIB generally include the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds. "Proceeds of taxes" include, but are not limited to, (a) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (b) the investment of tax revenues. Article XIIIB includes a requirement that if an entity s revenues in any fiscal year and the fiscal year immediately following it, exceed the amounts that may be appropriated in that fiscal year and the fiscal year immediately following it, 40

47 the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. Proposition 218 General. On November 5, 1996, the voters of the State approved Proposition 218, the so-called "Right to Vote on Taxes Act." Proposition 218 adds Articles XIIIC and XIIID to the State Constitution, which affect the ability of local governments to levy and collect both existing and future taxes, assessments, fees and charges. Proposition 218, which generally became effective on November 6, 1996, changes, among other things, the procedure for the imposition of any new or increased "fee" or "charge," which is defined as "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 user fees or charges for a property related service" (and referred to herein as a "property-related fee or charge"). Specifically, Article XIIID requires that, 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 property-related fee or charge. Further, revenues derived from a property-related fee or charge may not exceed the funds required to provide the "property-related service" and may not be used for any purpose other than that for which the fee or charge was imposed. Further, the amount of a propertyrelated fee or charge may not exceed the proportional cost of the service attributable to the parcel and no property-related fee or charge may be imposed for a service unless that service is actually used by, or is immediately available to, the owner of the property in question. Interpretation of Proposition 218. Since Proposition 218 was enacted in 1996, appellate court cases and an Attorney General opinion have indicated that fees and charges levied for water and wastewater services are not property-related fees and charges and thus are not subject to the above described requirements regarding notice, hearing and protests in connection with any increase in the fees and charges being imposed. However, in Richmond v. Shasta Community Services District (9 Cal. Rptr. 3 rd 121), the California Supreme Court addressed the applicability of the notice, hearing and protest provisions of Article XIIID to certain water service-related charges. In Richmond, the Court held that connection charges, including those similar to the City s "Facilities Fees," are not subject to Proposition 218. The Court also indicated in dicta that a fee for ongoing water service through an existing connection could, under certain circumstances, constitute a property-related fee and charge, with the result that a local government imposing such a fee and charge must comply with the notice, hearing and protest requirements of Article XIIID. In July 2004 the California Court of Appeal, Fourth District, held, in Bighorn-Desert View Water Agency v. Beringson (180 Cal. App 4 th 890), that the costs of water services are not property related or incidents of property ownership because they are based on consumption and not on property ownership. The Court had reached this conclusion previously in an earlier decision in the Bighorn case, but the California Supreme Court had directed the California Court of Appeal to reconsider its decision in light of the Richmond case mentioned above. The California Supreme Court has granted a petition for hearing in the Bighorn case. The City is unable to predict when the California Supreme Court will hear the case, or what the outcome of that hearing will be. 41

48 Most recently, in Howard Jarvis Taxpayers Association v. City of Fresno (March 23, 2005), the California Court of Appeal, Fifth District concluded that water, sewer and trash fees are property-related fees subject to Proposition 218 and must comply with Article XIIID. The California Supreme Court denied the City of Fresno's petition for review of the Court of Appeal's decision on June 15, Proposition 218 and the City's Water Service Charges. Since the passage of Proposition 218, the City has adopted water service charges increases nine times. The City did not consider these charges to be property-related fees and, accordingly, did not comply with Article XIIID notice requirements in connection with these increases. As described above under the caption "THE ENTERPRISE "Current Water Rates, Fees and Charges Water Rate Increases," the City has plans to increase water service charges, and, at this time, plans to comply with Proposition 218 in connection with such rate increases. Conclusion. The provisions of Proposition 218 have not been fully interpreted by the courts. The City is unable to predict how Article XIIIC and Article XIIID will be interpreted by the courts and what, if any, further implementing legislation will be enacted, and there can be no assurance that Article XIIIC and Article XIIID will not limit the ability of the City to impose, levy, charge and collect increased fees and charges for the Enterprise. Future Initiatives Article XIIIA, Article XIIIB and Proposition 218 were each adopted as measures that qualified for the ballot through California s initiative process. From time to time other initiative measures could be adopted, further affecting the City s revenues. Certain Legal Matters OTHER INFORMATION The validity of the Bonds and certain other legal matters are subject to the approving opinion of Nossaman, Guthner, Knox & Elliott, LLP, Irvine, California, California, Bond Counsel. Certain matters will be passed upon for the Issuer by Jones Hall, A Professional Law Corporation, San Francisco, California, as Disclosure Counsel. Certain legal matters will be passed upon for the Authority and the City by the City Attorney. Payment of the fees and expenses of Bond Counsel and Disclosure Counsel is contingent upon the issuance of the Bonds. Bond Counsel has not undertaken any responsibility for the accuracy, completeness or fairness of this Official Statement or other offering materials relating to the Bonds and expresses no opinion relating thereto. Continuing Disclosure The City has covenanted on behalf of itself and the Authority, for the benefit of the holders and beneficial owners of the Bonds, to provide certain financial information and operating data relating to the City and the Bonds (the "Annual Report") by not later than nine months after the end of the City's Fiscal Year, or March 31 of each year based on the City s current Fiscal Year ending on June 30, commencing March 31, 2006 with the report for the Fiscal Year, and to provide notices of the occurrence of certain enumerated events, if material. The City will file, or cause to be filed, the Annual Report with each Nationally 42

49 Recognized Municipal Securities Information Repository, and with the appropriate State information depository, if any. The City will file, or cause to be filed, the notices of material events with the Municipal Securities Rulemaking Board (and with the appropriate State information depository, if any). 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 D FORM OF CONTINUING DISCLOSURE CERTIFICATE." These covenants have been made in order to assist the Underwriter in complying with SEC Rule 15c2-12(b)(5). The City has never failed to comply in all material respects with any previous undertakings with regard to said Rule to provide annual reports or notices of material events. Tax Matters In the opinion of Nossaman, Guthner, Knox & Elliott, LLP, Bond Counsel ("Bond Counsel"), under existing statutes, regulations, rulings and judicial decisions, and assuming certain representations and compliance with certain covenants and requirements described herein, the interest on the Bonds is excludable from gross income for federal income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, the interest on the Bonds is exempt from State of California personal income tax. Bond Counsel notes that, with respect to corporations, the interest on the Bonds may be included as an adjustment in the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of such corporations. A complete copy of the proposed opinion of Bond Counsel is set forth in "APPENDIX D Form of Opinion of Bond Counsel." Bond Counsel s opinion as to the exclusion from gross income of the interest on the Bonds is based upon certain representations of fact and certifications made by the City and others and is subject to the condition that the City complies with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the execution and delivery of the Bonds to assure that the interest on the Bonds will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause the interest on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of execution and delivery of the Bonds. The City has covenanted to comply with all such requirements. Although Bond Counsel has rendered an opinion that the interest on the Bonds is excludable from gross income for federal income tax purposes provided that the City continues to comply with certain requirements of the Code, the ownership of the Bonds and the accrual or receipt of interest with respect to the Bonds may otherwise affect the tax liability of certain persons. Bond Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Bonds, all potential purchasers should consult their tax advisors with respect to collateral tax consequences relating to the Bonds. Bond Counsel s opinions may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. Bond Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture and the Tax Certificate relating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is provided with respect thereto. Bond Counsel expresses no opinion as to the exclusion from gross income of the interest on the Bonds for federal income tax purposes if any such action is taken or omitted based upon the advice of counsel other than Nossaman, Guthner, Knox & Elliott, LLP. 43

50 Absence of Litigation There is no action, suit or proceeding known to be pending or threatened, restraining or enjoining the issuance or sale of the Bonds or the execution of the Indenture, or in any way contesting or affecting the validity of the foregoing or any proceedings of the City taken with respect to any of the foregoing. RATINGS Moody's Investors Service ("Moody's"), Standard & Poor s Ratings Group ("S&P") and Fitch Ratings ("Fitch") have assigned ratings of "Aaa", "AAA", and "AAA", respectively, to the Bonds, with the understanding that, upon delivery of the Bonds, the Policy insuring the payment when due of principal of and interest on the Bonds will be issued by the Insurer. In addition, Moody,s, S&P and Fitch have assigned their underlying ratings of "A1," "AA-" and "A+," respectively, to the Bonds. Such ratings reflect only the views of the rating agencies, and an explanation of the significance of these ratings should be obtained from the rating agencies. There is no assurance that any rating will continue for any given period of time or that any rating will not be revised downward or withdrawn entirely by the issuing rating agency if, in its judgment, circumstances so warrant. Neither the Authority nor the City are obligated to maintain any ratings on the Bonds. Any downward revision or withdrawal of the rating may have an adverse effect on the market price of the Bonds. UNDERWRITING The Bonds were purchased by Morgan Stanley DW Inc. (the "Underwriter") pursuant to a competitive sale held on February 8, The Underwriter has agreed to purchase the Bonds at a price of $25,508, (representing the aggregate principal amount of the Bonds of $26,000,000 less a net original issue discount of $58, less an underwriter s discount of $432, (which includes the municipal bond insurance premium), such price being 98.11% of the principal amount of the Bonds. The Bonds may be offered and sold to certain dealers and others at prices lower than the offering prices stated on the cover page hereof. The offering prices may be changed from time to time. FINANCIAL ADVISOR The City has entered into an agreement with William Euphrat Municipal Finance, Inc. (the "Financial Advisor"), whereunder the Financial Advisor is providing financial advisory services to the City with respect to preparation and sale of the Bonds. The Financial Advisor has read and participated in the drafting of certain portions of this Official Statement. The Financial Advisor has not audited, authenticated or otherwise verified the information set forth in the Official Statement, or any other related information available to the City with respect to accuracy and completeness of disclosure of such information, and the Financial Advisor makes no guaranty, warranty or other representation respecting accuracy and completeness of the Official Statement or any other matter related to the Official Statement. The compensation of the Financial Advisor is contingent upon the sale of the Bonds. 44

51 EXECUTION The City and the Authority have duly authorized the execution and delivery of this Official Statement. CITY OF REDWOOD CITY PUBLIC FINANCING AUTHORITY By: Title: /s/ Brian J. Ponty Finance Director CITY OF REDWOOD CITY By: Title: /s/ Brian J. Ponty Director of Finance 45

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53 APPENDIX A GENERAL INFORMATION CONCERNING THE CITY OF REDWOOD CITY General The City of Redwood City (the "City") is located in the San Francisco Bay Area 25 miles south of San Francisco. It is the oldest bayside city in San Mateo County (the "County"), incorporated in 1867, and has been the County Seat since The City combines residential, industrial, and commercial elements in a largely urban environment. Its waterfront provides a yacht harbor and the only deep-water port in the South Bay. A wide variety of housing types are available. Municipal Government The City Council consists of seven members, elected by the voters of the City to staggered terms of four years each. The City Council is the only body elected directly by the residents of Redwood City. As the legislative branch of the government, it makes final decisions on all major city matters. The Council adopts ordinances and resolutions necessary for efficient governmental operations, approves the budget, and acts as a board of appeals. It appoints the City Manager, City Attorney, and City Clerk and also most members of the City s boards, committees and commissions. The current members of the City Council are as follows: Name and Office Current Term Expires Barbara Pierce, Mayor November 2007 Rosanne Foust, Vice Mayor November 2007 Alicia Aguirre, Councilmember November 2007 Ian Bain, Councilmember November 2007 Jim Hartnett, Councilmember November 2009 Diane Howard, Councilmember November 2009 Jeff Ira, Councilmember November 2009 The City Manager is appointed by the City Council. Brief resumes of the City Manager, the Director of Finance and the Financial Services Manager are shown below. Edward P. Everett, City Manager. Mr. Everett has been City Manager of Redwood City since Prior to that, he was the City Manager of the City of Belmont for 8 years. He has over 30 years experience in city and county government. His educational background includes a Bachelor s degree in Economics from the University of California at Davis and a Master s in Urban Affairs from Princeton University. Brian J. Ponty, Director of Finance and Financial Planning. Mr. Ponty has served as the Director of Finance and Financial Planning for the City since From 1985 to 1993, Mr. Ponty was the City's Assistant Finance Director. As Finance Director, Mr. Ponty leads a 30-member finance department consisting of three divisions, revenue services, information technology, and financial support operations for the City, with over $100 million in annual revenues. Mr. Ponty has taught finance and accounting classes at Golden Gate University. A-1

54 Alison Freeman, Financial Services Manager. Ms. Freeman has served as Financial Services Manager for the City since From 1991 to 2000 she was the Assistant Finance Director for the City of South San Francisco. Prior to that, Ms. Freeman served in various positions with other governmental agencies in California. Ms. Freeman holds a Bachelor of Science degree in Accounting from California State University, San Diego. Peter C. Ingram, Public Works Services Director. Mr. Ingram has been involved in water recycling for over 22 years, beginning with management of public works projects in the Middle East. His education in landscape architecture and interest in natural resource management led him to California and the public sector in Since coming to his Redwood City position in 1992, he has focused much of his attention on the issues of water supply. He has been a board member and officer of the Bay Area Water Users Association, and is now a member of the Technical Advisory Committee to the Bay Area Water Supply & Conservation Agency. Mr. Ingram is serving as the president of the Northern California Chapter of the WateReuse Association. Population Population figures for the City, the County and the State of California for the last five years are shown in the following table. CITY OF REDWOOD CITY Population Estimates; as of January 1 Year City of Redwood City County of San Mateo State of California , ,327 34,441, , ,788 35,088, , ,619 35,691, , ,993 36,271, , ,453 36,810,358 Source: State Department of Finance (as of May 1, 2005) A-2

55 Employment The following table summarizes the civilian labor force, employment and unemployment in the County for the calendar years 2000 through These figures are county-wide statistics and may not necessarily accurately reflect employment trends in the City. SAN MATEO COUNTY Civilian Labor Force, Employment and Unemployment (Annual Averages) Civilian Labor Force (1) 398, , , , ,400 Employment 386, , , , ,400 Unemployment 11,400 15,100 21,700 21,800 18,000 Unemployment Rate 2.9% 3.8% 5.7% 5.9% 5.0% Wage and Salary Employment: (2) Agriculture 2,900 2,900 2,700 2,600 2,200 Natural Resources, Mining, Construction 19,000 19,700 19,000 18,000 18,100 Construction 35,900 34,800 31,000 29,000 29,500 Manufacturing 14,800 14,400 13,500 12,100 11,500 Wholesale Trade 39,200 39,600 37,700 36,800 35,600 Retail Trade 35,200 34,400 29,300 27,800 28,100 Trans., Warehousing, Utilities 24,000 26,100 23,300 22,500 21,200 Information 16,800 16,300 15,100 14,300 14,500 Financial and Insurance 8,000 7,600 6,900 6,900 6,600 Real Estate, Rental & Leasing 78,500 71,000 59,300 55,200 56,200 Professional and Business Services 28,100 29,100 30,000 30,100 30,500 Educational and Health Services 30,500 30,900 30,800 30,300 30,600 Leisure and Hospitality 10,700 10,800 11,800 11,400 10,900 Other Services 4,600 4,500 4,600 4,600 4,500 Federal Government State Government 27,100 27,600 28,200 27,400 27,000 Local Government 2,900 2,900 2,700 2,600 2,200 Total All Industries 375, , , , ,500 (1) Labor force data is by place of residence; includes self-employed individuals, unpaid family workers, household domestic workers, and workers on strike. (2) Industry employment is by place of work; excludes self-employed individuals, unpaid family workers, household domestic workers, and workers on strike. Source: State of California Employment Development Department. A-3

56 Largest Employers High-tech computer and internet companies account for the largest job sector in the City area. Government is the next leading source of employment. The following table lists the major employers within the City as reported by the Redwood City Chamber of Commerce in April CITY OF REDWOOD CITY Major Employers As of January 2005 Employer Name Number of Employees Oracle Corporation 8,000 San Mateo County 2,200 Electronic Arts 1,826 Kaiser Permanente 1,800 Sequoia Hospital 1,154 Redwood City School District 1,050 Informatica Corporation 1,000 Open Wave Systems 900 Broad Vision 759 Sequoia Union High School 700 District City of Redwood City 607 Tyco Electronics 400 PDI/Dreamworks 400 Canada College 380 Ampex Corporation 300 Granite Rock 300 Abbott Vascular/Perclose 300 ABD Insurance 300 Provident Credit Union 230 Hotel Sofitel 235 Source: Redwood City Chamber of Commerce. A-4

57 The following table lists the major employers within the County as of January SAN MATEO COUNTY Major Employers As of January 2005 Employer Name Location Industry Applied Biosystems Group Foster City Laboratory Analytical Instruments (Mfrs) Bay Meadows Racecourse San Mateo Horse Racing Cingular Wireless South San Francisco Cellular Telephones (Services) College Of San Mateo San Mateo Schools-Universities & Colleges Academic Electronic Arts Inc Redwood City Electronic Equipment & Supplies-Retail Electronics For Imaging Inc Foster City Electronic Equipment & Supplies-Whol Fast Office Networks Inc San Mateo Real Estate Management Franklin Resources Inc San Mateo Financial Advisory Services Franklin Templeton Investments San Mateo Financial Advisory Services Franklin Templeton Svc Inc San Mateo Financial Advisory Services Franklin Trust Co San Mateo Mutual Funds Genentech Inc South San Francisco Commercial Physical Research Gilead Sciences Inc Foster City Pharmaceutical Research Laboratories Kaiser Foundation Medical Grp South San Francisco Hospitals Kaiser Permanente Medical Ctr Redwood City Hospitals Monster Cable Products Inc Brisbane Electronic Connectors (Manufacturers) Oracle Corp Redwood City Computer Software-Manufacturers Rudolph & Sletten Inc Foster City Building Contractors San Mateo Health Svc San Mateo Health Services Seton Medical Ctr Daly City Hospitals Siebel Systems Inc San Mateo Computer Software-Manufacturers Sri Consulting Menlo Park Laboratories-Research & Development Sri International Inc Menlo Park Physicians & Surgeons Equip & Supls-Mfrs Us Interior Dept Menlo Park Federal Government-Conservation Depts Visa International Svc Assn San Mateo Credit Card & Other Credit Plans Source: State of California Employment Development Department. A-5

58 Commercial Activity Total taxable transactions reported in the City during calendar year 2004 amounted to $1,517,365,000, an 8.0% increase over the total taxable transactions of $1,405,129,000 that were reported during calendar year A summary of historic taxable sales within the City for calendar years 1999 through 2003 is shown in the following table. Figures for 2005 are not yet available. CITY OF REDWOOD CITY Taxable Retail Sales Number of Permits and Valuation of Taxable Transactions (Dollars in Thousands) Retail Stores Total All Outlets Number of Permits Taxable Transactions Number of Permits Taxable Transactions $1,205,497 2,278 $1,931, ,057,252 2,182 1,611, ,615 2,203 1,409, ,695 2,304 1,405, ,060,175 2,208 1,517,365 Source: State Board of Equalization. Total taxable transactions reported in the County during calendar year 2004 were reported to be to $11,808,074,000, a 4.0% increase over the total taxable transactions of $11,358,439,000 that were reported during calendar year A summary of historic taxable sales within the County is shown in the following table. Figures for 2005 are not yet available. SAN MATEO COUNTY Taxable Retail Sales Number of Permits and Valuation of Taxable Transactions (Dollars in Thousands) Retail Stores Total All Outlets Number of Permits Taxable Transactions Number of Permits Taxable Transactions ,392 $8,596,944 21,173 $14,044, ,813 8,215,567 21,287 12,859, ,982 7,700,365 21,101 11,614, ,681 7,701,536 21,531 11,358, ,975 8,088,935 21,475 11,808,074 Source: State Board of Equalization. A-6

59 Median Effective Buying Income Effective buying income ("EBI") is designated by Sales and Marketing Management Magazine as personal income less personal tax and non-tax payments. Personal income is the aggregate of wages and salaries, other labor income (such as employer contributions to private pension funds), proprietor's income, rental income (which includes imputed rental income of owner-occupants of non-farm dwellings), dividends paid by corporations, personal interest income from all sources, and transfer payments (such as pensions and welfare assistance). Deducted from this total are personal taxes (federal, state and local, non-tax payments (such as fines, fees, penalties), and personal contributions for social insurance. Effective buying income is a bulk measure of market potential. It indicates the general ability to buy and is essential in comparing, selecting and grouping markets on that basis. The following table demonstrates the growth in annual estimated EBI for the City, County, the State of California and the United States. Year SAN MATEO COUNTY Median Effective Buying Income As of January 1, 1999 through 2004 Area Total Effective Buying Income (000 s Omitted) Median Household Effective Buying Income 1999 City of Redwood City $ 1,874,993 $52,769 County of San Mateo 18,721,334 56,433 California 590,376,663 39,492 United States 4,877,786,658 37, City of Redwood City $ 2,133,693 $62,903 County of San Mateo 20,511,353 65,565 California 652,190,282 44,464 United States 5,230,824,904 39, City of Redwood City $ 2,152,934 $62,335 County of San Mateo 21,193,515 64,766 California 650,521,407 43,532 United States 5,303,481,498 38, City of Redwood City $ 2,068,115 $57,487 County of San Mateo 20,903,988 60,071 California 647,879,427 42,484 United States 5,340,682,818 38, City of Redwood City $ 2,104,220 $57,025 County of San Mateo 21,239,098 60,516 California 674,721,020 42,924 United States 5,466,880,008 38, City of Redwood City $ 2,082,970 $56,390 County of San Mateo 21,344,165 59,703 California 705,108,410 43,915 United States 5,692,909,567 39,324 Source: Sales & Marketing Management Survey of Buying Power. A-7

60 Construction Activity Building activity for the fiscal years through in the City and for calendar years 2000 through 2004 for the County is shown in the following tables. CITY OF REDWOOD CITY Building Permit Valuation (Valuation in Thousands of Dollars) FY FY FY FY FY Permit Valuation Residential $18,461.5 $ 6,719.0 $ 3,416.6 $ 3,905.6 $ 5,557.6 Res. Alterations/Additions 26, , , , ,805.8 Total Residential $44,613.4 $33,109.0 $29,307.7 $34,624.5 $34,363.4 Commercial/Industrial/Other $245,004.0 $28,695.0 $0 $20,171.4 $16,168.7 Com./Indust/Other Alterations/Additions 74, , , , ,685.5 Total Nonresidential $319,607.6 $82,894.0 $34,441.8 $42,755.0 $52,854.2 Number of New Dwelling Units Source: City's Comprehensive Annual Financial Report for the year ending June 30, SAN MATEO COUNTY Building Permit Valuation (Valuation in Thousands of Dollars) Permit Valuation New Single-family $241,236.0 $234,590.9 $267,726.9 $257,900.5 $281,408.5 New Multi-family 131, , , , ,006.1 Res. Alterations/Additions 189, , , , ,003.4 Total Residential $562,202.2 $515,728.9 $586,792.6 $610, ,418.0 New Commercial $423,976.5 $362,812.6 $185,884.1 $14,480.6 $131,711.8 New Industrial 27, , , ,540.5 New Other 34, , , , ,168.3 Com. Alterations/Additions 252, , , , ,460.3 Total Nonresidential $739,303.1 $638,955.8 $516,609.5 $235,550.7 $389,880.9 New Dwelling Units Single Family Multiple Family 1, TOTAL 2,317 1,441 1,423 1,304 1,111 Source: Construction Industry Research Board, Building Permit Summary. Utilities Natural gas, electric power and telephone service are provided by Pacific Gas & Electric Company and SBC, respectively. The City supplied water to 22,975 water customers in Fiscal Year , and provides sewer services with 185 miles of sanitary sewers and 103 miles of storm sewers. A-8

61 Education Public education instruction in the elementary grades is provided by the Redwood City Elementary School District, which operates 16 elementary and intermediate schools, serving approximately 8,022 students in the City. Sequoia Union High School District, in addition to administrative offices, operates a high school, a continuation school and an adult school, serving approximately 1,657 students within the City limits. Post-secondary public education is available at three community college campuses operated by the San Mateo County Community College District. Aggregate enrollment in the College of San Mateo in the City of San Mateo, Canada College in the City, and Skyline College in the City of San Bruno was approximately 25,322 in Fall of Within less than an hour s drive of the City are San Francisco State University, University of San Francisco, Stanford University, the University of Santa Clara, Hayward State University, University of California at Berkeley and San Jose State University. Public Safety The Redwood City Police Department has 94 law enforcement officers, 9 community service officers and 12 communication dispatchers. The Redwood City Fire Department has 62 firefighters and officers serving and 4 fire prevention personnel from five fire stations. A-9

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63 APPENDIX B Redwood City Audited Financial Statements for Fiscal Year B-1

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65 Comprehensive Annual Financial Report Main & Broadway - San Francisco Earthquake 1906 Main & Broadway - Today City of Redwood City Redwood City, California Fox Theater s Fox Theater - Today Fire Station on Middlefield Road Main Library on Middlefield Road - Today fiscal year ended June 30, 2005