BofA Merrill Lynch. $47,740,000 City of Azusa Water System Refunding Revenue Bonds, Series 2015

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1 NEW ISSUE BOOK-ENTRY ONLY SYSTEM S&P: AA See RATINGS herein. In the opinion of Hawkins Delafield & Wood LLP, Bond Counsel to the City, under existing statutes and court decisions and assuming continuing compliance with certain tax certifications described herein, (i) interest on the 2015 Bonds is excluded from gross income for Federal income tax purposes pursuant to Section 103 of the Internal Revenue Code of 1986, as amended (the Code ), and (ii) interest on the 2015 Bonds is not treated as a preference item in calculating the alternative minimum tax imposed on individuals and corporations under the Code; such interest, however, is included in the adjusted current earnings of certain corporations for purposes of calculating the alternative minimum tax imposed on such corporations. In addition, in the opinion of Bond Counsel to the City, under existing statutes, interest on the 2015 Bonds is exempt from personal income taxes of the State of California and its political subdivisions. See TAX MATTERS herein. Dated: July 23, 2015 $47,740,000 City of Azusa Water System Refunding Revenue Bonds, Series 2015 Dated: Date of Delivery Due: July 1, as shown below on the inside cover hereof The $47,740,000 City of Azusa Water System Refunding Revenue Bonds, Series 2015 (the 2015 Bonds ) are being issued by the City of Azusa (the City ) pursuant to the Indenture, dated as of July 1, 2015 (the Indenture ), by and between the City and Wells Fargo Bank, National Association, as trustee thereunder (the Trustee ), California Government Code Sections et seq. (as amended, the Refunding Law ) and a resolution of the City authorizing the issuance of the 2015 Bonds. Proceeds of the 2015 Bonds, together with certain available moneys, will be used to refinance all of the City s obligations in connection with the Azusa Public Financing Authority Parity Revenue Bonds (Water System Capital Improvements Program) Series 2006, and pay costs of issuance incurred in connection with the issuance of the 2015 Bonds. Interest on the 2015 Bonds will be payable on January 1 and July 1, commencing on January 1, The 2015 Bonds will be issued as fully-registered bonds, will mature in the principal amounts in each year, subject to prior redemption, and will bear interest at the respective rates per annum as set forth on the inside cover of this Official Statement. The 2015 Bonds will be registered in the name of Cede & Co., as nominee of The Depository Trust Company ( DTC ). DTC will act as securities depository for the 2015 Bonds. Ownership interests in the 2015 Bonds may be purchased in book-entry form only. So long as DTC or its nominee is the Owner of the 2015 Bonds, payments of the principal of, redemption premium, if any, and interest on the 2015 Bonds will be made as described in Appendix E Book-Entry Only System attached hereto. To secure the payment of the 2015 Bonds, the City pledges to the Owners of the 2015 Bonds and grants the Owners a lien upon the Net Revenues in the Water Fund held by the City and any other amounts held by the Trustee in any fund or account established under the Indenture; provided, however, that out of the Net Revenues and other moneys there may be applied such sums for such purposes as are permitted under the Indenture. The pledge of Net Revenues constitutes a first pledge of and charge and lien upon the Net Revenues for the payment of the interest on and principal of the 2015 Bonds in accordance with the terms of the Indenture on parity with the pledge of Net Revenues for the City s heretofore and hereinafter issued Parity Obligations. Payment of principal of and interest on the 2015 Bonds and all other payments with respect to other Parity Obligations shall be equally secured by Net Revenues without priority for number or date of issuance or incurrence of such 2015 Bonds or Parity Obligations. See SECURITY FOR THE 2015 BONDS Sources of Payment, Outstanding Parity Obligations and Additional Indebtedness herein. The 2015 Bonds are subject to optional redemption prior to maturity as more fully described herein. See DESCRIPTION OF THE 2015 BONDS Redemption herein. The 2015 Bonds are limited obligations of the City and are payable solely from the Net Revenues and the City is not obligated to pay them except from the Net Revenues. All the 2015 Bonds and other Parity Obligations are equally secured by a pledge of and charge and lien upon the Net Revenues. The 2015 Bonds are not a debt of the State of California (the State ) or any of its political subdivisions, and neither the State nor any of its political subdivisions is liable thereon, nor in any event shall the 2015 Bonds be payable out of any funds or properties other than those of the City as described herein. The pledge under the Indenture does not constitute a pledge of general revenues, funds or moneys of the City or an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The full faith and credit of the City is not pledged for the payment of the principal of or interest on the 2015 Bonds and no tax or other source of funds other than the Net Revenues are pledged to pay the principal of or interest on the 2015 Bonds. This cover page contains information for general reference only. Potential purchasers are advised to read the entire Official Statement to obtain information essential to making an informed investment decision. The 2015 Bonds are offered when, as and if issued and accepted by the Underwriter subject to the approval, as to their validity, of Hawkins Delafield & Wood LLP, Los Angeles, California, Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the City by Best Best & Krieger LLP, Riverside, California, as City Attorney, for the City by Hawkins Delafield & Wood LLP, Los Angeles, California, Disclosure Counsel, and for the Underwriter by its counsel, Katten Muchin Rosenman LLP, New York, New York. It is expected that the 2015 Bonds will be available for delivery in book-entry form on or about August 18, BofA Merrill Lynch

2 MATURITY SCHEDULE $47,740,000 Water System Refunding Revenue Bonds, Series 2015 Year (July 1) Principal Amount Interest Year Rate Yield CUSIP (July 1) Principal Amount Interest Rate Yield CUSIP 2016 $1,150, % 0.350% AN $1,855, % 2.710% c AY ,185, AP ,930, AZ ,245, AQ ,990, BA ,310, AR ,050, BB ,375, AS ,135, c BC ,445, AT ,225, BD ,520, AU ,315, c BE ,600, AV ,415, BF ,680, AW ,505, BG ,765, AX ,595, BH6 $11,450, % Term Bonds due July 1, 2039; Price to Yield 3.890% c CUSIP : BJ2 c Copyright 2015, American Bankers Association. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by the CUSIP Service Bureau, managed on behalf of the American Bankers Association by Standard & Poor s. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services Bureau. CUSIP numbers have been assigned by an independent company not affiliated with the City and are included solely for the convenience of the registered owners of the applicable 2015 Bonds. Neither the City nor the Underwriter are responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the applicable 2015 Bonds or as included herein. The CUSIP number for a specific maturity is subject to being changed after the issuance of the 2015 Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part or as a result of the procurement of secondary market portfolio insurance and other similar enhancement by investors that is applicable to all or a portion of certain maturities of the 2015 Bonds. Priced to the optional redemption date of July 1, 2025 at par.

3 CITY OF AZUSA, CALIFORNIA Azusa City Council and Other Elected Officials Joseph R. Rocha, Mayor Edward J. Alvarez, Mayor Pro-Tem Uriel E. Macias, Councilmember Robert Gonzales, Councilmember Angel A. Carrillo, Councilmember Jeffrey Lawrence Cornejo Jr., City Clerk Arthur Vasquez, City Treasurer City Officials Troy Butzlaff, City Manager Susan Paragas, Director of Finance Best Best & Krieger LLP, City Attorney Azusa Light & Water Utility Board Edward J. Alvarez, Chairperson Angel A. Carrillo, Vice Chairperson Joseph R. Rocha, Board Member Robert Gonzales, Board Member Uriel E. Macias, Board Member Azusa Light & Water Staff George Morrow, Director of Utilities Yarek Lehr, Chet Anderson, Assistant Director of Power Resources Assistant Director of Water Operations Cary Kalscheuer, Federico Langit, Assistant Director of Customer Care and Solutions Assistant Director of Electronic Operations Melissa Barbosa, Steven Seffer Lead Water System Engineer Water Production Supervisor/ Chief Plant Operator Talika Johnson, Utilities Administrative and Financial Services Manager Bond and Disclosure Counsel Hawkins Delafield & Wood LLP Los Angeles, California Trustee Wells Fargo Bank, National Association Los Angeles, California Financial Advisor Fieldman Rolapp & Associates Irvine, California Verification Agent Grant Thornton LLP Minneapolis, Minnesota

4 No dealer, broker, salesperson or other person has been authorized by the City to give any information or to make any representations other than those contained herein and, if given or made, such other information or representations must not be relied upon as having been authorized by the City. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the 2015 Bonds by a person in any jurisdiction in which it is unlawful for such person to make an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the 2015 Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as a representation of facts. The information set forth in this Official Statement has been obtained from the City and other sources which are believed by the City to be reliable. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the City since the date hereof. All summaries of the 2015 Bonds, the Resolutions (as defined herein) and other documents summarized herein, 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. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. This Official Statement is submitted in connection with the issuance of the 2015 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2015 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE 2015 BONDS TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AT PRICES LOWER THAN THE PUBLIC OFFERING PRICE STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICE MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER. The City maintains a website at The information presented therein is not a part of this Official Statement, is not incorporated by reference herein, and should not be relied upon in making an investment decision with respect to the 2015 Bonds.

5 TABLE OF CONTENTS INTRODUCTION... 1 General... 1 Security and Sources of Payment for the 2015 Bonds... 1 Parity Obligations... 1 Limited Obligations... 2 The City and the Water System... 2 Forward-Looking Statements... 3 Miscellaneous... 3 PLAN OF REFINANCING... 3 ESTIMATED SOURCES AND USES OF FUNDS... 4 DESCRIPTION OF THE 2015 BONDS... 5 General... 5 Book-Entry Only System... 5 Redemption... 5 Notice of Redemption... 6 Partial Redemption... 7 Effect of Redemption... 7 SECURITY FOR THE 2015 BONDS... 7 General... 7 Sources of Payment... 7 Application of Gross Revenues... 8 Outstanding Parity Obligations... 9 Additional Indebtedness Rates and Charges No Reserve Account Additional Covenants No Acceleration Upon an Event of Default AZUSA LIGHT & WATER DEPARTMENT General Description Azusa Light and Water Utility Board Management of the Department THE WATER SYSTEM General Existing Service Territory Major Facilities and Equipment Sources of Water Water Rights Replacement Water Water Production and Average Cost Drought Conditions and Financial Impacts Customers Rates and Charges Water System Employees Water Treatment and Quality Control Page

6 TABLE OF CONTENTS Water System Master Plan Urban Water Management Plan Capital Requirements Transfers to the General Fund of the City Insurance Pension Benefits Other Post-Employment Benefits Historical Operating Results and Debt Service Coverage of Water System Obligations Debt Service Requirements Projected Coverage of Water Systems Obligations Debt Service Projected Cash Reserves of Water System Water System Litigation RISK FACTORS Limited Obligations Net Revenues and Expenditures Water System Demand Rate-Setting and Initiative Processes Under Proposition Statutory and Regulatory Compliance Earthquakes and Other Natural Disasters; Casualty Risk Risks Relating to the Water Supply Impact of Economic Conditions on Net Revenues No Acceleration; Limitations on Remedies CONSTITUTIONAL LIMITATIONS ON TAXES, WATER RATES AND CHARGES Proposition Proposition Future Initiatives CONTINUING DISCLOSURE LEGAL OPINION TAX MATTERS Opinion of Bond Counsel Certain Ongoing Federal Tax Requirements and Certifications Certain Collateral Federal Tax Consequences Original Issue Discount Bond Premium Information Reporting and Backup Withholding Miscellaneous VERIFICATION OF MATHEMATICAL COMPUTATIONS RATINGS FINANCIAL STATEMENTS FINANCIAL ADVISOR UNDERWRITING MISCELLANEOUS Page ii

7 TABLE OF CONTENTS APPENDIX A THE CITY OF AZUSA... A-1 APPENDIX B SUMMARY OF THE INDENTURE... B-1 APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE CITY AS OF JUNE 30, C-1 APPENDIX D PROPOSED FORM OF BOND COUNSEL OPINION... D-1 APPENDIX E BOOK-ENTRY ONLY SYSTEM... E-1 APPENDIX F FORM OF CONTINUING DISCLOSURE AGREEMENT... F-1 Page iii

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9 OFFICIAL STATEMENT $47,740,000 City of Azusa Water System Refunding Revenue Bonds, Series 2015 INTRODUCTION This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents described herein. All statements contained in this introduction are qualified in their entirety by reference to the entire Official Statement. References to, and summaries of, provisions of the Constitution and laws of the State of California (the State ) and any documents referred to herein do not purport to be complete and such references are qualified in their entirety by reference to the complete provisions. All capitalized terms used in this Official Statement and not otherwise defined herein have the meanings set forth in the Indenture. General The $47,740,000 City of Azusa Water System Refunding Revenue Bonds, Series 2015 (the 2015 Bonds ) are being issued by the City of Azusa (the City ) pursuant to the Indenture, dated as of July 1, 2015 (the Indenture ), by and between the City and Wells Fargo Bank, National Association, as trustee thereunder (the Trustee ), California Government Code Sections et seq. (as amended, the Refunding Law ) and a resolution of the City authorizing the issuance of the 2015 Bonds. Proceeds of the 2015 Bonds, together with certain available moneys, will be used to refinance all of the City s obligations in connection with the Azusa Public Financing Authority Parity Revenue Bonds (Water System Capital Improvements Program) Series 2006 (the 2006 Bonds ), and pay costs of issuance incurred in connection with the issuance of the 2015 Bonds. Security and Sources of Payment for the 2015 Bonds The 2015 Bonds are revenue bonds secured by and payable from certain limited revenues of the City received from the ownership and/or operation of the water system (the Water System ). The 2015 Bonds are special limited obligations of the City payable solely from net revenues of the Water Fund held by the City (the Net Revenues ) and any other amounts held by the Trustee in any fund or account established under the Indenture. The pledge of Net Revenues constitutes a pledge of and charge and lien upon the Net Revenues for the payment of the interest on and principal of the 2015 Bonds in accordance with the terms of the Indenture on parity with the pledge of Net Revenues for the City s heretofore and hereinafter issued Parity Obligations (herein defined). Payment of principal of and interest on the 2015 Bonds and all other payments with respect to other Parity Obligations shall be equally secured by Net Revenues without priority for number or date of issuance or incurrence of such 2015 Bonds or Parity Obligations. SECURITY FOR THE 2015 BONDS Sources of Payment herein. Parity Obligations To finance and refinance the costs of certain improvements to its Water System, the City has executed and delivered an installment sale agreement (the 2006 Water Installment Agreement ) with the Azusa Public Financing Authority (the Authority ). The 2006 Water Installment Agreement with the

10 Authority secures the Authority s 2006 Bonds, which are currently outstanding in the principal amount of $51,180,000, prior to the defeasance described herein. Subsequent to the issuance of the 2015 Bonds and the defeasance described herein, none of the 2006 Bonds will be outstanding. See PLAN OF FINANCE and SECURITY FOR THE 2015 BONDS Outstanding Parity Obligations herein. The City has also issued its Water System Refunding Revenue Bonds, Series 2012A (the 2012 Bonds ), currently outstanding in the principal amount of $6,645,000, pursuant to an Indenture, dated as of June 1, 2012 (the 2012 Indenture ), by and between the City and Wells Fargo Bank, National Association, as trustee thereunder. The 2012 Bonds are secured by a lien on Net Revenues and payable on a parity with the 2015 Bonds. In addition, subject to satisfaction of the conditions set forth in the 2012 Indenture and the Indenture, the City may enter into additional installment agreements to finance and refinance improvements to the Water System and/or issue additional refunding revenue bonds. Such additional installment agreements and refunding revenue bonds will be secured by a lien on Net Revenues and payable on a parity with the City s 2012 Bonds and 2015 Bonds. All 2012 Bonds, 2015 Bonds and additional obligations relating to the Water System secured by a lien on Net Revenues and payable on a parity therefrom are collectively referred to herein as Parity Obligations. See SECURITY FOR THE 2015 BONDS Additional Indebtedness herein and Appendix B SUMMARY OF THE INDENTURES Indenture Conditions for the Issuance of Additional Bonds and Procedure for the Issuance of Additional Bonds attached hereto. Limited Obligations The 2015 Bonds are limited obligations of the City and are payable solely from the Net Revenues and the City is not obligated to pay them except from the Net Revenues. All the 2015 Bonds and other Parity Obligations are equally secured by a pledge of and charge and lien upon the Net Revenues. The 2015 Bonds are not a debt of the State of California (the State ) or any of its political subdivisions, and neither the State nor any of its political subdivisions is liable thereon, nor in any event shall the 2015 Bonds be payable out of any funds or properties other than those of the City as described herein. The pledge under the Indenture does not constitute a pledge of general revenues, funds or moneys of the City or an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The full faith and credit of the City is not pledged for the payment of the principal of or interest on the 2015 Bonds and no tax or other source of funds other than the Net Revenues are pledged to pay the principal of or interest on the 2015 Bonds. The City and the Water System The City was founded in 1887 and incorporated as a general law city on December 29, The City is located in the County of Los Angeles (the County ) and situated 27 miles northeast of the City of Los Angeles. The City encompasses 9.13 square miles and has a population of over 49,000. The City has a diverse economy of retail, commercial, industrial businesses (including defense and higher education), and an equally diverse population. See Appendix A THE CITY OF AZUSA attached hereto. The Water System is owned by the City and operated by the City s Light & Water Department (the Department ), which is staffed by 78 employees. The Water System has a service territory that includes the City and adjoining portions of surrounding cities and unincorporated areas of the County. The Water System serves approximately 23,500 accounts with an estimated population of 110,000 persons, over half of whom live outside City limits. See THE WATER SYSTEM herein. 2

11 Forward-Looking Statements Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, budget, projected or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Although the City believes that such expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. The City is not obligated to issue any updates or revisions to the forward-looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based occur. Miscellaneous The summaries of and references to documents, statutes, reports and other instruments referred to herein do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its entirety by reference to each document, statute, report or instrument. The capitalization of any word not conventionally capitalized or otherwise defined herein, indicates that such word is defined in a particular agreement or other document and, as used herein, has the meaning given it in such agreement or document. See Appendix B SUMMARY OF THE INDENTURES for summaries of certain of such definitions. PLAN OF REFINANCING Proceeds of the 2015 Bonds, together with amounts on deposit under the 2006 Indenture and available therefor, will be used to refinance all of the City s outstanding 2006 Bonds and pay costs of issuance incurred in connection with the issuance of the 2015 Bonds. The 2006 Bonds were issued on December 20, 2006 to finance certain capital improvements to the Water System. The 2006 Bonds being refinanced are as follows: Maturity Date (July 1) Principal Amount Redemption Date Redemption Price * CUSIP No (1) $1,145,000 N/A N/A BA ,200,000 January 1, % BB ,595,000 January 1, BC ,865,000 January 1, BD ,170,000 January 1, BE ,475,000 January 1, BF ,675,000 January 1, BG ,825,000 January 1, BH ,230,000 January 1, BJ1 (Table continued on next page.) 3

12 (Table continued from prior page.) * (1) Expressed as a percentage of the principal amount thereof, plus accrued interest to the Redemption Date. Copyright 2015, American Bankers Association. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by the CUSIP Service Bureau, managed on behalf of the American Bankers Association by Standard & Poor s. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services Bureau. CUSIP numbers have been assigned by an independent company not affiliated with the City and are included solely for the convenience of the registered owners of the referenced bonds. Neither the City nor the Underwriter are responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the applicable bonds or as included herein. Amounts in the Escrow Fund (as described below) will be used to pay the principal of and interest on the 2006 Bonds maturing on July 1, 2016 as they become due and payable. To provide for the defeasance of the 2006 Bonds, the City intends to deposit into an escrow fund (the Escrow Fund ) to be held by Wells Fargo Bank, National Association (the Escrow Agent ), proceeds of the 2015 Bonds and amounts on deposit under the 2006 Indenture and available therefor which, when invested in certain defeasance securities, will be sufficient to pay (i) the principal of and interest on the 2006 Bonds maturing on July 1, 2016 as they become due and payable, (ii) the interest on the 2006 Bonds maturity after July 1, 2016 on each interest payment date thereof to January 1, 2017 (the Redemption Date ) and (iii) the prepayment price of the 2006 Bonds maturing after July 1, 2016 equal to 100% of the principal amount thereof on Redemption Date without premium. The City intends to purchase or direct the Escrow Agent to purchase certain defeasance securities that will be held by the Escrow Agent in the Escrow Fund to be established thereby under an escrow agreement (the Escrow Agreement ) by and among the City, the Authority and the Escrow Agent. Such defeasance securities will be available only for the payment of the 2006 Bonds for which the Escrow Fund is created. After the deposit of the defeasance securities into the Escrow Fund as described above, the City will be discharged from all obligations with respect to the 2006 Bonds. Grant Thornton LLP, a firm of independent certified public accountants, will verify the arithmetical computations used to determine the sufficiency of the escrow deposit. See Verification of Mathematical Computations herein. ESTIMATED SOURCES AND USES OF FUNDS The following sets forth the estimated sources and uses of funds related to the issuance of the 2015 Bonds. Sources of Funds: Principal Amount $47,740, Net Original Issue Premium 3,068, Release from funds/accounts for the 2006 Bonds 3,973, Total Sources of Funds $54,781, Uses of Funds: Deposit to Escrow Fund for 2006 Bonds $54,555, Costs of Issuance (1) 226, Total Uses of Funds $54,781, (1) Includes fees and expenses of the financial advisor, bond counsel and disclosure counsel, verification agent, underwriting fees, fees of the Trustee, printing and other miscellaneous costs associated with the issuance of the 2015 Bonds. 4

13 DESCRIPTION OF THE 2015 BONDS General The 2015 Bonds will be dated their date of delivery and will bear interest at the rates set forth on the inside cover page of this Official Statement, payable on January 1 and July 1 of each year, commencing January 1, 2016 (each, an Interest Payment Date ) until maturity or earlier redemption. Subject to the redemption provisions set forth herein, the 2015 Bonds will mature on the dates and in the amounts set forth on the inside cover page hereof. Each 2015 Bond shall bear interest (based on a 360-day year comprised of twelve 30 day months) from the Interest Payment Date next preceding the date of authentication thereof, in which event such 2015 Bond shall bear interest from such date, or unless such date of authentication is prior to the Record Date (as hereinafter defined) for the first Interest Payment Date, in which event such 2015 Bond shall bear interest from its date of delivery. Principal of any 2015 Bond and any premium upon redemption shall be paid by check of the respective Trustee upon presentation and surrender thereof at the office of the respective Trustee. Principal of and interest and premium (if any) on the 2015 Bonds shall be payable in lawful money of the United States of America. So long as Cede & Co. is the registered owner of the 2015 Bonds, payments of principal and interest on the 2015 Bonds will be paid to DTC as registered owner of the 2015 Bonds. Book-Entry Only System The 2015 Bonds are being issued as fully registered bonds, registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York ( DTC ) and will be available to ultimate purchasers in the denomination of $5,000 or any integral multiple thereof, under the book-entry only system maintained by DTC. While the 2015 Bonds are subject to the book-entry only system, the principal, interest and any redemption premium with respect to a 2015 Bond will be paid by the respective Trustee to DTC, which in turn is obligated to remit such payment to its DTC Participants for subsequent disbursement to Beneficial Owners of the 2015 Bonds as described herein. See Appendix E Book- Entry Only System below. Redemption Optional Redemption. The 2015 Bonds maturing on or before July 1, 2025 are not subject to optional redemption prior to their maturities. The 2015 Bonds maturing on or after July 1, 2026 shall be subject to redemption prior to their respective maturities at the option of the City from any source of funds on or after July 1, 2025, as a whole or in part on any date, in integral multiples of $5,000 at a redemption price equal to the principal amount of the 2015 Bonds to be redeemed, together with interest accrued thereon to the date fixed for redemption, without premium. Mandatory Sinking Fund Redemption. The 2015 Bonds maturing on July 1, 2039 shall be subject to mandatory sinking fund redemption in part, by lot, commencing on July 1, 2036, from mandatory sinking fund payments set aside in the Payment Account, at a redemption price equal to the principal amount thereof to be redeemed, plus accrued interest to the date fixed for redemption, without premium, in the aggregate respective principal amounts and on the dates set forth below: 5

14 Redemption Dates (July 1) 6 Principal Amount 2036 $2,695, ,805, ,915, (maturity) 3,035,000 Upon any optional redemption of 2015 Bonds, the City shall direct that an amount equal to the aggregate principal amount of term 2015 Bonds so redeemed or purchased be credited towards a part or all of any one or more of the mandatory sinking fund payments required for such term 2015 Bonds. Any such direction shall be in writing, shall be delivered to the Trustee at least 35 days before the scheduled date of such mandatory sinking fund redemption and shall state the years in which and the amounts by which such mandatory sinking fund payments are to be reduced. Notice of Redemption Notice of Redemption. In the event of an optional redemption, the Trustee will mail by first-class mail, not less than thirty (30) nor more than sixty (60) days prior to the redemption date to the respective Owners of the 2015 Bonds designated for redemption at their addresses appearing on the registration books of the respective Trustee. Each notice of redemption will state (1) the date of such notice, (2) the date of redemption, (3) the redemption price, if any, (including the name and appropriate address of the respective Trustee), (4) the place or places where the redemption will be made, including the name and address of any paying agent, (5) the CUSIP number (if any) of the maturity or maturities, (6) if less than all of any such maturity is to be redeemed, the distinctive certificate numbers of the 2015 Bonds of such maturity to be redeemed and (7) in the case of 2015 Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. Each such notice will also state that on said redemption date there will become due and payable on each of said 2015 Bonds the redemption price thereof (including redemption premium, if any) and in the case of a 2015 Bond to be redeemed in part only, the specified portion of the principal amount thereof to be redeemed, together with interest accrued thereon to the redemption date, and that from and after such redemption date interest thereon will cease to accrue, and will require that such 2015 Bonds be then surrendered at the address of the respective Trustee specified in the redemption notice. Failure to receive such notice will not invalidate any of the proceedings taken in connection with such redemption. With respect to any notice of any optional redemption of 2015 Bonds, unless at the time such notice is given the 2015 Bonds to be redeemed will be deemed to have been defeased pursuant to the respective Indenture, such notice will state that such redemption is conditional upon receipt by the respective Trustee, on or prior to the date fixed for such redemption, of moneys that, together with other available amounts held by the respective Trustee, are sufficient to pay the redemption price of, and accrued interest on, the 2015 Bonds to be redeemed, and that if such moneys will not have been so received said notice will be of no force and effect and such 2015 Bonds will not be required to be redeemed. In the event a notice of redemption of 2015 Bonds contains such a condition and such moneys are not so received, the redemption of 2015 Bonds as described in the conditional notice of redemption will not be made and the respective Trustee will, within a reasonable time after the date on which such redemption was to occur, give notice to the persons and in the manner in which the notice of redemption was given, that such moneys were not so received and that there will be no redemption of 2015 Bonds pursuant to such notice of redemption. Neither the failure to receive any notice of redemption so mailed nor any defect therein will affect the validity of the proceedings for the redemption of the 2015 Bonds to be redeemed or the cessation of the accrual of interest with respect to such redemption.

15 Partial Redemption In the event only a portion of any 2015 Bond is called for redemption, then upon surrender of such 2015 Bond to the respective Trustee, the City will execute and the respective Trustee will authenticate and deliver to the Owner thereof a new 2015 Bond of the same series, maturity date and interest rate in an aggregate principal amount equal to the non-redeemed portion of the 2015 Bond to be redeemed; provided, however, so long as there is a securities depository for the 2015 Bonds, there will be only one registered owner and neither the City nor the respective Trustee will have responsibility for prorating partial redemption payments among beneficial owners of the 2015 Bonds. Effect of Redemption If notice of redemption has been duly given as aforesaid and money for the payment of the redemption price of the 2015 Bonds called for redemption is held by the respective Trustee, then on the redemption date designated in such notice 2015 Bonds so called for redemption will become due and payable, and from and after the date so designated interest on such 2015 Bonds will cease to accrue, and the Owners of such 2015 Bonds will have no rights in respect thereof except to receive payment of the redemption price thereof. All 2015 Bonds redeemed as described herein will be cancelled and destroyed by the respective Trustee and will not be reissued. General SECURITY FOR THE 2015 BONDS The 2015 Bonds are limited obligations of the City and are payable solely from the Net Revenues and the City is not obligated to pay them except from the Net Revenues. All the 2015 Bonds and other Parity Obligations are equally secured by a pledge of and charge and lien upon the Net Revenues. The 2015 Bonds are not a debt of the State or any of its political subdivisions, and neither the State nor any of its political subdivisions is liable thereon, nor in any event shall the 2015 Bonds be payable out of any funds or properties other than those of the City as described herein. The pledge under the Indenture does not constitute a pledge of general revenues, funds or moneys of the City or an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The full faith and credit of the City is not pledged for the payment of the principal of or interest on the 2015 Bonds and no tax or other source of funds other than the Net Revenues are pledged to pay the principal of or interest on the 2015 Bonds. Sources of Payment Pursuant to the Indenture, to secure the payment of the 2015 Bonds, the City pledges to the Owners of the 2015 Bonds and grants the Owners a lien upon the Net Revenues in the Water Fund held by the City and any other amounts held by the Trustee in any fund or account established under the Indenture; provided, however, that out of the Net Revenues and other moneys there may be applied such sums for such purposes as are permitted under the Indenture. The pledge of Net Revenues constitutes a first pledge of and charge and lien upon the Net Revenues for the payment of the interest on and principal of the 2015 Bonds in accordance with the terms of the Indenture on parity with the pledge of Net Revenues for the City s heretofore and hereinafter issued Parity Obligations. Payment of principal of and interest on the 2015 Bonds and all other payments with respect to other Parity Obligations shall be equally secured by Net Revenues without priority for number or date of issuance or incurrence of such 2015 Bonds or Parity Obligations. 7

16 Net Revenues means Gross Revenues less Operation and Maintenance Expenses. Gross Revenues means all revenues, charges, income and receipts derived by the City from the operation of the Water System or arising from the Water System (including all revenues, charges, income and receipts received by the City from the services, facilities and distribution of water by the City), including, but not limited to income from investments, but excepting therefrom all refundable charges and deposits to secure service. Operation and Maintenance Expenses means the amount required to pay the reasonable expenses of management, repair and other costs of the nature of costs which have historically and customarily been accounted for as such, necessary to operate, maintain and preserve the Water System in good repair and working order, including but not limited to, the cost of supply and transmission of water under long-term contracts or otherwise and the expenses of conducting the activities of the water division of the City, but excluding depreciation. Operation and Maintenance Expenses does not include any payments to the City for special franchise fees or any transfers to the City s general fund. Application of Gross Revenues Pursuant to the Indenture, the City agrees and covenants that all Gross Revenues received by it will be deposited when and as received in the existing Water Fund established and held by the City with respect to the Water System (the Water Fund ), and all money on deposit in the Water Fund will be applied and used only as provided in the Indenture and each other instrument authorizing the other Parity Obligations. The City will pay all Operation and Maintenance Expenses (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Expenses the payment of which is not then immediately required) from the Water Fund as they become due and payable, and remaining Net Revenues on deposit in the Water Fund will be transferred or expended by the City at the following times in the following order of priority: (a) Parity Obligation Service; Transfers. On or before the third Business Day before each date on which Parity Obligation Service (which means, with respect to any period, the amount of principal and interest or other payments accrued or to accrue in such period with respect to all outstanding Parity Obligations (excluding the amount of proceeds of Parity Obligations held in any fund or account for the payment of Parity Obligation Service accrued or to accrue during such period); provided that for purposes of accrual under this definition, all payments with respect to Parity Obligations due in a calendar month shall be deemed due on the first day of such calendar month; provided further Parity Obligation Service includes the principal and interest payments with respect to the 2015 Bonds issued under the Indenture) becomes due and payable (whether at maturity or prior redemption or otherwise) the City shall, from the Net Revenues in the Water Fund, transfer to the Trustee for deposit in the Payment Fund under the Indenture (the Payment Fund ) and to the trustee or trustees for any corresponding funds or accounts relating to any other Parity Obligations, sums equal to the amount of principal of and interest on the 2015 Bonds and other Parity Obligation Service, respectively, becoming due and payable on such due date, except that no such deposit need be made if the Trustee or such other trustees, as the case may be, then holds monies in the Payment Fund or any corresponding funds or accounts, respectively, at least equal to the amount of principal of and interest on the 2015 Bonds or other Parity Obligation Service (including mandatory sinking account payments) becoming due and payable on the next succeeding date on which Parity Obligation Service becomes due and payable; provided, however, that if Net Revenues are not sufficient to make such transfers, then such transfers shall be made on a pro rata basis based upon the amounts due on each such series of Parity Obligations. The City shall pay to the Trustee for deposit in the Payment Fund not less than three Business Days prior to January 1 and July 1 of each year the amount of the principal and/or interest payments due on such January 1 or July 1, respectively. 8

17 Each payment under the Indenture shall be paid by the City in funds available on the due date thereof in lawful money of the United States of America to the Trustee at its Corporate Trust Office, and the City agrees that such amounts shall be held, invested, disbursed and applied as provided in the Indenture. (b) Reserve Account; Transfers. On or before the third Business Day before each date on which Parity Obligation Service becomes due and payable, the City shall, from the remaining Net Revenues on deposit in the Water Fund after transfers pursuant to paragraph (a) above, transfer to the Trustee for deposit in the Reserve Account (if any) and to the trustee or trustees for any corresponding funds or accounts relating to any other Parity Obligations the respective amounts, if any, required to be so transferred to satisfy the Reserve Account Requirement (if any) pursuant to the Indenture and the reserve requirements of each other instrument authorizing the other Parity Obligations; provided, however, that if Net Revenues are not sufficient to make such transfers, then such transfers shall be made on a pro rata basis based upon the amount of the deficiency in each fund or account (including the accounts in the Payment Fund) to which transfers are to be made. (c) Rebate Payments. The City shall, from the remaining Net Revenues on deposit in the Water Fund after transfers pursuant to paragraphs (a) and (b) above, make when due any payments required to be made to the United States in accordance with the Indenture and any tax certificate relating to the Water System. (d) Administrative Fee and Tax Payments. The City shall, from the remaining Net Revenues on deposit in the Water Fund after transfers pursuant to paragraphs (a), (b) and (c) above, transfer to the Trustee amounts in payment of administrative fee and tax payments relating to the 2015 Bonds and transfer to any other trustee for deposit into any corresponding administrative fee and tax payments funds or accounts relating to any other Parity Obligations the amount necessary to pay when due all administrative fee and tax payments as provided herein and other payments required to be made from any other corresponding funds or accounts. (e) Remaining Net Revenues. All Net Revenues remaining on deposit in the Water Fund after transfers pursuant to paragraphs (a), (b), (c) and (d) above shall be held free and clear of the Indenture by the City, and the City may use and apply such remaining amount for any lawful purpose of the City, including, but not limited to, replenishing any deficiencies under the Indenture or any other instrument authorizing Parity Obligations, payment of any repairs, replacements, improvements or renewals of or to the Water System, payment of any cost or funding of any reserve or fund, the redemption, prepayment or payment of 2015 Bonds or other Parity Obligations upon the terms and conditions set forth in the Indenture or the instrument authorizing such other Parity Obligations, the purchase of 2015 Bonds or other Parity Obligations as and when and at such prices as the City may determine, the payment of any subordinate obligations in accordance with the instruments authorizing such subordinate obligations, and transfers to the City s general fund, including but not limited to special franchise fees or other similar fees or taxes. Outstanding Parity Obligations To finance the costs of certain improvements to its Water System, the City has executed and delivered the 2006 Water Installment Agreement with the Authority. The Prior Water Installment Agreement with the Authority secures the Bonds, which are currently outstanding in the principal amount of $51,180,000, prior to the defeasance described herein. Subsequent to the issuance of the 2015 Bonds and the defeasance described herein, none of the 2006 Bonds will be outstanding. 9

18 The City has also issued its 2012 Bonds, currently outstanding in the principal amount of $6,645,000, pursuant to the 2012 Indenture to refinance certain capital improvements of the Water System. The 2012 Bonds are secured by a lien on Net Revenues and payable on a parity with the 2015 Bonds. Additional Indebtedness Additional Parity Obligations. Pursuant to the Indenture, the City covenants that it shall not issue or incur any Water Revenue Bonds (defined as any revenue bond, revenue note, warrant or other evidence of indebtedness issued, incurred or delivered for the financing or refinancing or extensions of, additions to, repairs and replacements to, renewals of, and improvements of, the Water System, designated by the City at the initial delivery thereof as payable from Net Revenues to be transferred to the Trustee for deposit in the Payment Fund under Indenture and any other corresponding fund or account relating to any other Parity Obligations, to the extent the payments under such revenue bond, revenue note, warrant or other evidence of indebtedness are payable from such Net Revenues), indebtedness or obligations (excluding obligations for payment of Operation and Maintenance Expenses) that would be payable out of Net Revenues prior to Parity Obligations. Except for Water Revenue Bonds or other indebtedness issued to refund revenue bonds under the Indenture or other Parity Obligations payable from Net Revenues in accordance with the Indenture or otherwise, which may be issued at any time without meeting the test set forth below, no additional indebtedness of the City payable out of Net Revenues on a parity with the 2015 Bonds and other Parity Obligations shall be created or incurred unless: (i) the Net Revenues during any twelve (12) consecutive calendar months out of the immediately preceding eighteen (18) calendar month period, plus, at the option of the City, any or all of the items hereinafter described in (a) and (b) in this subsection, shall have amounted to at least one hundred twenty-five percent (125%) of the greatest amount of Water Annual Parity Obligation Service (as defined in the Indenture) immediately subsequent to the incurring of such additional Parity Obligations, as certified by the City; or (ii) the projected Net Revenues during the first complete Fiscal Year following issuance of such Parity Obligations when the improvements to the Water System financed with the proceeds of the Parity Obligations shall be in operation, plus, at the option of the City, any or all of the items hereinafter described in (a) and (b) in this subsection, shall amount to at least one hundred twenty-five percent (125%) of the greatest amount of Annual Parity Obligation Service immediately subsequent to the incurring of such additional Parity Obligations, as certified by the City. The items any or all of which may be added to such Net Revenues for the purpose of meeting either of the requirements set forth in clause (i) or (ii) above are the following: (a) An allowance for any increase in Net Revenues (including, without limitation, a reduction in Operation and Maintenance Expenses) which may arise from any additions to or extensions or improvements of the Water System to be made or acquired with the proceeds of such additional Parity Obligations or with the proceeds of indebtedness previously issued, and also for Net Revenues from any such additions, extensions or improvements which have been made or acquired with moneys from any source but which, during all or any part of such Fiscal Year or such twelve (12) consecutive calendar month period out of the immediately preceding eighteen (18) calendar month period, were not in service, all in an amount equal to the estimated additional average annual Net Revenues (or estimated average annual reduction in Operation and Maintenance Expenses) to be derived from such additions, extensions or improvements for the first thirty-six (36) month period in which each addition, extension or improvement is to be in operation, all as certified by the City. 10

19 (b) An allowance for earnings arising from any increase in the charges made for the use of the Water System which has become effective prior to the incurring of such additional Parity Obligations but which, during all or any part of such Fiscal Year or such twelve (12) consecutive calendar month period out of the immediately preceding eighteen (18) calendar month period, was not in effect, in an amount equal to the amount by which the Net Revenues would have been increased if such increase in charges had been in effect during the whole of such Fiscal Year or such twelve (12) consecutive calendar month period out of the immediately preceding eighteen (18) calendar month period, as certified by the City. Nothing in the Indenture shall limit the ability of the City to issue or incur obligations that are junior and subordinate to the payment of the principal, premium, interest and reserve fund requirements for the 2015 Bonds and all other Parity Obligations and which subordinate obligations are payable as to principal, premium, interest and reserve fund requirements, if any, only out of Net Revenues after the prior payment of (i) all amounts then due and required to be paid or set aside under the Indenture from Net Revenues for principal, premium, if any, interest and reserve fund requirements for the 2015 Bonds and other Parity Obligations, as the same become due and payable and at the times and in the manner as required in the Indenture or any documents providing for the issuance or incurrence of other Parity Obligations and (ii) any rebate amount to the United States pursuant to the Indenture. Additional Water Refunding Bonds. Pursuant to the Indenture, subject to satisfaction of the conditions set forth in the Indenture, the City may at any time issue additional water refunding bonds payable from the Net Revenues secured by a pledge of the Net Revenues on a parity with the pledge securing the Outstanding 2015 Bonds theretofore issued under the Indenture. See Appendix B SUMMARY OF THE INDENTURES Indenture Conditions for the Issuance of Additional 2015 Bonds and Procedure for the Issuance of Additional 2015 Bonds attached hereto. Rates and Charges Pursuant to the Indenture, the rates to be charged for services furnished by the Water System will be fixed so as to provide Gross Revenues for each Fiscal Year at least sufficient to pay, as the same become due, all Operation and Maintenance Expenses for such Fiscal Year and so as to provide Net Revenues for each Fiscal Year at least 1.25 times the amount necessary to pay, as the same become due, all Parity Obligation Service (including mandatory sinking account payments) on the 2015 Bonds and any other Parity Obligations for such Fiscal Year and to pay all other obligations and indebtedness payable under the Indenture or similar agreement for any other Parity Obligation for such Fiscal Year (including the payment of any amounts owing to any provider of any surety bond, insurance policy or letter of credit with respect to the 2015 Bonds and any other Parity Obligations, which amounts are payable under the Indenture or other applicable instrument). The City will have in effect at all times rules and regulations requiring each consumer or customer located on any premises connected with the Water System to pay the rates and charges applicable to the Water System provided to such premises and providing for the billing thereof and for a due date and a delinquency date for each bill. The City will not permit any part of the Water System or any facility thereof to be used or taken advantage of free of charge by any corporation, firm or Person, or by any public agency (including the United States of America, the State and any city, county, district, political subdivision, public corporation or agency of any thereof). No Reserve Account There is no reserve fund for the 2015 Bonds. 11

20 Additional Covenants Additional covenants contained in the Indenture include, but are not limited to, the following: No Encumbrances. The City will not create any pledge, lien or charge upon any of the Net Revenues having priority over the lien of the 2015 Bonds and the other Parity Obligations with respect to Net Revenues. The City covenants that in order to fully preserve and protect the priority and security of the 2015 Bonds, the City will pay from the Water Fund and discharge all lawful claims for labor, materials and supplies furnished for or in connection with the Water System which, if unpaid, may become a lien or charge upon the revenues prior or superior to the lien of the 2015 Bonds and impair the security of the 2015 Bonds. Except as expressly otherwise provided in the Indenture, the City will also pay from the Water Fund all taxes and assessments or other governmental charges lawfully levied or assessed upon or in respect of the Water System or upon any part thereof or upon any of the revenues therefrom. Sale of Water System. The Water System shall not be sold or leased or otherwise disposed of as a whole, or substantially as a whole, unless such sale, lease or other disposition be so arranged as to provide for a continuance of payments into the Water Fund sufficient in amount to permit payment therefrom of the principal of and interest on, and premiums, if any, due upon the maturity or redemption of, all 2015 Bonds and other Parity Obligations payable out of Net Revenues, or to provide for such payments into some other fund charged with such payments. None of the works, plant, properties, facilities or other part of the Water System or any real or personal property comprising a part of the Water System shall be sold, leased or otherwise disposed of if such sale, lease or disposition would cause the City to be unable to satisfy the requirements of the Indenture. Maintenance and Operation of the Water System. The City covenants and agrees that it will operate and maintain the Water System in an efficient and economic manner and to operate, maintain and preserve the Water System in good repair and working order. Insurance on the Water System. The City covenants that it shall at all times maintain with responsible insurers, to the extent available from such insurers at reasonable rates as determined by the City, all such insurance on the Water System as is customarily maintained with respect to works and properties of like character against accident, loss of or damage to such works or properties and against loss of revenues. If any useful part of the Water System shall be damaged or destroyed such part shall be restored to use unless the City provides a Written Certificate to the Trustee to the effect that in the opinion of the City such restoration would not be prudent. The money collected from insurance against accident, loss or damage shall be used for repairing or rebuilding the loss, damaged or destroyed works and properties, and to the extent not so applied, shall be applied to the retirement of outstanding Parity Obligations of the City and for such purpose paid into the appropriate funds or accounts. The City shall also maintain with responsible insurers to the extent available from such insurers at reasonable rates worker s compensation insurance and insurance against public liability and property damage to the extent reasonably necessary and obtainable. Notwithstanding the foregoing, the City may provide any insurance required by this covenant through a self-insurance program or it may provide such insurance as part of any blanket coverages maintained by the City. 12

21 No Acceleration Upon an Event of Default Pursuant to the Indenture, upon the occurrence and continuance of an event of default thereunder, the Trustee may, and at the written direction of the Owners of a majority in aggregate principal amount of the 2015 Bonds at the time Outstanding shall, upon notice in writing to the City, pursue any available remedy at law or in equity to remedy such event of default and to enforce any applicable rights of the Trustee under or with respect to the Indenture; provided, that, such remedies shall not include any remedy of acceleration with respect to the payment of the principal of and interest on the 2015 Bonds. See RISK FACTORS No Acceleration Upon an Event of Default; Limitations on Remedies herein APPENDIX B SUMMARY OF THE INDENTURES Indenture Events of Default and Remedies of Owner attached hereto. General Description AZUSA LIGHT & WATER DEPARTMENT The Department is responsible for construction, maintenance and operation of electric and water utilities owned or operated by the City pursuant to Chapter 78 of the City Municipal Code. The Department s Director administers the Department under the authority of the City Manager and is charged with the operation of both the City s Water System and the City s electric system (the Electric System ). The Water System and the Electric System provide water and electricity to nearly all of the residential, commercial and industrial customers within the City limits. The Water System also serves portions of the Cities of Covina, Glendora, Irwindale, West Covina, and unincorporated areas of Los Angeles County. The funds and accounts of the Water System are held in the Water Fund and the funds and accounts of the Electric System are held in the Electric Fund (the Electric Fund ), respectively, and the funds and accounts of one system are not pledged or available to pay the other system s obligations. Azusa Light and Water Utility Board The City Council established the Azusa Light & Water Utility Board (the Utility Board ). The Utility Board is empowered to carry out the following duties: (1) establish rates for the Electric System and Water System and such other fees and charges as may be appropriate in the provision of utility services, (2) establish rules and regulations governing the conduct of the Utility Board and its members and the employees of the Department, (3) control and order the expenditures of all money received from the sale or use of water and electric power for defraying of expenses, maintenance, repairs, construction, extension and operation of the Water System and Electric System and for any expenses for additions to same, (4) supply customers of the Electric System and the Water System with electric power and water, respectively, for any and all purposes and adopt all necessary rules and regulations for the provisions of service, (5) enter into contracts with any public or private agency for the exchange of water or electric power, (6) hold, lease, acquire and purchase property in the name of the City, and (7) dispose of property surplus to the needs of the Water System or Electric System. The Utility Board consists of five members, none of whom may hold any paid office in City government or be a City employee. The members of the Utility Board are currently the five City Council members. The current members of the Utility Board are: EDWARD J. ALVAREZ, Chairperson 13

22 ANGEL A. CARRILLO, Vice Chairperson ROBERT GONZALES, Board Member URIEL E. MACIAS, Board Member JOSEPH R. ROCHA, Board Member Management of the Department GEORGE MORROW, Director of Utilities Mr. Morrow has served as the Director of the utility since September Mr. Morrow has 37 years of experience in the electric and water sector, including 10 years with a private for profit electric utility and 27 years serving the not-for-profit water/electric sector of the industry. He has a Bachelor of Science degree in Electrical Engineering and a Master of Business Administration from the University of Texas at El Paso. Mr. Morrow began his career as a planning engineer with El Paso Electric Company, a private utility serving approximately 10,000 square miles in west Texas and southern New Mexico. He later served as Assistant General Manager of Pasadena Water and Power and as Electric Utility Director for the City of Lodi both California community-owned electric utilities. During his tenure with the City of Pasadena, he was responsible for water resource planning and water environmental/conservation programs. He also served 11 years as the Director of Independence Power & Light in Missouri the second largest of 89 municipal utilities in that state. Mr. Morrow s professional experience includes service on the Board of Directors of the American Public Power Association, the Southern California Public Power Authority, the Northern California Power Agency, the Transmission Agency of Northern California and the Financing Authority for Resource Efficiency of California. He has also served as President of the Consumers Electric Power Association, President of the Missouri Association of Municipal Utilities, Chairman of the Missouri Municipal Electric Utility Commission, President of the Azusa Agricultural Water Company, and Chief Operating Officer of Azusa Valley Water Company. CHET ANDERSON, Assistant Director of Water Operations Mr. Anderson has served Azusa Light & Water Department since September of Mr. Anderson oversees the operation of the Water System. He has provided civil engineering services for approximately 35 years. Mr. Anderson previously worked as a design engineer, project manager and supervising engineer in Illinois, Colorado, and California for various consultants, special districts, and Southern California Water Company. Mr. Anderson holds a Bachelor of Science Degree in Civil Engineering from Bradley University and a Bachelor of Arts Degree from Southern Illinois University. He is a registered Professional Engineer in Civil Engineering in California and is also a Registered Professional Engineer (inactive) in the State of Colorado. Mr. Anderson is scheduled to retire effective December 31, The Utility Board will be seeking a qualified replacement for this position in a nationwide search that is expected to take approximately four months. CARY KALSCHEUER, Assistant Director - Customer Care & Solutions Mr. Kalscheuer has been with the Department since January 2000 and has 25 years municipal management experience, including 10 years with the City of Covina. Mr. Kalscheuer s principal duties with Azusa Light & Water include management of the customer services division, which includes frontline communications with customers, meter reading and utility billing functions. Mr. Kalscheuer oversees division staff responsible for processing utility payments, cash management, and operating reports. Mr. Kalscheuer s previous experience with Azusa Light & Water included budgeting, financial management, cost of service studies and rate setting for the water and electric utilities. Mr. Kalscheuer has participated in various debt financings for the Department, including issuance of $54.85 million in revenue bonds to finance 14

23 construction of various water system improvements in Mr. Kalscheuer holds Bachelor of Arts Degree and Master of Public Administration Degree with a concentration in Public Finance from California State University, Fullerton. TALIKA JOHNSON, Utilities Administrative and Financial Services Manager Ms. Johnson has been with the Department since October 2013 and assists the Director of Utilities with administration of Azusa Light & Water. Ms. Johnson has nearly 10 years of municipal finance and accounting experience, including seven years with the City of Riverside Public Utilities. Ms. Johnson s principal duties with Azusa Light & Water include Utility Board agenda preparation, budgeting, financial management, cost of service studies and rate setting for the water and electric utilities, preparation of financial disclosure reports, and solid waste contract administration and rate setting. Ms. Johnson has participated in various debt financings throughout her tenure. Ms. Johnson holds a Bachelor of Arts Degree in Accounting from the University of La Verne and a Master of Public Administration Degree from California Baptist University, Riverside. MELISSA BARBOSA, Lead Water System Engineer Ms. Barbosa has served as the Lead Water System Engineer for Azusa since September Ms. Barbosa has over 10 years of experience in the civil engineering industry and is a Registered Professional Engineer in the State of California. She has worked at the City of Monrovia, City of Whittier and for a private consulting firm in the Inland Empire, Albert A. Webb Associates. Ms. Barbosa leads the Water Engineering section which is tasked with performing professional engineering work in support of the Water Division s operations, programs and projects; she manages the master planning, hydraulic analysis, prepares engineering plans and specifications for capital improvements and maintenance projects, and performs project and contract management administration. Ms. Barbosa holds a Bachelor of Science Degree in Civil Engineering and a Master of Science in Engineering Management from California Polytechnic State University, Pomona. Ms. Barbosa is active in the American Society of Civil Engineers and received an award for Outstanding Younger Civil Engineer in STEVEN SEFFER, Water Production Supervisor/Chief Plant Operator Mr. Seffer has served as the Water Production Supervisor/Chief Plant Operator for Azusa Light & Water since August Mr. Seffer has over 34 years of experience in the water utility industry and has worked at Southwest Suburban Water Co. and Azusa Valley Water Co., private investor owned water companies. Mr. Seffer leads the Water Divisions Production section which is tasked with the maintenance and operations of the water production facilities including a potable water treatment plant, wells, pumps, controls and water quality. Mr. Seffer holds certifications as a Water Treatment Operator T-5 & Water Distribution D-5 with the State of California Water Resources Control Board. Mr. Seffer is an active member with the American Water Works Association since YAREK LEHR, Assistant Director of Power Resources Mr. Lehr joined the Department in May His responsibilities include management of power and transmission resources, state and federal regulatory matters, wholesale contract administration, financial planning, and retail rate setting. Mr. Lehr spent over 28 years in the electric utility business in various resource planning, operating and contract/regulatory functions as well as in private consulting functions. Mr. Lehr s experience includes managing Los Angeles Department of Water and Power s wholesale energy trading group, serving as market operations specialist and manager of electric contracts at the CAISO (herein defined), serving as Western Electricity Coordinating Council ( WECC )/North American Electric Reliability Corporation ( NERC ) Reliability Coordinator; managing resources (including a power plant) and engineering groups at the City of Corona s Department of Water and Power; and consulting on NERC Reliability Standards and renewable resources. Mr. Lehr holds a Bachelor of Science degree in Electrical Engineering from the California State University, Northridge, and a Master of Business Administration from the University of 15

24 Redlands. Mr. Lehr is a licensed professional engineer in California (electrical) and certified WECC and NERC system operator (inactive). FEDERICO LANGIT, JR., Assistant Director of Electric Operations Mr. Langit has served as the Assistant Director of Electrical Operations since May Mr. Langit manages the engineering, construction, maintenance and operations of the electric distribution system. Mr. Langit served in various positions at Azusa Light & Water for the past 23 years, starting as Electrical Engineer, Senior Engineer and Project Manager of Azusa s second electrical substation Kirkwall Substation. Prior to joining Azusa, Mr. Langit served for 5 years as Associate Engineer, designing and constructing high voltage underground electric distribution systems for Glendale Water & Power, a medium-sized municipal utility in Southern California. Mr. Langit holds a Bachelor of Arts degree in Business and a Master in Business Administration from Webster University. Mr. Langit is also a Registered Professional Electrical Engineer in the State of California. General THE WATER SYSTEM The Water System began operation in 1900, approximately one year after the incorporation of the City. That same year the City issued bonds to finance construction of the facilities of the Water System. Deep groundwater wells were drilled and their initial use was primarily for agricultural consumption. In the latter half of the 1940s, the wells were redeveloped for domestic production. In 1993, the City acquired the outstanding shares and retired the outstanding debt of the Azusa Valley Water Company ( AVWC ), substantially increasing the Water System service territory, customer base and facilities. The Water System, being the combined and integrated water systems of the City and the AVWC, comprises the largest municipal water utility in the San Gabriel Valley. Existing Service Territory The Water System service territory includes the City and adjoining portions of surrounding cities and unincorporated areas of Los Angeles County. The Water System serves approximately 23,500 active service connections with an estimated population of 110,000. Approximately 45% of the Water System s customers are located in the City, with the remainder in the Cities of Covina, Glendora, Irwindale, West Covina, and unincorporated areas of the County. A majority of customers served outside the City are located in the Cities of Covina and West Covina. 16

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26 Major Facilities and Equipment The major facilities and equipment of the Water System consist of 11 active wells, 9 booster pump stations, 13 reservoirs (with a total capacity of 38.2 million gallons) and 1 filtration plant. The City s filtration plant, the Joseph F. Hsu Water Filtration Plant (the Hsu Water Filtration Plant ), filters 12 million gallons of water per day. Completed in 2009 at a cost of $36 million, the technology at the Hsu Water Filtration Plant pumps water through membranes in an outside-in pattern such that any particle larger than 0.04 microns is retained on the fiber surface. The Hsu Water Filtration Plant has been designed to exceed current water quality requirements, thereby enabling the City to treat San Gabriel River water, imported water from the Colorado River and water from the State Water Project. In addition, the Water System includes 251 miles of transmission and distribution mains. The distribution system is divided into four pressure zones based on the hydraulic gradient throughout the service area. The Water System also maintains fire hydrants throughout the service area. The Department maintains a program that monitors the condition of all major facilities and equipment of the Water System. Facilities and equipment are rehabilitated or replaced on a timely basis to ensure reliable service. Sources of Water The Water System relies on several sources of water supply. These are: (i) underground water, which is pumped from 11 deep wells currently in operation within the Main San Gabriel Basin, Intermediate San Gabriel Basin, and Upper San Gabriel (Canyon) Basin, with a total flow capacity of 20,118 gallons per minute); (ii) surface water from the San Gabriel River, which is filtered and treated at the Hsu Water Filtration Plant, located in north Azusa; (iii) treated and/or untreated water purchased from the Upper San Gabriel Valley Municipal Water District ( Upper San Gabriel Valley MWD ); and (iv) untreated State Water Project water purchased from the San Gabriel Valley Municipal Water District. The Water System has interconnections with other water purveyors and is able to receive from or supply water to other systems on an emergency basis. Water Rights Pursuant to the judgment and decree in the California Superior Court case titled Upper San Gabriel Valley Municipal Water District v. City of Alhambra et al., California Superior Court No , Dec. 29, 1972, as amended (the Judgment ), all of the rights of the Water System to pump ground water and to divert surface water are under the jurisdiction of the Main San Gabriel Basin Watermaster ( Watermaster ). Watermaster, a 9-member board composed of six representatives of water producers and three public water agency representatives, determines the annual amount of water that can safely be produced from the Watershed (the Operating Safe Yield ). Parties which produce in excess of their share of the Operating Safe Yield are subject to assessment by Watermaster for the purpose of purchasing replacement water to recharge the ground water basin. The Water System pays a replacement water charge that varies depending on the geographic location of the overdraft. By agreement among the City, Watermaster, and the San Gabriel Valley MWD, 40% of the City s total annual water production is considered produced within the San Gabriel Valley MWD service boundaries, and is subject to a water replacement cost of $145 per acre foot for water produced in excess of the City s water rights. The remaining 60% of the City s total annual water production is considered produced within the service boundaries of the Upper San Gabriel Valley Municipal Water District, and is subject to a water replacement cost in Fiscal Year of $673 per acre foot for water produced in excess of the water rights of AVWC, in its own capacity and as transferee of the rights of the Azusa Agricultural Water Company ( AAWC ) effective Fiscal Year

27 Rights to divert surface water are fixed and do not vary with changes in the Operating Safe Yield. Pumping rights of a producer are expressed as the percentage share of the annual Operating Safe Yield which that producer is entitled to take without being subject to assessment for purchase of replacement water. A producer which produces less than its share of the Operating Safe Yield is able to carryover its unproduced share. In a year in which the producer produces in excess of its share of the Operating Safe Yield, it may produce additional water in an amount equal to its carryover water rights without incurring an assessment for replacement water. In years in which the Watermaster declares a reduced Operating Safe Yield, the amount of water each pumper is entitled to take without assessment is reduced proportionately. See the table below entitled San Gabriel Basin Operating Safe Yield for the Operating Safe Yield since Fiscal Year , the table entitled Adjudicated Water Rights below for the diversion rights of the City and AVWC, in its own capacity and as transferee of the rights of the AAWC effective Fiscal Year , as set forth in the Judgment and such entities corresponding pumping rights, based on the Operating Safe Yield for Fiscal Year ended June 30, 2015, and the table entitled Water Production set forth under Water Production and Average Cost below for the City s overdraft and carryover amounts in the last five fiscal years. A producer which has both diversion and pumping rights is treated as an Integrated Producer. An Integrated Producer is a producer that may, at its sole option, produces its entire aggregate production right by any combination of pumping and diversion. The Water System is one of sixteen Integrated Producers designated by the Judgment. The City has designated Diversion Rights to a constant amount of water available which does not change with the variations in the Watermaster annual Operating Safe Yield determination. Of the City s water rights, 3,785 acre-feet are Diversion Rights. The following table sets forth the Operating Safe Yields since Fiscal Year Fiscal Year (ended June 30) San Gabriel Basin Operating Safe Yield Operating Safe Yield (Acre Feet) (1) , , , , , , , , , , ,000 Source: City of Azusa, Light & Water Department. (1) One acre feet (also referred to herein as AF ) is equal to the amount of water needed to cover one acre with water one foot deep or 325,829 gallons The Water System holds the City s water rights and the water rights of the AVWC (which the City purchased, as described under the Section entitled THE WATER SYSTEM General herein), in its own capacity and as transferee of the water rights of the AAWC effective Fiscal Year

28 The following table sets forth the diversion rights of the City and AVWC, as set forth in the Judgment, and the pumping rights of the respective entities, based on the Operating Safe Yield of 150,000 AF in effect through Fiscal Year ended June 30, Adjudicated Water Rights (Acre Feet Per Year) (as of June 30, 2015) Azusa AVWC Total Diversion (1) , ,785.0 Pumping (2) 2, , ,369.3 Total (3) 3, , ,154.3 Source: City of Azusa Light & Water Department. (1) Fixed diversion rights established pursuant to the Judgment. (2) Based on the respective entity s percentage share of the Operating Safe Yield, which was established by Watermaster as 150,000 AF through Fiscal Year ending June 30, (3) See the table entitled Water Production under Replacement Water herein for the City s rights to carryover water. See Drought Conditions and Financial Impacts below for a description of current drought conditions, regulatory requirements and related City actions to address the projected needs of the Water System. Replacement Water Since 1953, surface and ground water have been taken from the groundwater resources utilized by the Water System and other water purveyors in the San Gabriel Valley (the Watershed ) at a rate greater than that at which natural precipitation and runoff can replenish them. To maintain the productivity of wells in spite of this overdraft condition, the Watershed is recharged by importing water from outside sources and spreading it in basins located above the waterbearing strata of the Watershed. This replacement water or spreading water currently is provided by three local water districts: (i) the Upper San Gabriel Valley Municipal Water District, a member public agency of The Metropolitan Water District of Southern California, a metropolitan water district that supplies supplemental water at wholesale rates to its 26 member public agencies ( MWD ); (ii) the Three Valleys Municipal Water District, formerly Pomona Valley Municipal Water District, also a member public agency of MWD; and (iii) the San Gabriel Valley Municipal Water District (the San Gabriel Valley MWD ), which has a direct contract with the California Department of Water Resources for State Water Project water. San Gabriel Valley MWD was organized in 1959 by the Cities of Azusa, Alhambra, Monterey Park, and Sierra Madre and has an annual entitlement of State Water Project water of 28,800 AF with actual deliveries based on available State Water Project water. The San Gabriel Valley MWD has a pipeline that extends from the State Project Ground Water Recharge Service Connection to the Azusa Canyon Spreading Grounds. This extension provides the Water System with an additional source of ground water replenishment. San Gabriel Valley MWD has stated that despite recent developments such as record-breaking dry weather, a statewide drought declaration, relatively low levels of imported water deliveries via the State Water Project (with imported water deliveries from the State Water Project have been reduced to 20% of normal as of February 2015), and implementation of both voluntary and mandatory water usage restrictions, the San Gabriel Valley MWD has water in reserve to meet local needs for the next few years, even if the drought continues. 20

29 The City purchases replacement water from the Main San Gabriel Watermaster. During Fiscal Year ended June 30, 2014, the Water System purchased 3,995 AF of replacement water. The source of this water was the San Gabriel Valley MWD at a price of $130 per AF. The cost of replacement water increased to $145 per AF in Fiscal Year Water Production and Average Cost The following table sets forth the sources and amount of total water production of the Water System for Fiscal Years 2010 through Water Production (Acre Feet) Fiscal Year Ended June 30 AF Percent Percent Percent Percent Percent of Total AF of Total AF of Total AF of Total AF of Total Wells/Underground Water 14, % 12, % 10, % 13, % 16, % Surface Water 6, , , , , Total 20, % 19, % 20, % 21, , Adjudicated Water Rights (1) 20,419 18,103 18,302 17,611 16,228 Carryover (Overdraft) (2)(3) 978 4,759 9,072 7,149 3,209 Sources: Main San Gabriel Basin Water Master Reports and City of Azusa. (1) For Fiscal Years and , Adjudicated Water Rights include diversion and pumping rights of the City and AVWC to water from the San Gabriel Basin (equal to 15,537 AF for each fiscal year) and other water rights of the City and AVWC. Commencing Fiscal Year , amounts set forth under Adjudicated Water Rights reflect diversion and pumping rights of the City and AVWC to water from the San Gabriel Basin only. (2) Reflects production rights to be carried over to the next fiscal year and includes beneficial water purchases. If the number is positive for a year in which the carryover is realized, the amount carries forward for two years unless used. If the amount is negative, the overdraft amount must be paid by the City for the year in which the overdraft occurred. Payment amounts are used to purchase replenishment water. Replenishment costs are determined through the Watermaster and are passed on to customers in the form of a Replacement Water Cost Adjustment. Total includes consideration of water rights transferred from MillerCoors LLC ( MillerCoors ) to the City. See description of the City s water supply agreement with MillerCoors under Customers herein. (3) Reflects amount set forth in the Watermaster s Annual Report for the indicated year, which serves as the basis for carryover rights or overdraft obligations for the following year. Total water production for fiscal year ending June 30, 2014 was 20,660 AF, a decrease of 457 AF from the amount produced in the prior year. Of the total produced, 78.0%, or 16,122 AF, was produced from the deep wells, and 22.0%, or 4,538 AF, was produced at the Joseph F. Hsu Water Filtration Plant from surface water supplied by the San Gabriel River. No treated water was purchased for fiscal year ending June 30, Water production from each source has varied from year to year. Total annual production for the past five years, from 2010 through 2014, has varied from 19,343 AF to 21,117 AF. The lowest cost water source is from the San Gabriel River, which has varied from 22.0% to 48.2% of total production over the period from 2010 to From 2010 through 2014, ground water supplies varied from 51.8% to as much as 78.0% of total water produced. During the Fiscal Year ended June 30, 2014, the Water System distributed an average of MGD. Total water production for the Fiscal Year ended June 30, 2014 was 6, MG. 21

30 Drought Conditions and Financial Impacts On April 1, 2015, the Governor issued an Executive Order requiring the State Water Resources Control Board to issue regulations for implementing a 25% average state-wide reduction (from the baseline year of 2013) for urban water usage that would include a tiered system for water reduction targets by water agency ranging from 8% to 36%. Based on actual residential gallons per capita per day water consumption for the period from July through September 2014, the Water System was placed in a 20% reduction target tier. Consumption in baseline year 2013 was 7,956,453 CCF and a 20% reduction would result in a targeted reduction to 6,365,162 CCF. Pursuant to an emergency rate plan previously adopted by the City, a third tier rate was added in order to maintain revenue requirements during periods of water conservation. The City s current rate structure has been sufficient in meeting revenue requirements. However, the State s mandate of a 20% reduction in water usage from the 2013 baseline year has prompted a review of rates. The City is in the process of developing a cost of service study to help forecast appropriate revenue requirements over the next five years, which forecast will also be part of the basis for making recommendations on the magnitude and frequency of water rate adjustments. The study will include a review of existing rates to ensure that they are reflect an equitable allocation of costs, in proportion to the cost to serve the different customer classes, and may include recommendations on changes to the existing rate structure to meet all legal and regulatory requirements. Also as part of the City s drought response, on June 16, 2015, the City held a public meeting with respect to its local drought response program and, after due consideration, approved various penalties for water consumption beyond exempted levels. The penalties are assessed for the purpose of compliance with the City s mandatory water use restrictions. However, the penalties are expected to result in additional unrestricted revenues for the Water System that will be used to offset water costs and related expenditures. The penalties set forth below are effective July 1, 2015: Penalty Application Commodity Charge Drought Penalty Total Water Costs Tier 1 First 6, 25, or 50 CCF as applicable to meter size $1.007 $0.000 $1.007 Tier 1 all other usage Tier 2 all usage Tier 3 all usage Agricultural all usage after 50 CCF Source: City of Azusa Light & Water Department Customers During Fiscal Year , the Water System delivered approximately 5,999 MG of water to over 23,500 customers. Approximately 54% of such water was used for residential purposes, approximately 37% for commercial, industrial and municipal purposes, and approximately 9% for miscellaneous purposes. The City does not have wholesale customers. However, from time to time, the City leases for one fiscal year its excess water rights (being the portion of the City s adjudicated water rights in excess of the needs of the Water System) to other regulated entities, as permitted pursuant to Watermaster rule changes in The leasing of the City s excess water rights resulted in $12.2 million in the five years from Fiscal Year 2009 through Revenues derived from such leasing constitutes wholesale revenues. 22

31 The following table sets forth the volume of Water System sales by customer class and the corresponding revenues for Fiscal Years through Sale of Water Fiscal Year Ended June (5) 2011 (5) Accounts Residential... 19,848 19,894 19,978 20,182 20,450 Commercial, Industrial and Municipal... 3,186 3,204 3,124 3,118 3,145 Other (2) Total... 23,306 23,100 23,104 23,302 23,597 Volume (MG) (1) Residential... 3,057 2,966 3,079 3,262 3,234 Commercial, Industrial and Municipal... 2,010 1,978 2,035 2,199 2,206 Other (2) Total... 5,875 5,523 5,684 6,056 5,999 Revenues ($000s) Residential (3)... $ 8,933 $ 9,640 $ 9,884 $10,434 $10,324 Commercial, Industrial and Municipal (3)... 5,713 5,994 6,108 6,437 6,309 Other Retail (3) ,019 1,083 1,267 1,224 Wholesale (4)... 4, ,800 2,461 2,938 Total... $20,015 $17,170 $18,875 $20,599 $20,795 Source: Azusa Light & Water Billing Report. (1) Million Gallons (MG) = 1, hundred cubic feet or ccf. 1 acre foot = 325,829 gallons. (2) Includes contract water customer, MillerCoors. See description of the City s water supply agreement with MillerCoors under Customers herein. (3) Amounts for revenues from residential sales, commercial, industrial and municipal sales and other retail sales reflect audited sales. Differs from amounts in the Department s continuing disclosure annual reports, which were derived from the Department s billing report and do not include year-end accrued water sales. (4) Wholesale revenues in Fiscal Year 2011 were lower as a result of the City transferring certain of its water rights, in lieu of monetary payments, to AVWC to offset overproduction. (5) For Fiscal Year and , amounts reflect the calculated number of billed accounts derived from the number of service connections set forth in the Department s modified billing report. Each year thereafter reflects number of billed accounts. 23

32 The following table sets forth the ten largest customers of the Water System in terms of total water sales and total billings for the Fiscal Year ended June 30, Ten Largest Customers Fiscal Year Ended June 30, 2014 Customer Business Type Usage (ccf) Percentage of System Total Charges Percentage of System Miller Breweries West Limited (1) Food 628, % $1,068, % Ready Pac Food 269, , Azusa Unified School District Education 249, , Azusa Western Mining 176, , Azusa Greens Country Club (1) Golf 118, , City of Azusa Government 115, , Covina Valley Unified School District Education 111, , APU Foundation Education 105, , S & S Foods, LLC Food 75, , Vulcan Materials Mining 49, , Total 1,898, % $3,024, % Source: Azusa Light & Water billing system. Reflects minor methodological differences from amounts set forth in the Statistical Section of the City s Comprehensive Annual Financial Report for the Fiscal Year ended June 30, (1) Customer is subject to separate contract rate tariff. The City has entered into a Water Supply Agreement (the MillerCoors Agreement ) with MillerCoors, as successor in interest to Miller Brewing Company, which provides, among other things, for the City s delivery of water to Miller from the Canyon Basin at certain rates and the use by the City of Miller s water rights. The MillerCoors Agreement is effective through May 31, 2018, and provides Miller with the option to extend the agreement two more times for successive five-year terms. Pursuant to the MillerCoors Agreement, supplied water is derived from MillerCoor s prescriptive pumping rights which are leased to the City and the City charges Miller for the supplied water. The City also has an obligation to maintain the pipeline to Miller s Irwindale facility. Miller is required to comply with water curtailment conditions in event of emergencies and droughts. The City expects the MillerCoors Agreement to be extended beyond its current term. However, there can be no assurance that an extension will be executed or otherwise effected. Rates and Charges Water rates are developed by the Water System and approved by the City Council after a notice and public hearing process in accordance with the provisions of Proposition 218. See CONSTITUTIONAL LIMITATIONS ON TAXES, WATER RATES AND CHARGES Proposition 218 herein. The water rates of the Water System are comprised of a service charge component designed to cover a portion of the fixed costs and a commodity charge designed to cover the remaining fixed costs and all of the variable costs. The following table sets forth the rate increases for the Water System since January 1,

33 Schedule of Approved Rate Increases Since July 1, 1999 Service Charge (Percent Increase) Commodity Charge (Percent Increase) Approximate Revenue Increase Effective Date July 1, % 5.70% $ 790,000 April 4, ,000 July 21, ,000 November 1, ,000 July 1, ,000 July 1, ,242,000 July 1, ,293,000 May 1, (1) 1,300,000 Source: City of Azusa Light & Water Department. (1) Reflects third tier commodity rate effective May 1, 2014 applied to address drought conditions. The overall Water System rate increase averages to approximately 8.90%. Under a Phase III Water Shortage, rates were adjusted from a two-tier structure to a three-tier structure. Rates increased by 0.0% in the first tier, 9.0% in the second tier and 55.2% (relative to the second tier) in the third tier Effective October 1992, the City Council approved a surcharge which added a cost adjustment factor called the Replacement Water Cost Adjustment Factor (the RWCAF ). The RWCAF was designed to address water cost fluctuations caused by variation in Operating Safe Yield and the costs of replacement water. The Director of Utilities has the authority to administratively impose the RWCAF at the outset of each fiscal year to compensate for revenue deficiencies associated with replacement water costs incurred during the prior fiscal year. However, due to lower consumption levels, reduced need to purchase water and water rights leasing activities, RWCAF has not been used since The following table shows RWCAF adjustments since Schedule of RWCAF Charges Since 2005 Effective or Adopted Date RWCAF Cost Per ccf Approximate Revenue June 27, 2005 $ $0 July 1, 2006 July 1, 2007 $ $ $454,331 $1,186,713 October 1, 2007 $ $196,000 December 1, 2007 February 1, 2008 $ $ $222,800 $440,680 April 1, 2008 $ $255,617 June 1, 2008 July 1, 2008 $ $ $109,950 $491,000 July 1, 2009 July 1, 2010 July 1, 2011 $ $ $ $431,000 $0 $0 July 1, 2012 $ $0 July 1, 2013 $ $0 July 1, 2014 $ $0 Source: City of Azusa Light & Water Department 25

34 Residential, commercial and industrial customers within the City are billed monthly; residential, commercial and industrial customers outside of the City are billed bi-monthly. Bills are due and payable on presentation and become delinquent after 20 days unpaid. After a water bill is delinquent, following appropriate procedures, the Water System may disconnect the water service. Before service is reinstated, the customer must bring the entire bill current and pay a reconnection charge. As the June 30, 2014, the Fiscal Year delinquency rate for accounts over 30 days past due was 23% and the disconnection rate was 2%. Most disconnected customers paid to have service reconnected. During Fiscal Year , write-offs were 0.29% of total billed amounts. Water System Employees A staff of 26.3 fulltime equivalent employees is currently employed by the City to operate and maintain the Water System. Additional employees perform utility billing, customer services and central administrative service functions; the cost of these additional employees is shared with the Electric System. No significant changes to staffing levels are anticipated for fiscal year All Water System employees are represented by one of the following employee associations: IBEW, AMMA and Azusa City Employees Association ( ACEA ). The employee associations represent the employees in all matters pertaining to wages, benefits and working conditions. The current arrangements with IBEW, which is in the form of a memorandum of understanding, will continue in effect until July 31, The City is currently in negotiations with AMMA and ACEA. The employees represented by AMMA and ACEA will continue to operate under the terms of their existing memoranda of understanding until new agreements are executed. Water Treatment and Quality Control The United States Environmental Protection Agency ( EPA ) and the California Department of Public Health ( State Department of Public Health ) prescribe regulations that limit the amount of certain contaminants in water provided by public water systems. The regulations of the State Department of Public Health also establish limits for contaminants in bottled water that must provide the same protection for public health. Water supplied by the Water System meets or exceeds all existing chemical and bacteriological quality standards relating to domestic water supply as established by State and Federal water quality regulations. A water quality review conducted by the City in connection with its 2014 Consumer Confidence Report (the 2014 Confidence Report ) indicated that tap water from the Water System surpasses both State and federal standards for quality and safety. However, one of the City s wells has been inactive due to high nitrate levels and the presence of perchloroethylene ( PCE ) and certain contaminants have been found in another of the City s wells, as described below. Volatile Organic Compounds. In 1979, studies revealed that portions of the Main San Gabriel Basin had been contaminated by volatile organic compounds ( VOCs ), principal among which are trichloroethylene ( TCE ) and PCE. In 1984, the EPA placed the Main San Gabriel Basin on its National Priorities List. Contamination by VOCs has necessitated the closure of numerous wells and the blending or treatment of water from other wells in order to meet State and Federal drinking water requirements. Because the VOC contamination is located in the Main San Gabriel Basin, downstream from the wells of the Water System, the VOC contamination poses no threat to the Water System wells. The Upper and Intermediate San Gabriel Basins remain free of VOC contamination. VOC contamination is still considered a significant issue in the Main San Gabriel Basin. However, it is not a significant issue for the Water System due, in part, to the City s location upstream of the ground water gradient. 26

35 Status of Wells. The Water System includes 12 wells, one of which is inactive. According to the 2014 Confidence Report, no chemicals were detected in ten of the active wells. The 2014 Confidence Report stated that the presence of nitrate, perchlorate and PCE continued to be detected in Well No. 10, which produces 3.25 MGD and is the fourth largest producer of groundwater supplies of the 11 wells of the Water System. The level of nitrate contamination at Well No. 10 has been measured at up to 55 parts per million ( ppm ). The State Department of Health ( DOHS ) maximum contaminant level for nitrates is 45 ppm, and the Water System monitors the nitrate level regularly. A sampling from Well No. 10 conducted in connection with the 2014 Confidence Report showed a reading of 7.6 parts per billion ( ppb ) for perchlorate. The DOHS maximum contaminant level for perchlorate is 6 ppb. Water from Well No. 10 is blended with other sources, reducing perchlorates to lower levels before being piped to customers. The City notifies DOHS of compliance with its guidelines for monitoring and review. Well No. 10 is currently an approved source of drinking water; DOHS has not required that operation at Well No. 10 be limited. As of December 1, 2014 the nitrate level in Well No. 10 is 53 ppm and the PCE level is 0.82 ppb. Raw Surface Water Supply. The Water System obtains its raw surface water supply from a diversion at the San Gabriel Dam Reservoir. This water is filtered and disinfected at the Hsu Water Filtration Plant. Pursuant to a memorandum of understanding, protection of the surface water from unauthorized human contact is the responsibility of the Los Angeles County Department of Public Works (the DPW ), which operates the impoundments of the San Gabriel River. In addition, the Los Angeles County Sheriff patrols access points to the surface supply. The Water System is obligated under the Surface Water Treatment Rule to perform a watershed assessment every 5 years with regard to potential contamination due to unauthorized human contact. The utility has commissioned an update of the 2010 Watershed Sanitary Survey scheduled for completion in late Water System Master Plan In 1994, the City developed a Water System Master Plan to design an integration process along with the needed system improvements or modifications necessary to integrate the Water System with that of AVWC s water system. Integration was completed in 1998, and in 2000 and in 2005 the City updated its Water System Master Plan to guide Water System maintenance and capital improvements for the ensuing years. The City has commissioned an update of the Water System Master Plan scheduled for completion in late The 2015 update to the Water System Master Plan will include demands added to the Water System that have arisen since the 2005, update the Water System Hydraulic Model using updated software, and account for new water infrastructure. In addition, the 2015 update to the Water System Master Plan will include a five year list of potential Water System upgrades or replacements in order of priority. It is anticipated that the projects will include installation of a blend line for the Water Treatment Plant, replacement of one mile of pipeline within the distribution system, rehabilitation of existing Reservoirs and identification of potential interconnections for additional sources of water in the event of an emergency. Urban Water Management Plan Pursuant to the Urban Water Management Planning Act (Act), the Water System develops water management plans to achieve conservation and efficient use of water (the Urban Water Management Plan ) every five years. The latest version of the Urban Water Management Plan was completed in 2011 and the 2016 update is scheduled to be completed by the State deadline. As part of the Water System s past and current sustainability goals, it is implementing improvements and programs to achieve 20% conservation by 2020 which it believes it already meets or exceeds. 27

36 Based on the current capacity of the Water System s supply infrastructure, the Light & Water Department expects to meet the needs of its water customers through 2035 with an annual supply of approximately 4,000 AF of imported water, 24,350 AF of groundwater and 10,100 AF of surface water. In addition, the Water System s supply reliability in the near future is expected to increase through continued upgrades to its groundwater facilities, expansion of the Hsu Filtration Plant from 12 to 16 MGD, when needed, and continued access to imported water. Total annual water production for in Fiscal Year 2014 was approximately 20,660 AF. Capital Requirements The capital requirements for the Water System for the next five years is expected to aggregate approximately $11.1 million. It is expected that these costs will be funded primarily from Net Revenues. Use of Water System revenues to pay for capital improvements is permitted only after paying Operation and Maintenance Expenses and Parity Obligation Debt Service, which includes Water Payments for the 2015 Bonds. The following table lists the expected yearly capital requirements of the Water System over the next five Fiscal Years. Transfers to the General Fund of the City Projected Capital Requirements Fiscal Year Amounts 2015 $1,600, ,000, ,500, ,500, ,500,000 Total $11,100,000 Source: City of Azusa. Pursuant to Resolution No. 04-C38 adopted by the City Council in May 2004, the Water System annually contributes 2% of its retail sales revenue to the City s General Fund in the form of franchise fees. The transfers are intended to compensate the City for use of the pubic rights-of-way, public roadways and certain other public improvements in furtherance of providing water service. The Water System also transfers the interest earned on the Water Fund cash reserves to the General Fund if the Water Fund meets a net income test for the fiscal year. For the fiscal year ended June 30, 2014, the Water System transferred $373,842 as Franchise Fees. Under the 2012 Indenture and the Indenture, such transfers may be made only from Net Revenues which exist following payment of Operation and Maintenance Expenses and Parity Obligation Service, which includes principal of and interest on the 2015 Bonds. See DESCRIPTION OF THE 2015 BONDS herein. In addition, for Fiscal Year , $115,000 interest income was transferred to the General Fund. For a description of certain limitations on fees for service or regulatory activity applicable to the Water System, see CONSTITUTIONAL LIMITATIONS ON TAXES, WATER RATES AND CHARGES herein. 28

37 Insurance The City is self-insured for workers' compensation and general liability claims arising in the ordinary course of City operations. The City is a member of the Independent Cities Risk Management Authority for general liability insurance coverage in excess of $500,000 up to a maximum of $5,000,000 per claim and for coverage of workers' compensation claims in excess of $350,000 up to a maximum of $5,000,000 per claim. In addition the City also purchased excess liability insurance of $15,000,000 in excess of the $5,000,000 and excess worker's compensation insurance of $95,000,000 in excess of $5,000,000. For the past three years, no settlements or claims payments have exceeded the amount of the applicable insurance coverage. Additional losses may result from matters pending before the City. However, the resolution of such matters is not expected to have a material adverse effect on the financial condition of the Water System. See Note 10 to the Audited Financial Statements of the City as of June 30, 2014 attached hereto as Appendix C. Pension Benefits California Public Employees Retirement System. The City contracts with, and contributes to, the California Public Employees Retirement System ( PERS ), an agent multiple-employer public employee defined benefit pension plan, for certain defined pension benefits. PERS provides retirement and disability benefits, annual cost-of-living adjustments and death benefits to plan members and beneficiaries. PERS acts as a common investment and administrative agent for participating public entities within the State of California. Copies of PERS annual financial report may be obtained from their executive office: 400 P Street, Sacramento, CA Such information is not incorporated herein by reference. See Note 6 to the Audited Financial Statements of the City as of June 30, 2014 attached hereto as Appendix C. City safety employees and City non-safety employees participating in PERS are required to contribute 9% and 7%, respectively, of their annual covered salary. The City has historically made the entire contribution required of City employees on their behalf and for their account. Benefit provisions and all other requirements are established by State statutes and City contracts with employee bargaining groups. The City s Water System includes only non-safety employees; all references hereto to the City s PERS plan relate to the City s miscellaneous plan only. The City s contributions to the PERS plan include the employer-paid member contribution described above and the actuarially determined annual required contribution ( ARC ), which fluctuates each year based on an annual actuarial plan valuation. The ARC is calculated using the entry age actuarial cost method and consists of two components: the normal cost, which represents the annual cost associated with one year of service accrual, and the amortized amount of the accrued liability (the accrued liability ), which represents the current value of the benefit for all credited past service of current members. Aggregate pension plan costs are based on a number of assumptions about the future. The assumptions consist of demographic assumptions, including the percentage of employees that will terminate, die, become disabled and retire in each future year, and economic assumptions, including future salary increases for each active employee, future returns on investments at PERS for each year into the future until the last dollar is paid to current members in the City s plan. The actuarial valuation of the plan as of June 30, 2013, the most recent actuarial valuation provided by PERS (the 2013 PERS Actuarial Valuation ) used the entry age normal cost method, amortized pension costs based on a level percent of payroll and used the market value to value assets of the plan. The 2013 PERS Actuarial Valuation also included a discount rate of 7.50% (net of 29

38 administrative expenses), projected salary increases of 3.30% to 14.20% (depending on age, service, and type of employment), an inflation rate of 2.75%, a payroll growth of 3.00% and an individual salary growth that is based on a merit scale varying by duration of employment coupled with an assumed annual inflation growth of 2.75% and an annual production growth of 0.25%. Initial unfunded liabilities are amortized over a closed period that depends on the plan s date of entry into CalPERS. Subsequent plan amendments are amortized as a level percentage of pay over a closed 20-year period. Pursuant to the PERS Board of Administration action on April 17, 2013, gains and losses that occur in the operation of the plan are amortized over a 30-year period pursuant to PERS direct rate smoothing policy with a 5-year ramp up/ramp down. If the plan s accrued liability exceeds the actuarial value of plan assets, then the amortization payment on the total unfunded liability may not be lower than the payment calculated over a 30-year amortization period. Also, beginning with the June 30, 2013 valuations that set the rates, PERS no longer uses an actuarial value of assets. There is a lag between the point in time at which the actuary completes the actuarial valuation and the date that the contribution rates calculated in the valuation go into effect. This lag is typically two years. The 2013 PERS Actuarial Valuation sets forth the minimum employer contribution rate for Fiscal Year , which is % of annual covered payroll for non-safety employees, exclusive of cost sharing arrangements between the City and its employees. On January 1, 2013, the Public Employees Pension Reform Act of 2013 ( PEPRA ) took effect. The impact of the PEPRA changes are included in the rates and the benefit provision listings of the June 30, 2013 valuation for the rates. The City has included the minimum employer contribution rate for non-safety employees for Fiscal Year in its annual budget. The minimum employer contribution rate for non-safety employees for Fiscal Years and were % and %, respectively. Based on the 2013 PERS Actuarial Valuation and various estimates and assumptions set forth therein, including the estimate of the investment return for Fiscal Year (being 18%) and the impact of the actuarial assumptions adopted by the PERS Board in February 2014 that will impact employer rates for the first time in Fiscal Year , the projected minimum employer contribution rate for Fiscal Year for non-safety employees is 17.6%. Among other things, the projected minimum employer contribution rate assumes that there are no future contract amendments and no liability gains or losses (e.g., larger than expected pay increases, more retirements than currently expected). Under GASB 27, an employer reports an annual pension cost ( APC ) equal to the annual required contribution ( ARC ) plus an adjustment for the cumulative difference between the APC and the employer s actual plan contributions for the year. The cumulative difference is called the net pension obligation ( NPO ). The City has made contributions to the plan for non-safety employees equaling at least 100% of the ARC. Because the City pays the entire ARC each year, by definition, its NPO at the end of each year is $0 as of June 30, Since GASB 68 replaces GASB 27, for Fiscal Year , the APC is replaced by the actuarially determined contribution ( ADC ). The ADC for July 1, 2015 to June 30, 2016 is % percent of payroll. In order to calculate the dollar value of the ADC for inclusion in financial statements prepared as of June 30, 2016, this contribution rate, less any employee cost sharing, as modified by any amendments for the year, would be multiplied by the payroll of covered employees that was actually paid during the period July 1, 2015 to June 30, For more information on the City s pension plan and funding levels, see Note 6 to the financial statements attached to this Official Statement as Appendix C. In 2014, PERS completed a 2-year asset liability management study incorporating actuarial assumptions and strategic asset allocation. On February 19, 2014 the PERS Board of Administration adopted changes to its asset allocation that will reduce the expected volatility of returns, which is expected to have a long-term blended return that continues to support a discount rate assumption of 7.5 percent. The Board of Administration also approved several changes to the demographic assumptions to 30

39 more closely align the assumptions with actual experience, including an increase in the life expectancies of the PERS membership. The new actuarial assumptions will be used to set the Fiscal Year contribution rates. The increase in liability due to new actuarial assumptions will be calculated in the actuarial valuation as of June 30, 2014 and will be amortized over a 20-year period with a 5-year rampup/ramp-down in accordance with PERS policy. The table below sets forth the APC, percentage of APC contributed and NPO for Fiscal Years through and the estimated amounts for Fiscal Year PERS ANNUAL PENSION COSTS Miscellaneous Plan Fiscal Years through ($ in thousands) Fiscal Year Annual Pension Cost (1) Water System Portion % of Annual Pension Cost Contributed Net Pension Obligation $2,725 $ % $ , , , (2) N/A (3) Source: City of Azusa, California Comprehensive Annual Financial Report for Fiscal Years through ; City approved Budget for Fiscal Years and See Appendix C Audited Financial Statements of the City as of June 30, 2014 attached to this Official Statement. (1) Includes City contribution and employer paid member contributions. (2) Projected. (3) To be determined by PERS actuary. 31

40 The table below sets forth the PERS schedule of funding progress for Fiscal Years through PERS SCHEDULE OF FUNDING PROGRESS Miscellaneous Plan Fiscal Years through ($ in thousands) Valuation Date (June 30) Entry Age Normal Accrued Liability Actuarial Value of Assets (1) Market Value of Assets Unfunded Liability (Excess Assets) Funded Status Actuarial Value of Assets (1) Market Value of Assets Annual Covered Payroll UAAL as a Percentage of Payroll 2009 $87,949 $78,137 $56,988 $ 9, % 64.8% $15, % ,158 82,653 64,819 10, , ,812 88,006 78,336 12, , ,399 (2) 92,963 77,673 8, , (1) 112,172 86,313 86,313 25, , (3) Source: California Public Employee s Retirement System Actuarial Reports and the City of Azusa Comprehensive Annual Financial Report for the respective years. (1) Beginning with the 2013 PERS Actuarial Valuation, the actuarial value of assets equals the market value of assets in accordance with the PERS direct rate smoothing policy described above. (2) Reflects revised accrued liability reported by CalPERS subsequent to issuance of the City of Azusa Comprehensive Annual Financial Report, which reflects an accrued liability of $101,785. (3) The large increase in unfunded liability is primarily due to actuarial assumptions adopted by CalPERS such as a lower rate of return and the impact of the new amortization and rate smoothing policy adopted in April This new policy will pay for all gains and losses over a fixed 30-year period with the increases or decreases in the rate spread directly over a 5-year period. The Water System s share of the PERS costs fluctuates from year to year, depending on the number of Water System employees included in PERS. The Water System s full-time employees are covered by PERS. Pension costs are funded by monthly contributions to PERS by the City, with a portion thereof allocated to the Water System. For Fiscal Year , the Water System s proportionate share to fully fund the City s contribution to PERS was $309,600, and for Fiscal Years and such share is projected to be $324,700 and $356,400, respectively. As set forth in the 2013 PERS Actuarial Valuation, assuming that the 7.5% investment rate of return is achieved from Fiscal Years through , the City s pension costs are expected to increase due to, among other things, the increase in unfunded liability as a result of increased retirement costs, as offset by PERS investment gains over the smoothing period, the greater longevity of plan members and generally higher than expected actual rates of return on investments. The City is exploring various options to address its pension costs, including the potential for negotiating additional employee contributions and the creation of a new tier of reduced pension benefits of new employees. If the City is unsuccessful in attaining such cost reductions, the City may make additional operations reductions, which may include furloughs and layoffs. Public Agency Retirement System. Defined Contribution Pension Plan. The City contributes to the Public Agency Retirement System ( PARS ), a defined contribution pension plan provided and administered by the Public Agency Retirement System Alternate Retirement System Plan (the PARS Plan ). The PARS Plan was established by City ordinance and benefits thereunder depend solely on amounts contributed to the PARS Plan plus investment earnings. Federal legislation requires contribution of at least 7.5% to a retirement 32

41 plan, 3.75% of which is contributed by each of the City and the applicable employee pursuant to a 1992 agreement. Under the PARS Plan, normal retirement age is 60 years of age. PARS Plan assets are primarily invested in money market funds. The City s contributions for each employee and the interest thereon are fully vested immediately. There is no actuarial accrued liability attributable to past years employment. For the year ended June 30, 2014, total payroll for the City was $28,532,500, the covered payroll for employees in the PARS Plan was $436,092 and the employer and the employees each contributed an amount equal to $16,354. For the year ended June 30, 2013, total payroll for the City was $27,772,786, the covered payroll for employees in the PARS Plan was $467,695 and the employer and the employees each contributed an amount equal to $17,539. For the year ended June 30, 2012, total payroll for the City was $30,008,893, the covered payroll for employees in the PARS Plan was $600,803 and the employer and the employees each contributed an amount equal to $17,222. Retirement Enhancement Plan. The City also contributes to the PARS Retirement Enhancement Plan (the PARS Enhancement Plan ). The PARS Enhancement Plan provides pension benefits to approximately 116 eligible covered positions in the International Brotherhood of Electric Workers ( IBEW ), Azusa Middle Management Association ( AMMA ) and Executive Management (Contract) The plan is administered by Phase II Systems, PARS Trust Administration. The City and the affected employees are required to contribute the following percentage of annual covered salary in accordance with certain agreements approved in 2007, as set forth below: Covered Positions Employer Contribution Employee Contribution IBEW 3.59% 2.00% SEIU AMMA Executive Management Water System Share of PARS Plan and Retirement Enhancement Plan. The Water System s share of the PARS Plan and Retirement Enhancement Plan costs depends on the number of Water System employees included in the Retirement Enhancement Plan. For Fiscal Year , the Water System s proportionate share to of Retirement Enhancement Plan costs was $65,399, and for Fiscal Year such share is estimated to be $73,420. Other Post-Employment Benefits The City provides post-employment health care benefits to its retirees. To be eligible for benefits, an employee must qualify for retirement under the City s retirement plans. The benefits provided to retired employees are beyond those provided by their pension plans. The plan provisions vary based on the retiree s bargaining unit. Pursuant to contracts between the City and its employee associations, the City provides other postemployment benefits ( OPEB ) through a single-employer defined benefit healthcare plan (the Healthcare Plan ) by contributing approximately one-half of all premiums charged under the health benefit plan for all eligible employees and qualified family members. A separate financial report is not available for the plan. See Note 7 to the financial statements attached to this Official Statement as Appendix C. As of June 30, 2014, there were 327 active employees in the Healthcare Plan. The City currently funds the Healthcare Plan on a pay-as-you-go basis. The City contributed $585,919 during Fiscal Year 33

42 and expects to contribute $621,140 for Fiscal Year The City s contribution rate for Fiscal Year of 21.06% is based on the ARC of $2.83 million, an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis is projected to cover the annual normal cost and the amortization of unfunded actuarial liabilities (or funding excess) over a thirty year period. In connection with GASB 45 compliance, the City has calculated its net OPEB obligation ( NOPEBO ) as of June 30, 2014 to be approximately $10.38 million. The NOPEBO is the cumulative difference between the City s annual OPEB cost and the City s contributions to OPEB in a particular year, including the OPEB liability or asset at transition, if any, and subject to certain adjustments. Annual OPEB cost is equal to (i) the ARC for OPEB (determined to be $2.83 million for Fiscal Year ), (b) one year s interest on the NOPEBO from prior years ($82,468 for purposes of the June 30, 2014 calculation), and (c) an adjustment to the ARC for OPEB to offset the effect of actuarial amortization of past under- or over-contributions (-$315,546 for purposes of the June 30, 2014 calculation). The most recent actuarial valuation of the City s Healthcare Plan was prepared as of June 30, 2013 (the 2013 OPEB Valuation ) for the purpose of determining the City s annual cost in accordance with GASB 45. The valuation reflected a projected unit credit method and included an assumed investment rate of return of 4.00%, which is a blended rate of the expected long-term investment return on plan assets and on the City s own investments calculated based on the funded level of the plan at the valuation date, and annual healthcare cost trend rate of 11% beginning July 1, 2012, and reduced by decrements to an ultimate rate of 5% after six years. The actuarial value of assets is set to equal the reported market value of assets. The unfunded liability is being amortized as a level percentage of payroll on an open basis. The remaining amortization period at June 30, 2014, was twenty-seven years. In recognizing and addressing the increasing costs of OPEB, the City is considering various options to reduce and prefund its liabilities. The table below sets forth the OPEB schedule of funding progress since Fiscal Year OPEB SCHEDULE OF FUNDING PROGRESS Fiscal Years through ($ in thousands) Valuation Date (June 30) (1) Accrued Liability Actuarial Value of Assets Unfunded Liability Funded Ratio Covered Payroll UAAL as a Percentage of Payroll Interest Rate 2009 $25,445,000 $ 0 $25,445,000 0% $19,966, % 3.50% ,553, ,553, ,576, (2) 32,567, ,567, ,902, Source: City of Azusa Retiree Healthcare Plan June 30, 2013 GASB 45 Actuarial Valuation Final Results and the City of Azusa Comprehensive Annual Financial Report for the respective years. (1) No valuations were prepared for Fiscal Years and (2) The change in liability and UAAL as a percentage of payroll is primarily attributable to changes in actuarial assumptions relating to increasing medical cost trends, higher mortality age and a larger implied subsidy (being the retirees excess of claims over premiums). The Water System s share of the OPEB costs fluctuates from year to year, depending on the number of Water System employees included in OPEB. The Water System s full-time employees are covered by OPEB. For Fiscal Year , the Water System s proportionate share to fully fund the City s contribution to OPEB was $13,612, and for Fiscal Year such share is projected to be $14,

43 Historical Operating Results and Debt Service Coverage of Water System Obligations The following table sets forth the Water System operating results, including debt service coverage, for Fiscal Years Historical Operating Results and Debt Service Coverage of Water System Obligations Fiscal Year Ended June Revenues: Sales and service charges (1) $16,092,669 $17,097,694 $18,224,246 $18,967,285 $18,702,660 Water System development fees 51,461 10,305 37, , ,832 Water rights lease revenue (2) 4,448, ,478 1,800,000 2,461,300 2,937,750 Interdepartmental charges 43,603 39, ,914 36, ,244 Miscellaneous 2,075-13,523-2,800 Interest Revenue 576, , , , ,126 Total Revenues $21,214,733 $18,326,599 $20,537,532 $21,761,836 $22,025,412 Expenses: Cost of sales and service $ 3,091,155 $ 3,060,276 $ 3,229,268 $ 2,666,906 $ 2,222,934 Source of supply 1,005, , , , ,341 Pumping 43,946 32,726 48,117 52,312 48,680 Transmission/collection 1,560,995 1,593,543 1,750,084 1,681,967 1,725,524 Treatment 456, , , , ,180 Administration and general 6,201,717 6,335,406 6,370,992 6,364,527 6,339,599 Total Expenses $12,359,569 $12,413,196 $12,835,963 $12,206,073 $11,743,258 Net Revenues $ 8,855,164 $ 5,913,403 $ 7,701,569 $ 9,555,763 $10,282,154 Debt Service $ 4,507,433 $ 4,505,921 $ 4,505,671 $ 3,139,064 $ 3,958,038 Coverage General Fund Transfer $ 316,101 $ 341,033 $ 353,474 $ 374,184 $ 373,842 Funds Available after Debt Service and General Fund Transfer $ 4,031,631 $ 1,066,449 $ 2,842,424 $ 6,042,515 $ 5,950,275 City of Azusa, Light & Water Department; City of Azusa California Comprehensive Annual Financial Report for Fiscal Year (1) Includes retail sales and service charges. Excludes Water System development fees, which are reflected in the subsequent line item. Reflects the impact of continued water conservation efforts. (2) The Water Utility, may in its discretion, lease certain water rights to third parties. The amount of water rights leased from year to year depends in part on the amount of water the Utility Board elects to carry forward into the subsequent year, which is in turn dependent upon the San Gabriel Basin Operating Safe Yield. In 2011, the Water Utility elected to lease a smaller portion of its water rights to enable the carry forward of a larger amount of water. The Utility Board previously caused the loan of approximately $1.2 million of available moneys from the Water Fund to the then-existing Azusa Redevelopment Agency ( RDA ). The RDA was dissolved effective October 1, 2011 and the State Department of Finance determined that the loans were not enforceable obligations of the RDA. The Utility Board appealed the determination and litigation was instituted. In Fiscal Year , pending resolution of the litigation and any subsequent appeals or actions relating thereto, the loan amounts were accounted for in the Water Fund financials as an extraordinary loss. See Appendix A The City of Azusa Assessed Valuation and Tax Collections. Rejection of the loans, if any, will not materially impact the City s ability to pay debt service on the 2015 Bonds. 35

44 Debt Service Requirements The following table sets forth the annual debt service schedule for the 2015 Bonds and outstanding Parity Obligations (consisting of the 2012 Bonds assuming the issuance of the 2015 Bonds and the refinancing of the 2006 Bonds as described herein), which are payable from Net Revenues on a parity with the 2015 Bonds, assuming no redemption other than mandatory sinking account redemptions. Outstanding Parity Obligations (1) 2015 Bonds Bond Year Ending July 1 Principal Interest Principal Interest Total 2016 $735,000 $271,950 $1,150,000 $1,709,839 $3,866, , ,900 1,185,000 1,932,088 4,121, , ,250 1,245,000 1,884,688 4,136, , ,050 1,310,000 1,822,438 4,138, , ,900 1,375,000 1,756,938 4,136, , ,500 1,445,000 1,688,188 4,134, ,000 93,250 1,520,000 1,615,938 4,139, ,000 47,750 1,600,000 1,539,938 4,142, ,680,000 1,459,938 3,139, ,765,000 1,375,938 3,140, ,855,000 1,287,688 3,142, ,930,000 1,194,938 3,124, ,990,000 1,137,038 3,127, ,050,000 1,077,338 3,127, ,135,000 1,015,838 3,150, ,225, ,088 3,134, ,315, ,775 3,151, ,415, ,025 3,136, ,505, ,500 3,141, ,595, ,825 3,143, ,695, ,000 3,153, ,805, ,200 3,155, ,915, ,000 3,153, ,035, ,400 3,156,400 Total $6,645,000 $1,392,550 $47,740,000 $27,318,576 $83,096,126 (1) Reflects debt service on the 2012 Bonds only (i.e., excludes debt service on the 2006 Bonds), assuming the issuance of the 2015 Bonds and completion of the refinancing described under Plan of Finance herein. 36

45 Projected Coverage of Water Systems Obligations Debt Service The following table is a summary of the projected operating results of the Water System for the five Fiscal Years shown. The financial forecast represents the City s estimate of projected financial results based upon its judgment of the most probable occurrence of certain important future events. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material. Fiscal Year Ended June (1) Revenues: Sales and service charges (2) $19,182,478 $17,915,221 $17,988,219 $18,478,937 $18,989,250 Water rights lease revenue (3) 3,072,245 2,500,000 2,000,000 2,000,000 2,000,000 Interdepartmental charges 126, , , , ,073 Miscellaneous 12,480 20,000 20,000 20,000 20,000 Interest revenue 125, , , , ,000 Total Revenues $22,518,571 $20,661,315 $20,241,588 $20,734,632 $21,247,323 Expenses: Cost of sales and service $2,901,238 $2,988,275 $3,077,923 $3,170,261 $3,265,369 Source of supply (4) 3,011,268 1,022,036 1,052,697 1,084,277 1,116,806 Pumping 46,108 47,491 48,916 50,383 51,895 Transmission/collection 1,695,945 1,746,823 1,799,228 1,853,205 1,908,801 Treatment 463, , , , ,848 Administration and general 6,449,387 6,642,869 6,842,155 7,047,420 7,258,842 Total Expenses (5) $14,567,601 $12,925,059 $13,312,811 $13,712,195 $14,123,561 Net Revenues $7,950,970 $7,736,256 $6,928,777 $7,022,437 $7,123,762 Debt Service (6) $4,643,263 $4,098,414 $4,095,263 $4,086,963 $4,090,213 Coverage General Fund Transfer (7) $357,834 $303,040 $340,158 $347,812 $355,638 Funds Available after Debt Service and General Fund Transfer $2,949,874 $3,334,802 $2,493,357 $2,587,662 $2,677,912 Source: City of Azusa, Light & Water Department. (1) Actual through March 2015 and estimated through June 30, 2015 (2) Assumes the following: 20% reduction in sales in Fiscal Year , offset by estimated drought penalty revenues; beginning in Fiscal Year and annually thereafter, 2.25% increase in consumption for residential and commercial growth; 10% rate increase as of January 1, 2016; water rights leasing revenue in Fiscal Year of $3,072,245, projected water rights leasing in Fiscal Year of $2.5 million and $2.0 million each year thereafter. (3) The Water Utility, may in its discretion lease certain water rights to third parties. The amount of water rights leased from year to year depends in part on the amount of water the Water Utility elects to carry forward into the subsequent year, which is in turn dependent upon the San Gabriel Basin Operating Safe Yield. (4) Fiscal Year Source of supply expense includes $2,019,000 one-time purchase of 3000AF of water. (5) Adjustment factor of 3.0% annually applied to expenses. Fiscal Year projections are lower than budgeted due to exclusion of budget contingencies. Excludes interest expense and amortization, depreciation and transfers to the City s General Fund. (6) (7) Preliminary, subject to change. Includes projected debt service on the 2015 Bonds and defeasance of the 2006 Bonds. Reflects the Water System s annual contribution of 2% of its retail sales revenue to the City s General Fund in the form of franchise fees. See The Water System Transfers to the General Fund of the City herein. 37

46 Projected Cash Reserves of Water System Water System sales and expenses are monitored on a continuing basis. Projections of future revenues, customers, and water consumption are made annually and are revised when appropriate. Rates are reviewed annually and are recommended for adjustment as needed to meet budgetary, capital addition requirements, debt service obligations, and the Utility Board s reserve policy goals, which is currently $19 million. As of June 30, 2014, the Water System s unrestricted cash and investments balance was approximately $21.7 million. The following table is a summary of the projected unrestricted cash and investment balances of the Water System for the five fiscal years shown. Fiscal Year Ended June Cash and investments $23,012,056 $24,346,858 $24,340,215 $24,427,877 $24,605,788 Days cash on hand Source: City of Azusa, Light & Water Department. Water System Litigation There is no controversy of any nature now pending against the City or, to the knowledge of its respective officers, threatened, seeking to restrain or enjoin the issuance, sale, execution or delivery of the 2015 Bonds, or in any way contesting or affecting the validity of the 2015 Bonds, or the authorizations or any proceedings of the City taken with respect to the issuance or sale thereof, or the pledge or application of any moneys or security provided for the payment of the 2015 Bonds, or the use of the proceeds of the 2015 Bonds. There are no pending lawsuits that in the opinion of the City Attorney challenge the validity of the above issues, the corporate existence of the City, or the title of the officers to their respective offices. In this review, attention has been given to not only litigation pending against the City, but also against the City s Light & Water Department. In addition, there are no claims or lawsuits with any potential material loss pending against the Water Fund for construction claims or other alleged liabilities arising during the ordinary course of operations of the Water System. From time to time, there are lawsuits and other claims against the City with respect to the Water System incidental to the ordinary course of operations of the Water System. Such lawsuits and claims are largely covered by the City s self-insurance program and are not expected to result in judgments or settlements which, in the aggregate, would have a material adverse effect on the financial position of the Water Fund. RISK FACTORS The ability of the City to pay principal of and interest on the 2015 Bonds depends primarily upon the receipt by the City of Net Revenues. Some of the events which could prevent the City from receiving a sufficient amount of Net Revenues to enable it to pay the principal of and interest on the 2015 Bonds are summarized below. The following description of risks is not intended to be an exhaustive list of the risks associated with the purchase of the 2015 Bonds and the order of the risks set forth below does not necessarily reflect the relative importance of the various risks. 38

47 Limited Obligations The obligation of the City to pay debt service on the 2015 Bonds is a limited obligation of the City and is 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. The obligation of the City to pay debt service on the 2015 Bonds 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 Indenture to pay debt service on the 2015 Bonds solely from Net Revenues. Factors that can adversely affect the availability of Net Revenues include, among other matters, insufficient supply of water, general and local economic conditions, and changes in law and government regulations (including initiatives and moratoriums on growth). The realization of future Net Revenues is also subject to, among other things, the capabilities of management of the City, the ability of the City to provide water service to its customers and the ability of the City to establish, maintain and collect rates and charges sufficient to pay debt service on the 2015 Bonds. Net Revenues and Expenditures Actual operation and maintenance expenses of the Water System may be greater or less than currently projected. Factors such as changes in technology, regulatory standards, increased costs of material, energy, labor and administration can substantially affect Water System expenses. Although the City has covenanted to fix rates and charges in amounts sufficient to pay debt service on the 2015 Bonds, there can be no assurance that such amounts will be collected. Increases in water rates could result in a decrease in demand for Water System usage. Water System Demand There can be no assurance that the demand for water services will occur as described in this Official Statement. Reduction in levels of demand could require an increase in rates or charges in order to comply with the covenants to fix rates and charges so as to produce Net Revenues equal to the debt service coverage set forth in the Indenture, respectively. Rate-Setting and Initiative Processes Under Proposition 218 Proposition 218 affects the City s ability to impose future water rate increases and no assurance can be given that future water rate increases will not encounter majority protest opposition. In the event that future proposed water rate increases cannot be imposed as a result of majority protest, the City might thereafter be unable to generate Net Revenues in the amounts required to pay debt service on the 2015 Bonds. In addition, Proposition 218, as incorporated in the California Constitution under Article XIIIC, also provides that the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge and that the power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments. No assurance can be given that the voters of the City will not, in the future, approve initiatives which seek to repeal, reduce or prohibit the future imposition or increase of the City s water rates, which could adversely affect the Net Revenues pledged to the payment of debt service on Series 2012 Bonds. See also CONSTITUTIONAL LIMITATIONS ON TAXES, WATER RATES AND CHARGES herein. 39

48 Statutory and Regulatory Compliance Changes in the scope and standards for public agency water systems, such as the Water System, may lead to increasingly stringent operating requirements and the imposition of administrative orders issued by Federal or State regulators. Future compliance with such requirements and orders can impose substantial additional costs on the Water Fund. In addition, claims against the Water System for failure to comply with applicable laws and regulations could be significant. Such claims are payable from assets of the Water System or from other legally available sources. No assurance can be given that the cost of compliance with such existing or future laws, regulations and orders would not adversely affect the ability of the Water System to generate Net Revenues sufficient to pay debt service on the Parity Obligation Bonds, including the 2015 Bonds. Earthquakes and Other Natural Disasters; Casualty Risk The Water System are located above or near a number of geological faults capable of generating significant earthquakes. The area is characterized by a number of geotechnical conditions which represent potential safety hazards, including expansive soils and areas of potential liquefaction and landslide. In anticipation of such potential disasters, the City designs and constructs system facilities to the seismic codes in effect at the time of design of the project. In January 1994, an earthquake of magnitude 6.8 on the Richter Scale occurred in the northwest San Fernando Valley on a previously unmapped fault. It caused widespread damage to commercial and residential structures. No significant damage occurred to the Water System and sewer service was not interrupted. Although the City has implemented disaster preparedness plans, there can be no assurance that these or any additional measures will be adequate in the event that a natural disaster occurs, nor that costs of preparedness measures will be as currently anticipated. Further, damage to components of the Water System could cause a material increase in costs for repairs or a corresponding material adverse impact on Net Revenues. The City is not obligated under the Indenture to maintain earthquake insurance on the Water System, and the City does not now and does not plan to maintain, earthquake insurance on the Water System. Further, any natural disaster or other physical calamity, including earthquake, may have the effect of reducing Net Revenues through damage to the Water System or adversely affecting the economy of the surrounding area. The City maintains such insurance as is customarily maintained by similar utilities systems with respect to works and properties of like character against accident to, loss of or damage to such works or properties, but there can be no assurance that losses in excess of the insured amount will not occur. Risks Relating to the Water Supply Drought Risks. The Los Angeles region and its primary sources of water supply are subject to continued drought conditions, water use restrictions and regulations and judicial decisions relating thereto. The region is situated in an arid and semi-desert environment. While suppliers of water to the City have planned and managed reserve supplies to account for normal occurrences of drought conditions, decreased runoff, environmental issues in California and a severe drought can restrict the ability to transport water supplies to Southern California. These conditions may result in reduced Net Revenues. Security of the Water System. Military conflicts and terrorist activities may adversely impact the operations and finances of the Water System. The City continually plans and prepares for emergency 40

49 situations and immediately responds to ensure the quality and service of water is maintained. However, there can be no assurance that any existing or additional safety and security measures will prove adequate in the event that terrorist activities are directed against the Water System or that costs of security measures will not be greater than presently anticipated. Further, damage to certain components of the Water System could require the City to significantly increase expenditures for repairs to the Water System, which could adversely impact the City s ability to pay debt service on the 2015 Bonds. Utility Costs. Power outages may cause difficulties in receiving an adequate water supply and thus increase the cost of water. No assurance can be given that any future significant reduction or loss of power would not materially adversely affect the operations of the Water System. Also, the City cannot guarantee that prices for electricity or gas will not increase, which could adversely affect the Water System s financial condition. The City also cannot guarantee that additional increases in water rates charged by the City s wholesale providers or other charges imposed by the City s water sources will not be proposed. Impact of Economic Conditions on Net Revenues The major economic disruptions and recession beginning in 2009 adversely affected economic activity of the region in general, in particular resulting in decreased economic activity, increased unemployment and a reduction in residential and commercial construction. The City cannot predict the extent of the fiscal problems that will be encountered in in any future economic downturn. Reduction in Water System users ability to pay rates and charges, and reduction in the rate at which new customers are added to the Water System, can adversely impact Net Revenues. No Acceleration; Limitations on Remedies Pursuant to the Indenture, upon the occurrence and continuance of an event of default thereunder, the Trustee may, and at the written direction of the Owners of a majority in aggregate principal amount of the 2015 Bonds at the time Outstanding shall, upon notice in writing to the City, pursue any available remedy at law or in equity to remedy such event of default and to enforce any applicable rights of the Trustee under or with respect to the Indenture; provided, that, such remedies shall not include any remedy of acceleration with respect to the payment of the principal of and interest on the 2015 Bonds. Upon the occurrence and continuance of an event of default, the Trustee would be required to seek a separate judgment each year for that year s defaulted payments of principal and interest on the 2015 Bonds. Any such suit for money damages would be subject to limitations on legal remedies against counties in the State, including a limitation on enforcement of judgments against funds of a fiscal year other than the fiscal year in which the applicable payments of principal and interest were due and against funds needed to serve the public welfare and interest. In addition, enforceability of the rights and remedies of the Owners of the 2015 Bonds may become subject to (i) the Federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditor s rights generally, (ii) equity principles which may limit the specific enforcement of certain remedies, (iii) the exercise by the United States of America of the powers delegated to it by the Constitution, and (iv) the exercise of the state police powers. CONSTITUTIONAL LIMITATIONS ON TAXES, WATER RATES AND CHARGES Proposition 218 On November 5, 1996, California voters approved an initiative known as the Right to Vote on Taxes Act ( Proposition 218 ) that added Articles XIIIC and XIIID to the California Constitution. 41

50 Proposition 218 limits the application of property-related fees and charges and requires them to be submitted to property owners for approval or rejection, after notice and public hearing. Proposition 218 also extended the initiative power to reducing or repealing local property-related fees and charges, regardless of the date such fees and charges were imposed. Fees and charges for water service are excepted from the voter approval provisions of Proposition 218 pursuant to Article XIIID, but are subject to the limitations of Proposition 26 described below. Section 1 of Article XIIIC requires majority voter approval for the imposition, extension or increase of general taxes and Section 2 thereof requires two thirds voter approval for the imposition, extension or increase of special taxes. Section 3 of Article XIIIC expressly extends the initiative power to give voters the power to reduce or repeal local taxes, assessments, fees and charges, regardless of the date such taxes, assessments, fees or charges were imposed. Section 3 expands the initiative power to include reducing or repealing assessments, fees and charges, which had previously been considered administrative rather than legislative matters and therefore beyond the initiative power. This extension of the initiative power is not limited by the terms of Article XIIIC to fees imposed after November 6, 1996, the effective date of Proposition 218, and absent other legal authority could result in the reduction in any existing taxes, assessments or fees and charges imposed prior to November 6, Fees and charges are not expressly defined in Article XIIIC or in SB 919, the Proposition 218 Omnibus Implementation Act enacted in 1997 to prescribe specific procedures and parameters for local jurisdictions in complying with Article XIIIC and Article XIIID ( SB 919 ). However, on July 24, 2006, the California Supreme Court ruled in Bighorn-Desert View Water Agency v. Virjil (Kelley) (the Bighorn Decision ) that charges for ongoing water delivery are property-related fees and charges within the meaning of Article XIIID and are also fees or charges within the meaning of Section 3 of Article XIIIC. The California Supreme Court held that such water service charges may, therefore, be reduced or repealed through a local voter initiative pursuant to Section 3 of Article XIIIC. In the Bighorn Decision, the California Supreme Court did state that nothing in Section 3 of Article XIIIC authorizes initiative measures that impose voter-approval requirements for future increases in fees or charges for water delivery. The California Supreme Court stated that water providers may determine rates and charges upon proper action of the governing body and that the governing body may increase a charge which was not affected by a prior initiative or impose an entirely new charge. The Supreme Court further stated in the Bighorn Decision that it was not holding that the initiative power is free of all limitations and was not determining whether the initiative power is subject to the statutory provision requiring that water service charges be set at a level that will pay debt service on bonded debt and operating expenses. Such initiative power could be subject to the limitations imposed on the impairment of contracts under the contract clause of the United States Constitution. Additionally, SB 919 provides that the initiative power provided for in Proposition 218 shall not be construed to mean that any owner or beneficial owner of a municipal security, purchased before or after [the effective date of Proposition 218] assumes the risk of, or in any way consents to, any action by initiative measure that constitutes an impairment of contractual rights protected by the United States Constitution. No assurance can be given that the voters of the City will not, in the future, approve initiatives which repeal, reduce or prohibit the future imposition or increase of assessments, fees or charges, including the City s water rates, which are a significant source of Net Revenues pledged to the payment of debt service on 2015 Bonds. Whether and the extent to which the initiative power may be used to reduce water rates is unclear. However, the City believes that even if the water rates of the City are subject to the initiative power, under Article XIIIC or otherwise, the electorate of the City would be precluded from reducing water rates and charges in a manner adversely affecting the payment of the 2015 Bonds by virtue of the impairment of contracts clause of the United States and California Constitutions. 42

51 Article XIIID defines a fee or charge as any levy other than an ad valorem tax, special tax, or assessment imposed upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property-related service. A property-related service is defined as a public service having a direct relationship to a property ownership. In the Bighorn Decision, the California Supreme Court held that a public water agency s charges for ongoing water delivery are fees and charges within the meaning of Article XIIID. Article XIIID requires that any agency imposing or increasing any property-related fee or charge must provide written notice thereof to the record owner of each identified parcel upon which such fee or charge is to be imposed and must conduct a public hearing with respect thereto. Also, the proposed fee or charge may not be imposed or increased if a majority of owners of the identified parcels file written protests against it. As a result, the local government s ability to increase such fee or charge may be limited by a majority protest. The imposition or increase of any fee or charge by the City for its water service will be subject to majority protest. If such a majority protest occurs, the ability of the City to generate Net Revenues sufficient to comply with the covenants of the 2012 Indenture and Indenture may be adversely affected. In addition, Article XIIID includes a number of limitations applicable to existing fees and charges, including provisions to the effect that (i) revenues derived from the fee or charge shall not exceed the funds required to provide the property-related service; (ii) such revenues shall not be used for any purpose other than that for which the fee or charge was imposed; (iii) the amount of a fee or charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel; and (iv) no such fee or charge may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question. Property-related fees or charges based on potential or future use of a service are not permitted. Further, pursuant to Capistrano Taxpayers Association v. City of San Juan Capistrano, tiered rates charged to different classes of customers must be calculated based on the actual costs of providing the service. In Capistrano Taxpayers Association, the Court of Appeal held that Proposition 218 requires public water agencies to calculate the actual costs of providing water at various levels of usage and that Article XIII D, section 6, subdivision (b)(3) of the California Constitution, as interpreted by the California Supreme Court in Bighorn provides that water rates must reflect the cost of service attributable to a given parcel. The Court of Appeal further stated that [w]hile tiered, or inclined rates that go up progressively in relation to usage are perfectly consonant with [A]rticle XIII D, section 6, subdivision (b)(3) and Bighorn, the tiers must still correspond to the actual cost of providing service at a given level of usage. The City believes that current water fees and charges that are subject to Proposition 218 comply with the provisions thereof and that the City will continue to comply with the rate covenant set forth in the 2012 Indenture and t in conformity with the provisions of Article XIIID of the California State Constitution. Should it become necessary to increase the water fees and charges above current levels, the City would be required to comply with the requirements of Article XIIID in connection with such proposed increase. No assurance can be given that the voters of the City will not, in the future, approve initiatives which repeal, reduce or prohibit the future imposition or increase of assessments, fees or charges. Implementing legislation pertaining to Proposition 218 may be introduced in the State legislature from time to time. Moreover, Proposition 218 was adopted as a measure that qualified for the ballot pursuant to California s initiative process. From time to time other initiative measures could be adopted to modify Proposition 218. No assurance may be given as to the terms of such legislation or initiatives or their potential impact on the various fees and charges that constitute Revenues of the System, however, there could be a material negative impact on the City s ability to collect such Revenues. 43

52 Proposition 26 On November 2, 2010, the voters approved Proposition 26 and approved revising provisions of Articles XIIIA and XIIIC of the California Constitution. Proposition 26 re-categorizes many State and local fees as taxes and specifies approval requirements for those taxes. In its Findings and Declarations of Purpose section, Proposition 26 states: Fees couched as regulatory but which exceed the reasonable costs of actual regulation or are simply imposed to raise revenue for a new program and are not part of any licensing or permitting programs are actually taxes and should be subject to the limitations applicable to the imposition of taxes. For State taxes, a two-thirds vote of both houses of the Legislature is required for a higher tax. The State bears the burden of proving that a levy, charge or other exaction is not a tax subject to Proposition 26. Any State-imposed tax adopted after January 1, 2010, but prior to the effective date of Proposition 26 that was not adopted in compliance with Proposition 26 s approval requirements is void 12 months after the effective date of Proposition 26. Among the regulatory fees that could be subject to Proposition 26 approval threshold include State laws enacted in 2010 that allow tax breaks for new alternative energy plants and the cap-and- trade program for greenhouse gases adopted by CARB that will result in auctioning pollution permits to entities. Opponents of Proposition 26 have taken the position that such auctioning of pollution permits is a tax that will require a two-thirds vote of the Legislature. The ultimate resolution as to the scope of Proposition 26 will likely be determined through litigation. It is not certain how the courts will interpret the provisions of Proposition 26 as applicable to AB32 or other regulatory fees. With respect to local government taxes, Proposition 26 expressly excludes a variety of levies, charges and exactions from the definition of tax, including a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege, and a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product. The City believes that the water rates and charges are not taxes for purposes of Proposition 26. However, a court could conclude that, to the extent the City transfers surplus funds to the General Fund, the Water System rates and charges constitute taxes for purposes of Proposition 26. This could mean that, so long as the City continued to make General Fund transfers of surplus funds, the City could not increase the existing rates and charges without a two-thirds vote of the City s voters. The City is unaware of any applicable case law precedent regarding this issue. However, there is litigation challenging a similar transfer by the City of Redding. While a final judgment has not been reached, the ruling by the trial court issued after a hearing on the merits found that adoption of the payment in lieu of taxes at issue in the Redding case predated the effectiveness of Proposition 26; there was no determination on whether the payment in lieu of taxes constitutes a tax. Proposition 26 amended Article XIIIC to provide that the local government bears the burden of proving by a preponderance of the evidence that a levy, charge or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor s burdens on, or benefits received from, the governmental activity. Future Initiatives Proposition and Proposition 26 were each adopted as measures that qualified for the ballot pursuant to the State s initiative process. From time to time, other initiative measures could be adopted, 44

53 further affecting revenues of the City or the City s ability to expend revenues. The nature and impact of these measures cannot be predicted by the City. CONTINUING DISCLOSURE The City has executed separate Continuing Disclosure Agreements (each a Continuing Disclosure Agreement ) for the benefit of the respective Owners of the 2015 Bonds, respectively. The forms of Continuing Disclosure Agreements are attached hereto as Appendix F. Under the Continuing Disclosure Agreement, the City will covenant for the benefit of respective Owners and Beneficial Owners of the 2015 Bonds to provide certain annual financial information and operating data, including its audited financial statements, relating to the City by not later than nine months after the end of the City s Fiscal Year, commencing with its report for Fiscal Year , or if the fiscal year-end changes from June 30, not later than nine months after the end of the City s Fiscal Year (the Annual Reports ), and to provide notices of the occurrence of certain enumerated events (the Listed Events ). The Annual Reports and notices of Listed Events will be filed with the Electronic Municipal Market Access ( EMMA ) database maintained by the Securities and Exchange Commission, pursuant to the Rule. These covenants will be made in order to assist the Underwriter of the 2015 Bonds in complying with the Rule. The City and its related entities issue a variety of bonds, notes and obligations ( Obligations ), including Obligations issued through its proprietary enterprise programs. The statements made by the City in this section regarding its previous continuing disclosure undertakings relate only to those Obligations secured by the Water Fund and the Electric Fund, which are managed by the Utility Board and its staff. The City s sewer and other departments, which are not managed by the Utility Board, enter into continuing disclosure undertakings in connection with the Obligations that are secured and payable from their respective revenues. The City has existing continuing disclosure undertakings that have been made pursuant to the Rule in connection with the issuance of certain of the City s outstanding water revenue bonds and electric revenue bonds. The City did not (i) timely file complete annual reports setting forth all operating data for for Fiscal Years , and , (ii) timely file its audited financial statements for Fiscal Years , and in part because the audited financial statements were not available by the applicable filing deadline and (iii) timely file a notice of rating change in connection with a bond insurer downgrade in In addition, the City did not timely file notices of the aforementioned failures. Each of the annual reports, audited financial statements and event notice were subsequently filed. To assist in the City s compliance with its continuing disclosure undertakings, the City has contracted with a third party to assist in the preparation and filing of its annual reports. LEGAL OPINION The validity of the 2015 Bonds and certain other matters are subject to the approval of legality by Hawkins Delafield & Wood LLP, Los Angeles, California, Bond Counsel. A complete copy of the proposed forms of opinions of Bond Counsel are contained in Appendix D attached hereto. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the City by Best Best & Krieger LLP, Riverside, California, as City Attorney, for the City by Hawkins Delafield & Wood LLP, Los Angeles, California, Disclosure Counsel, and for the Underwriter by its counsel, Katten Muchin Rosenman LLP, New York, New York. 45

54 TAX MATTERS Opinion of Bond Counsel In the opinion of Hawkins Delafield & Wood LLP, Bond Counsel to the City, under existing statutes and court decisions and assuming continuing compliance with certain tax certifications described herein, (i) interest on the 2015 Bonds is excluded from gross income for Federal income tax purposes pursuant to Section 103 of the Internal Revenue Code of 1986, as amended (the Code ), and (ii) interest on the 2015 Bonds is not treated as a preference item in calculating the alternative minimum tax imposed on individuals and corporations under the Code; such interest, however, is included in the adjusted current earnings of certain corporations for purposes of calculating the alternative minimum tax imposed on such corporations. The Tax and Nonarbitrage Certificate of the City (the Tax Certificate ), which will be delivered concurrently with the delivery of the 2015 Bonds will contain provisions and procedures relating to compliance with applicable requirements of the Code. In rendering its opinion, Bond Counsel has relied on certain representations, certifications of fact, and statements of reasonable expectations made by the City in connection with the 2015 Bonds, and Bond Counsel has assumed compliance by the City with certain ongoing provisions and procedures set forth in the Tax Certificate relating to compliance with applicable requirements of the Code to assure the exclusion of interest on the 2015 Bonds from gross income under Section 103 of the Code. In addition, in the opinion of Bond Counsel to the City, under existing statutes, interest on the 2015 Bonds is exempt from personal income taxes of the State of California and its political subdivisions. Bond Counsel expresses no opinion regarding any other Federal or state tax consequences with respect to the 2015 Bonds. Bond Counsel renders its opinion under existing statutes and court decisions as of the issue date, and assume no obligation to update, revise or supplement its opinion after the issue date to reflect any action hereafter taken or not taken, or any facts or circumstances that may hereafter come to their attention, or changes in law or in interpretations thereof that may hereafter occur, or for any other reason. Bond Counsel expresses no opinion on the effect of any action hereafter taken or not taken in reliance upon an opinion of other counsel on the exclusion from gross income for Federal income tax purposes of interest on the 2015 Bonds, or under state and local tax law. Certain Ongoing Federal Tax Requirements and Certifications The Code establishes certain ongoing requirements that must be met subsequent to the issuance and delivery of the 2015 Bonds in order that interest on the 2015 Bonds be and remain excluded from gross income under Section 103 of the Code. These requirements include, but are not limited to, requirements relating to use and expenditure of gross proceeds of the 2015 Bonds, yield and other restrictions on investments of gross proceeds, and the arbitrage rebate requirement that certain excess earnings on gross proceeds be rebated to the Federal government. Noncompliance with such requirements may cause interest on the 2015 Bonds to become included in gross income for Federal income tax purposes retroactive to their issue date, irrespective of the date on which such noncompliance occurs or is discovered. the City, in executing the Tax Certificate, will certify to the effect that the City will comply with the provisions and procedures set forth therein and that it will do and perform all acts and things necessary or desirable to assure the exclusion of interest on the 2015 Bonds from gross income under Section 103 of the Code. Certain Collateral Federal Tax Consequences The following is a brief discussion of certain collateral Federal income tax matters with respect to the 2015 Bonds. It does not purport to address all aspects of Federal taxation that may be relevant to a 46

55 particular owner of a Bond. Prospective investors, particularly those who may be subject to special rules, are advised to consult their own tax advisors regarding the Federal tax consequences of owning and disposing of the 2015 Bonds. Prospective owners of the 2015 Bonds should be aware that the ownership of such obligations may result in collateral Federal income tax consequences to various categories of persons, such as corporations (including S corporations and foreign corporations), financial institutions, property and casualty and life insurance companies, individual recipients of Social Security and railroad retirement benefits, individuals otherwise eligible for the earned income tax credit, and taxpayers deemed to have incurred or continued indebtedness to purchase or carry obligations the interest on which is excluded from gross income for Federal income tax purposes. Interest on the 2015 Bonds may be taken into account in determining the tax liability of foreign corporations subject to the branch profits tax imposed by Section 884 of the Code. Original Issue Discount Original issue discount ( OID ) is the excess of the sum of all amounts payable at the stated maturity of a 2015 Bond (excluding certain qualified stated interest that is unconditionally payable at least annually at prescribed rates) over the issue price of that maturity. In general, the issue price of a maturity means the first price at which a substantial amount of the 2015 Bonds of that maturity was sold (excluding sales to bond houses, brokers, or similar persons acting in the capacity as underwriters, placement agents, or wholesalers). In general, the issue price for each maturity of 2015 Bonds is expected to be the initial public offering price set forth on the cover page of the Official Statement. Counsel further is of the opinion that, for any 2015 Bonds having OID (a Discount Bond ), OID that has accrued and is properly allocable to the owners of the Discount Bonds under Section 1288 of the Code is excludable from gross income for Federal income tax purposes to the same extent as other interest on the 2015 Bonds. In general, under Section 1288 of the Code, OID on a Discount Bond accrues under a constant yield method, based on periodic compounding of interest over prescribed accrual periods using a compounding rate determined by reference to the yield on that Discount Bond. An owner s adjusted basis in a Discount Bond is increased by accrued OID for purposes of determining gain or loss on sale, exchange, or other disposition of such Bond. Accrued OID may be taken into account as an increase in the amount of tax-exempt income received or deemed to have been received for purposes of determining various other tax consequences of owning a Discount Bond even though there will not be a corresponding cash payment. Owners of Discount Bonds should consult their own tax advisors with respect to the treatment of original issue discount for Federal income tax purposes, including various special rules relating thereto, and the state and local tax consequences of acquiring, holding, and disposing of Discount Bonds. Bond Premium In general, if an owner acquires a 2015 Bond for a purchase price (excluding accrued interest) or otherwise at a tax basis that reflects a premium over the sum of all amounts payable on the 2015 Bond after the acquisition date (excluding certain qualified stated interest that is unconditionally payable at least annually at prescribed rates), that premium constitutes bond premium on that 2015 Bond (a Premium Bond ). In general, under Section 171 of the Code, an owner of a Premium Bond must amortize the bond premium over the remaining term of the Premium Bond, based on the owner s yield over the remaining term of the Premium Bond determined based on constant yield principles (in certain cases involving a Premium Bond callable prior to its stated maturity date, the amortization period and 47

56 yield may be required to be determined on the basis of an earlier call date that results in the lowest yield on such bond). An owner of a Premium Bond must amortize the bond premium by offsetting the qualified stated interest allocable to each interest accrual period under the owner s regular method of accounting against the bond premium allocable to that period. In the case of a tax-exempt Premium Bond, if the bond premium allocable to an accrual period exceeds the qualified stated interest allocable to that accrual period, the excess is a nondeductible loss. Under certain circumstances, the owner of a Premium Bond may realize a taxable gain upon disposition of the Premium Bond even though it is sold or redeemed for an amount less than or equal to the owner s original acquisition cost. Owners of any Premium Bonds should consult their own tax advisors regarding the treatment of bond premium for Federal income tax purposes, including various special rules relating thereto, and state and local tax consequences, in connection with the acquisition, ownership, amortization of bond premium on, sale, exchange, or other disposition of Premium Bonds. Information Reporting and Backup Withholding Information reporting requirements apply to interest on tax-exempt obligations, including the 2015 Bonds. In general, such requirements are satisfied if the interest recipient completes, and provides the payor with, a Form W-9, Request for Taxpayer Identification Number and Certification, or if the recipient is one of a limited class of exempt recipients. A recipient not otherwise exempt from information reporting who fails to satisfy the information reporting requirements will be subject to backup withholding, which means that the payor is required to deduct and withhold a tax from the interest payment, calculated in the manner set forth in the Code. For the foregoing purpose, a payor generally refers to the person or entity from whom a recipient receives its payments of interest or who collects such payments on behalf of the recipient. If an owner purchasing a 2015 Bond through a brokerage account has executed a Form W-9 in connection with the establishment of such account, as generally can be expected, no backup withholding should occur. In any event, backup withholding does not affect the excludability of the interest on the 2015 Bonds from gross income for Federal income tax purposes. Any amounts withheld pursuant to backup withholding would be allowed as a refund or a credit against the owner s Federal income tax once the required information is furnished to the Internal Revenue Service. Miscellaneous Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, may adversely affect the tax-exempt status of interest on the 2015 Bonds under Federal or state law or otherwise prevent beneficial owners of the 2015 Bonds from realizing the full current benefit of the tax status of such interest. In addition, such legislation or actions (whether currently proposed, proposed in the future, or enacted) and such decisions could affect the market price or marketability of the 2015 Bonds. For example, the Fiscal Year 2016 Budget proposed by the Obama Administration recommends a 28% limitation on all itemized deductions, as well as other tax benefits including tax-exempt interest. The net effect of such a proposal, if enacted into law, would be that an owner of a tax-exempt obligation with a marginal tax rate in excess of 28% would pay some amount of Federal income tax with respect to the interest on such tax-exempt obligation, regardless of issue date. Prospective purchasers of the 2015 Bonds should consult their own tax advisors regarding the foregoing matters. 48

57 VERIFICATION OF MATHEMATICAL COMPUTATIONS Upon delivery of the 2015 Bonds, Grant Thornton LLP, independent certified public accountants, will deliver a report stating that the firm has verified the mathematical accuracy of certain computations relating to the adequacy of the related defeasance securities and the interest thereon to pay the principal of, and premium, if any, and interest with respect to the Refunded Bonds on their respective payment and prepayment dates. RATINGS The City anticipates that Standard & Poor s, a Division of The McGraw-Hill Companies ( S&P ), will assign its rating of AA to the 2015 Bonds. Such ratings reflect only the views of such organization and any desired explanation of the significance of such ratings should be obtained from the rating agency furnishing the same, at the following address: Standard & Poor s Ratings Services, 55 Water Street, New York, New York Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by the rating agencies, if in the judgment of such rating agencies, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market prices of the 2015 Bonds. FINANCIAL STATEMENTS The audited financial statements of the City for the Fiscal Year ended June 30, 2014 are included as Appendix C. The financial statements of the City for the Fiscal Year ended June 30, 2014 have been audited by Lance, Soll & Lunghard, LLP, certified public accountants, as stated in their report. Lance, Soll & Lunghard, LLP has not consented to the inclusion of its report as Appendix C and has not undertaken to update its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by Lance, Soll & Lunghard, LLP with respect to any event subsequent to the date of the audited financial statements. FINANCIAL ADVISOR Fieldman Rolapp & Associates has served as Financial Advisor to the City in connection with the issuance of the 2015 Bonds. The Financial Advisor has assisted the City in matters relating to the planning, structuring and issuance of the 2015 Bonds. The Financial Advisor has not audited, authenticated or otherwise independently 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. The Financial Advisor makes no guaranty, warranty or other representation respecting accuracy and completeness of the Official Statement. UNDERWRITING The 2015 Bonds are being purchased by the Underwriter at a price of $50,739, (which amount represents the principal amount of the 2015 Bonds of $47,740,000.00, plus net original issue premium of $3,068,742.30, and less an Underwriter discount of $68,882.22). The Underwriter may offer and sell the 2015 Bonds to certain dealers and others at prices lower than the offering prices stated on the inside cover page hereof. The offering prices may be changed from time to time by the Underwriter. 49

58 The Underwriter and its affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. In the various course of its various business activities, the Underwriter and its affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of City (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with the City. The Underwriter and its affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments. MISCELLANEOUS This Official Statement has been duly approved, executed and delivered by the City. There are appended to this Official Statement a summary of certain provisions of the Indenture, audited financial statements of the City, the proposed forms of opinions of Bond Counsel, a general description of the City and a description of the Book-Entry Only System. The Appendices are integral parts of this Official Statement and must be read together with all other parts of this Official Statement. This Official Statement is not to be construed as a contract or agreement between the City and the purchasers or Owners of any of the 2015 Bonds. Any statements made in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended merely as an opinion and not as representations of fact. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City since the date hereof. CITY OF AZUSA By: /s/ Troy Butzlaff City Manager 50

59 APPENDIX A THE CITY OF AZUSA The 2015 Bonds will not be secured by any pledge of ad valorem taxes or General Fund revenues but will be payable solely from the Net Revenues as more fully described in the body of this Official Statement. The description of the financial and economic position of the City set forth below and on the following pages is included in this Official Statement for informational purposes only. General The City of Azusa (the City ) is a municipal corporation existing under the laws of the State of California (the State ). Located in the County of Los Angeles (the County ), the City owns and operates an electric public utility for its citizens, which provides electric service to virtually all of the electric customers within the City limits, encompassing approximately 9 square miles. The City also owns and operates a water system. Its service territory includes the City and adjoining portions of surrounding cities and unincorporated areas of Los Angeles County. The City is located in the greater metropolitan Los Angeles area, approximately 24 miles east of downtown Los Angeles. The economy represents a diverse blend of industrial, commercial, agricultural and residential development. The City was incorporated as a general law city in 1898, and is administered by a Council- Administrator form of government. The four City Council members are elected at large for four-year terms. Elections are staggered at two-year intervals. The office of Mayor is elected at-large for a twoyear term. The election coincides with those of the Council members. History and Development of Community The Azusa area grew after 1854 when gold was discovered in the San Gabriel Canyon. By 1860 the town had over 2,000 inhabitants and the United States government bought much of the land from founder Henry Dalton for homesteading. The advent of the railroad spurred more growth in the area and agriculture emerged as the dominant industry. After acquiring the orchard community of Azusa Rancho from Dalton in 1880, Jonathan D. Slauson, a Los Angeles banker, laid out the City in The City of Azusa was then incorporated on December 29, During the 1900s, Azusa, like many surrounding cities, urbanized from a largely rural agricultural community to a city with a downtown surrounded by tract housing. Agriculture continued to have a presence in the City through the Monrovia wholesale nursery and food processing facilities. Mining also continued as one of Azusa s industries in the form of inert materials mining for cement, rock and road base. Other more sophisticated industries emerged, such as defense and higher education, and Azusa became host to Aerojet, now Northrop, manufacturer of satellites, and Azusa Pacific University. Currently, Azusa has a diverse economy of retail, commercial, industrial businesses, and an equally diverse population of over 49,000 residents. The industries and demographics in Azusa continue to diversify. In 2013, the City was awarded than $650,000 as part of a Transit Oriented Development Planning grant by the Los Angeles County Metropolitan Transportation Authority to study the extension of the Gold Line of the train system. In 2014, the City approved an agreement with Net Development A-1

60 Co., Inc., which agreed to purchase 2.49-acre of city-owned property development into a three-story, 110 room Hilton Home 2 Suites and a drive-thru McDonald s establishment. Population The following table sets forth population data for the City, the County and the State since TABLE A-1 POPULATION CITY OF AZUSA, COUNTY OF LOS ANGELES AND STATE OF CALIFORNIA Calendar Year City of Azusa (1) County of Los Angeles (1) State of California (1) ,152 9,756,914 35,163, ,808 9,806,944 35,570, ,642 9,816,153 35,869, ,279 9,798,609 36,116, ,133 9,780,808 36,399, ,117 9,785,474 36,704, ,227 9,801,096 36,966, ,361 9,818,605 37,253, ,348 9,847,712 37,427, ,713 9,908,030 37,680, ,667 9,980,432 38,030, ,405 10,054,852 38,357, ,425 10,136,559 38,714,725 Source: State of California, Department of Finance, E-4 Population Estimates for Cities, Counties and the State, , with 2010 Benchmark. (1) As of January 1 of the indicated year. A-2

61 Income The following table sets forth the total personal income and average per capita personal income for the County, State and United States for the calendar years 2006 through Average per capita personal income data set forth below reflects total personal income divided by population. TABLE A-2 PERSONAL INCOME COUNTY OF LOS ANGELES, STATE OF CALIFORNIA AND UNITED STATES Calendar Years 2006 through 2014 Year and Area Total Personal Income ($ in Thousands) Average Per Capita Personal Income 2006 County (1) 384,722,373 39,508 State (2) 1,499,308,841 41,623 United States (3) 11,376,405,000 38, County (1) 398,281,877 41,058 State (2) 1,564,289,335 43,152 United States (3) 11,990,104,000 39, County (1) 410,482,294 42,165 State (2) 1,596,229,973 43,608 United States (3) 12,429,234,000 40, County (1) 395,372,354 40,396 State (2) 1,537,094,676 41,587 United States (3) 12,080,223,000 39, County (1) 404,473,004 41,163 State (2) 1,578,553,439 42,282 United States (3) 12,417,659,000 40, County 425,673,042 43,062 State (2) 1,685,635,498 44,749 United States (3) 13,189,935,000 42, County 455,788,782 45,800 State (2) 1,805,193,769 47,505 United States (3) 13,873,161,000 44,200 (Table continued on next page.) A-3

62 (Table continued from prior page.) 2013 County 466,098,988 46,530 State (2) 1,856,614,186 48,434 United States (3) 14,151,427,000 44, County N/A N/A State (2) 1,944,369,223 50,109 United States (3) 14,708,582,165 46,129 Source: Personal Income Information from U.S. Department of Commerce Bureau of Economic Analysis. All state and local area dollar estimates are in current dollars (not adjusted for inflation). (1) County of Los Angeles Personal Income numbers for years 2006 through 2013 last updated November 20, 2014 new estimates for 2013; revised estimates for (2) California Personal Income numbers for years 2006 through 2014 last updated March 25, (3) U.S. Personal Income numbers for years 2006 through 2014 last updated March 25, A-4

63 Industry The following table sets forth the annual average employment in the County for the years 2010 through TABLE A-3 COUNTY OF LOS ANGELES ANNUAL AVERAGE EMPLOYMENT (In Thousands) Industry Total Farm 6,200 5,600 5,400 5,500 5,300 Mining and Logging 4,100 4,100 4,300 4,600 4,700 Construction 104, , , , ,200 Manufacturing: 373, , , , ,900 Durables 207, , , , ,100 Nondurables 166, , , , ,800 Trade, Transportation and Utilities: 740, , , , ,700 Wholesale Trade 203, , , , ,500 Retail Trade 386, , , , ,500 Transportation, Warehousing and Utilities 150, , , , ,700 Information 191, , , , ,900 Financial Activities 209, , , , ,700 Professional and Business Services 528, , , , ,400 Educational and Health Services 637, , , , ,000 Leisure and Hospitality 384, , , , ,600 Other Services 136, , , , ,700 Government 579, , , , ,700 TOTAL ALL INDUSTRIES 5,010,100 5,035,000 5,150,900 5,285,600 5,397,400 Source: State Employment Development Department, Labor Market Information Division. A-5

64 Employment The following table sets forth the labor force, employment and unemployment figures, to the extent available, for the years 2010 through 2014 in the City, the County, the State and the United States. Year and Area (1) TABLE A-4 County of Los Angeles, State of California and United States (1) (2) Labor Force, Employment and Unemployment Annual average Civilian Labor Force Civilian Employment Civilian Unemployment Civilian Unemployment Rate 2010 City of Azusa 22,600 20,400 2, % County of Los Angeles 4,917,400 4,302, , California 18,336,300 16,091,900 2,244, United States 153,889, ,064,000 14,825, City of Azusa 22,700 20,500 2, % County of Los Angeles 4,929,500 4,326, , California 18,419,500 16,260,100 2,159, United States (3) 153,617, ,869,000 13,747, City of Azusa 22,700 20,800 1, % County of Los Angeles 4,914,500 4,378, , California 18,554,800 16,630,100 1,924, United States (3) 154,975, ,469,000 12,506, City of Azusa 23,100 21,400 1, % County of Los Angeles 4,982,300 4,495, , California 18,671,600 17,002,900 1,668, United States (3) 155,389, ,929,000 11,460, City of Azusa 23,400 21,900 1, % County of Los Angeles 5,025,900 4,610, , California 18,811,400 17,397,100 1,414, United States (3) 155,922, ,305,000 9,617, Source: California Employment Development Department; U.S. Dept. of Labor; Bureau of Labor Statistics. (1) The State Employment Development Department has reported an unemployment rate (not seasonally adjusted) within Los Angeles County of 7.1% for April (2) Data not seasonally adjusted. (3) Effective with data for January 2011, the current population survey ( CPS ) was modified to allow respondents to report longer durations of unemployment. Prior to that time, the CPS accepted unemployment durations of up to 2 years; any response of unemployment duration greater than this was entered as 2 years. Starting with data for January 2011, respondents were able to report unemployment durations of up to 5 years. This change affected estimates of average (mean) duration of unemployment. The change did not affect the estimate of the number of unemployed persons and did not affect other data series on the duration of unemployment. A-6

65 The State of California Employment Development Department, Labor Market Information Division (the EDD ), preliminarily estimates that, on a seasonally unadjusted basis, the civilian labor force in the City in May 2015 was 23,700, of which approximately 1,300 persons were unemployed. Based on preliminary estimates of the EDD as of July 1, 2015, the County s unemployment rate in May 2015 of 7.3%, on a seasonally unadjusted basis, was below that of the City at 5.5% The following table sets forth the principal employers in the City for fiscal year ended June 30, TABLE A-5 CITY OF AZUSA PRINCIPAL EMPLOYERS Fiscal Year 2014 Employer Number of Employees Percentage of City Employment Azusa Unified School District 1, % Northrop Grumman City of Azusa Costco Wholesale Corporation Dostalek Construction Company S&S Foods LLC Buena Vista Food Products Colorama Wholesale Nursery Target Store Hanson Distributing Company Source: City of Azusa, California Comprehensive Annual Financial Report for Fiscal Year A-7

66 Building Permit Activity The following table sets forth building permit activity issued in the City from calendar year 2010 through TABLE A-6 CITY OF AZUSA BUILDING PERMIT ACTIVITY Calendar Years 2010 through 2015 (Dollars in Thousands) (2) PERMIT VALUATION New Single-family $11,824.8 $58,429.3 $54,276.1 $58,730.3 $70, ,862.8 New Multi-family , , ,926.3 Res. Alterations/Additions , , Total Residential $12,628.1 $59, , , , ,688.1 Offices (1) $ $ 0.0 $ 0.0 $ 0.0 $ $ 0.0 New Industrial , ,541.6 New Other (2) , , ,919.8 Com. Alterations/Additions 1, , , , , ,665.6 Total Nonresidential $3,087.8 $1,585.2 $9, , , ,127.0 NEW DWELLING UNITS Single Family Multiple Family TOTAL Source: Construction Industry Research Board (1) Previously categorized as New Commercial by Construction Industry Research Board. (2) Includes churches and religious buildings, hospitals and institutional buildings, schools and educational buildings, residential garages, public work and utilities buildings, parking garages, residential garages, other non-residential buildings and structures other than buildings. (3) As of April A-8

67 Taxable Sales The following table sets forth taxable sales transactions in the City for the calendar years 2009 through TABLE A-7 CITY OF AZUSA TAXABLE TRANSACTIONS BY TYPE OF BUSINESS Calendar Years 2009 through 2013 ($ in Thousands) Type of Business Motor Vehicle and Parts Dealers 10,731 11,323 14,906 16,444 13,848 Home Furnishings and Appliance Stores 3,453 3,714 3,658 3,656 4,239 Building Material and Garden Equip. and Supplies 1,904 1,857 2,785 3,178 3,067 Food and Beverage Stores 16,625 17,037 16,837 17,121 17,465 Gasoline Stations 55,000 62,470 72,740 77,498 75,400 Clothing and Clothing Accessories Stores 11,165 11,826 12,786 13,421 14,162 General Merchandise Stores 161,028 Food Services and Drinking Places 38,975 39,400 42,548 46,714 51,127 Other Retail Group 135, , , ,340 29,655 All Other Outlets 74,917 78,453 85,146 85,942 92,161 TOTAL ALL OUTLETS 348, , , , ,152 Source: California State Board of Equalization, Taxable Sales in California. Direct and Overlapping Debt Report Set forth below is a direct and overlapping debt report (the Debt Report ) prepared by California Municipal Statistics Inc. The Debt Report is included for general information purposes only. The City makes no representations as to its completeness or accuracy. The Debt Report generally includes long-term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the City in whole or in part. Such long-term obligations generally are not payable from revenues of the City (except as indicated) nor are they necessarily obligations secured by property within the City. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency. A-9

68 Assessed Valuation: $3,680,259,674 TABLE A-8 CITY OF AZUSA DIRECT AND OVERLAPPING DEBT (as of July 1, 2015) OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 7/1/15 Los Angeles County Flood Control District 0.321% $ 48,487 Metropolitan Water District ,565 Citrus Community College District ,545,604 Mount San Antonio Community College District ,203 Azusa Unified School District ,561,015 Covina Valley Unified School District ,512 Duarte Unified School District ,567 City of Azusa Community Facilities District No ,440,000 City of Azusa Community Facilities District No I.A. No ,985,000 Los Angeles County Regional Park and Open Space Assessment District ,613 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $111,455,566 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Los Angeles County General Fund Obligations 0.306% $ 5,769,111 Los Angeles County Superintendent of Schools Certificates of Participation ,680 Los Angeles County Sanitation District No. 22 Authority ,107,341 Los Angeles County Sanitation District No. 18 Authority Azusa Unified School District Certificates of Participation ,711,823 Covina Valley Unified School District Certificates of Participation ,300 City of Azusa General Fund Obligations ,285,000 (1) City of Azusa Pension Obligation Bonds ,205,000 TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND DEBT $21,116,796 Less: Los Angeles County obligations supported by landfill revenues 13,907 TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND DEBT $21,102,889 OVERLAPPING TAX INCREMENT DEBT (Successor Agency): % $47,127,800 GROSS COMBINED TOTAL DEBT $179,700,162 (2) NET COMBINED TOTAL DEBT $179,686,255 Ratios to Assessed Valuation: Total Overlapping Tax and Assessment Debt % Combined Direct Debt ($5,490,000) % Gross Combined Total Debt % Net Combined Total Debt % Ratios to Redevelopment Successor Agency Incremental Valuation ($814,401,066): Total Overlapping Tax Increment Debt 5.79% Source: California Municipal Statistics, Inc. (1) Excludes issue to be sold. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue bonds and non-bonded capital lease obligations. A-10

69 Assessed Valuation and Tax Collections Property taxes attach as an enforceable lien on property as of March 1, each year. Taxes are levied on July 1, and are payable in two installments no later than December 10, and April 10, respectively, of each year. The County of Los Angeles bills and collects the property taxes and remits them to the City in installments during the year. City property tax revenues are recognized when received in cash except at year-end when they are accrued pursuant to the modified accrual basis of accounting. The following table sets forth the assessed property valuations within the City for fiscal years 2007 through Assessed valuations include homeowners and business inventory exemption, the taxes on which have been paid by the State. Figures in the final column below consist of total assessed valuations less redevelopment project area incremental assessed valuations, the taxes on which are payable to the Azusa Redevelopment Agency, which was dissolved effective October 1, 2011 pursuant to ABX1 26. ABX1 26 requires that successor agencies take over from the former redevelopment agencies and perform certain functions, including (i) continue making payments on existing legal obligations of the former redevelopment agencies and not incur any additional debt and (ii) wind down the affairs of the former redevelopment agencies and return the funds of liquidated assets to the county auditor-controller, who will in turn distribute these funds to all taxing entities. Any tax increment remaining after the payment of enforceable legal obligations, pass-through payments and limited administrative costs of the former redevelopment agencies will be distributed as property tax revenue to the appropriate taxing entities, including the City General Fund. Since February 2012, the City received an additional $37,850 as a result of the dissolution of the Azusa Redevelopment Agency ( RDA ). The amounts that the City will receive going forward will depend on the conclusion of various reviews being undertaken among the City, the Oversight Board of the Successor Agency for the former RDA (the Oversight Board ), the State Department of Finance ( DOF ) and the State Controller s Office ( SCO ), as further described below. Since the formation of the RDA, the City has made several loans to the RDA, including four loans from available moneys in the Electric Fund totaling approximately $6.8 million and two loans from available moneys in the Water Fund totaling approximately $1.2 million, to assist the RDA in making improvements to blighted areas and purchase properties for redevelopment. The DOF previously determined that several of the loans, including the loans from the Electric Fund and the Water Fund, were not enforceable obligations of the RDA under ABX1 26. The City and the Utility Board petitioned to compel the director of DOF to recognize such obligations as enforceable and, in July 2015, the Third Appellate District upheld the trial court s determination in favor of DOF. The City and the Utility Board are in the process of considering potential options, including an appeal to DOF to reinstatae several of these loans for repayment. In addition, the SCO completed its review of the assets transferred from the RDA to the City and has requested that over $12.8 million of properties be returned by the City. These subject properties were transferred to City from the RDA to repay several of the outstanding loans. Through a meeting with the DOF, the City will be requesting that the Oversight Board reinstate these loans so that the City can be repaid. The repayment of any loans to the City will be subject to a 20% reduction and any amounts received will be transferred to the low/moderate housing program administered by the County of Los Angeles. A-11

70 TABLE A-9 CITY OF AZUSA ASSESSED PROPERTY VALUATIONS Fiscal Years 2010 through 2015 Fiscal Year Residential Property Commercial Property Other Property Total Taxable Assessed Value 2010 $2,149,538,213 $282,164,446 $1,008,117,565 $3,439,820, ,989,337, ,686, ,335,236 3,242,358, ,006,514, ,699, ,262,608 3,198,476, ,065,151, ,567, ,529,536 3,242,248, ,239,991, ,125, ,950,465 3,429,067,624 Source: County of Los Angeles Auditor-Controller. The following table shows the ten largest taxpayers in the City based on the Fiscal Year tax roll. TABLE A-10 PRINCIPAL PROPERTY TAXPAYERS Fiscal Year Property Owner Secured Assessed Valuation (1) Land Use Percentage of Assessed Value 1. Northrop Grumman Systems Corporation $111,859,628 Industrial 3.26% 2. Rainbird Corp/CA Div. 42,993,962 Industrial Azusa Pacific University 32,849,106 Education PPF Industrial th Street 32,215,460 Commercial Citrus Crossing Properties Fee 22,551,415 Industrial Rosedale Land Partners II LLC 21,828,057 Real Estate S & S Foods LLC 20,018,173 Food Service Costco Wholesale Corporation 19,175,634 Retail Sam Menlo Trust 18,835,448 Commercial VPM Soldano Senior Village LP 17,217,740 Real Estate 0.50 Total 339,544, Source: City of Azusa, California Comprehensive Annual Financial Report for Fiscal Year , citing HdL Coren & Cone. (1) Amounts include assessed value data for both the City and the Redevelopment Agency/Successor Agency. A-12

71 The following table shows the City s property tax collections and adjustments for the fiscal years indicated. TABLE A-11 PROPERTY TAX COLLECTIONS Fiscal Years 2010 through 2014 Fiscal Year Taxes Levied Amount Collected within Fiscal Year Percent of Levy Collections in Subsequent Years Total Collections to Date Percent of Levy to Date 2010 $3,815,354 $3,622, % $(29,760) $3,592, % ,492,186 3,261, (3,421) 3,257, ,447,405 3,192, ,662 3,209, ,506,941 3,404, ,623 3,489, ,743,370 3,632, ,318 3,706, Source: County of Los Angeles Auditor-Controller; City of Azusa Administrative Services Finance Department. Education There is one unified (K-12) school district in Azusa. Approximately 9,277 students attend Azusa Unified schools, which include eleven elementary, three middle and three high schools, as well as an Alternative Education Center. Public school enrollment for the school years through is set forth in the following table. TABLE A-11 City of Azusa Public School Enrollment Grade Level K-8 7,262 7,054 6,739 6,631 6, ,256 3,109 3,016 2,935 2,840 Total 10,518 10,163 9,755 9,566 9,277 Source: California Department of Education, Educational Demographics Unit. (1) Total enrollment numbers include ungraded elementary and secondary students. Azusa is also home to Azusa Pacific University. Azusa Pacific University was founded in 1899, and today the institution offers accredited undergraduate and graduate level education to its more than 10,800 current students. Transportation Azusa is connected to neighboring cities via major freeways and highways. The Foothill Freeway (State Route 210) extends West through Pasadena and East to San Bernardino County. The Orange Freeway (State Route 57) connects Azusa to Orange County. Interstate 10 connects Azusa to downtown Los Angeles via the San Gabriel River freeway (State Route 605). A-13

72 The City of Azusa operates a shuttle service to and from the Covina Metrolink station. The service is offered Monday through Friday. The commuter rail service connects Azusa to San Bernardino County. The Foothill Transit Bus System, Dial-A-Ride and Rideshare programs offer non-driving commuters transportation throughout the City. A-14

73 APPENDIX B SUMMARY OF THE INDENTURE The following is a summary of certain definitions and provisions set forth in the Indenture. The summary does not purport to be comprehensive, and reference should be made to the Indenture for a full and complete statement of such definitions and provisions. Except as otherwise defined in this Appendix B, the terms previously defined in this Official Statement have the respective meanings previously given. Copies of the Indenture are available from the Trustee. Selected Definitions 2012A Indenture. Indenture. The following terms have the following meanings with respect to the Indenture: 2012 Bonds means the City of Azusa Water System Refunding Revenue Bonds, Series 2015 Bonds means the City of Azusa Water System Refunding Revenue Bonds, Series 2015 Interest Account means the account by that named created pursuant to the 2015 Principal Account means the account by that named created pursuant to the Act means Section et seq. of the California Government Code and all laws amendatory thereof or supplemental thereto. Additional Bonds means all refunding bonds of the City authorized by and at any time Outstanding pursuant hereto and authorized, issued and delivered as described under General Terms of Bonds - Conditions for the Issuance of Additional Refunding Bonds and - Procedure for the Issuance of Additional Refunding Bonds. Annual Parity Obligation Service means, as of any date of calculation for any Fiscal Year, with respect to all Parity Obligations then outstanding (as determined in accordance with each instrument authorizing such Parity Obligations) and any Parity Obligations then proposed to be issued, the aggregate amount of principal and interest or other payments scheduled to become due with respect to such Parity Obligations in such Fiscal Year, calculated in accordance with this definition. The following assumptions shall be used to determine the Annual Parity Obligation Service becoming due in any Fiscal Year: (a) payments of principal or interest that are due on or before the fifteenth day of a Fiscal Year shall be assumed to be due on the last day of the immediately preceding Fiscal Year; (b) in determining the principal amount due in each Fiscal Year (unless a different subsection of this definition applies for purposes of determining principal maturities on amortization), payment shall be assumed to be made in accordance with any amortization schedule established for such principal, including any scheduled sinking fund; (c) if 20% or more of the principal of Parity Obligations matures on the same date or within a twelve-month period (including sinking fund payments as payments of matured principal), such principal shall not be treated as due on the maturity date thereof and, for the period commencing on the maturity date of such Parity Obligations, principal thereof and interest thereon shall be determined as if such principal and interest were due based upon an amortization of the principal of such Parity Obligations from the maturity thereof through the final maturity of any Parity Obligation then outstanding (as determined in accordance with each instrument authorizing such Parity Obligation) and interest on B-1

74 such Parity Obligations for such period shall be calculated using the rate most recently published in The Bond Buyer as the Bond Buyer Revenue Bond Index prior to the date of such calculation, or, if the Bond Buyer Revenue Bond Index is no longer published, another similar index selected by the City; (d) if the subject Parity Obligations are supported by a credit support instrument in the form of a line of credit or a letter of credit, principal may, at the option of the City, be treated as if it were due based upon a level amortization of such principal over the maximum term of repayment of borrowings under such credit support agreement entered into in connection with such line of credit or letter of credit; (e) if the interest rate of any Parity Obligation then outstanding (as determined in accordance with each instrument authorizing such Parity Obligation) is not a fixed rate, the interest rate on such Parity Obligation shall be assumed to be 100% of the greater of (i) the daily average interest rate on such Parity Obligation during the 12 months ending with the month preceding the date of calculation, or such shorter period that such Parity Obligation shall have been outstanding, or (ii) the rate of interest on such Parity Obligation on the date of calculation; (f) if the interest rate of any Parity Obligation proposed to be issued will not be a fixed rate and the interest thereon will be excluded from gross income for federal income tax purposes, the interest rate on such Parity Obligation shall be assumed to be equal to 110% of the average BMA Index during the three (3) months preceding the month of sale of such Parity Obligation, or if BMA Index is no longer published, at an interest rate equal to 75% of the average One Month USD LIBOR Rate during the three (3) months preceding the month of sale of such Parity Obligation, or if the One Month USD LIBOR Rate is not available for such period another similar rate or index selected by the City; (g) if the interest rate of any Parity Obligation proposed to be issued will not be a fixed rate and the interest thereon will be included in gross income for federal income tax purposes, the interest rate on such Parity Obligation shall be assumed to be equal to 100% of the average One Month USD LIBOR Rate during the three (3) months preceding the month of sale of such Parity Obligation, or if the One Month USD LIBOR Rate is not available for such period, another similar rate or index selected by the City; (h) if any Parity Obligation is, or upon issuance will be, part of a commercial paper program, the principal of such Parity Obligation constituting commercial paper will be treated as if such principal were due based upon an amortization of such principal so as to produce substantially level payments of principal and interest with respect to such commercial paper over the period commencing on the date of such calculation through the final maturity of any Parity Obligation then outstanding (as determined in accordance with each instrument authorizing such Parity Obligation), and the interest on such commercial paper shall be calculated as if such commercial paper were a Parity Obligation without a fixed interest rate as provided in this definition; and (i) if moneys or Defeasance Securities have been irrevocably deposited with and are held by the Trustee or another fiduciary in escrow to be used to pay principal and/or interest on any specified Parity Obligation or Parity Obligations, then the principal and/or interest to be paid from such moneys, from Defeasance Securities or from the earnings thereon shall be disregarded and not included in calculating Annual Parity Obligation Service. Authorized Officer means, in the case of the City, any Person or Persons authorized pursuant to a resolution of the governing body of the City to perform any act or execute any document relating to the Indenture. BMA Index means on any day, The Bond Market Association Municipal Swap Index as of the most recent date for which such index was published by Municipal Market Data, Inc., provided that, if such index is no longer published by Municipal Market Data, Inc. or its successor, then BMA Index shall mean such other reasonably comparable index selected by the City. B-2

75 Bond Year means the period of twelve consecutive months ending on July 1 in any year in which any Bond has not yet been retired and cancelled, provided that the first Bond Year shall commence on the date of issuance of the 2015 Bonds and end on the next July 1. Bonds means all refunding bonds of the City authorized by and at any time Outstanding pursuant hereto and executed, issued and delivered in accordance with the Indenture, including the 2015 Bonds. The term Serial Bonds means Bonds for which no sinking fund payments are provided. The term Term Bonds means Bonds which are payable on or before their specified maturing dates from sinking fund payments established for that purpose and calculated to retire such Bonds on or before their specified maturity dates. Business Day means any day on which the Trustee is open for business at its Principal Corporate Trust Office. Certificate of the City means an instrument in writing signed by an Authorized Officer. Defeasance Obligations means: (1) cash, (2) non-callable direct obligations of the United States of America ( Treasuries ), (3) evidences of ownership of proportionate interests in future interest and principal payments on Treasuries held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying Treasuries are not available to any person claiming through the custodian or to whom the custodian may be obligated, (4) pre-refunded municipal obligations rated AAA and Aaa by S&P and Moody s, respectively or (5) securities eligible for AAA defeasance under then existing criteria of S&P or any combination thereof. Event of Default means any of the events described under Events of Default and Remedies of Owners - Events of Default. Indenture. Expense Fund means the fund by that name established and maintained pursuant to the Fiscal Year means the twelve month fiscal period of the City which commences on July 1 in every year and ends on June 30 of the succeeding year, or any other twelve-month, or fifty-two week, period hereafter selected and designated by an Authorized Officer of the City as the official fiscal year period of the City. Gross Revenues means all revenues, charges, income and receipts derived by the City from the operation of the Water System or arising from the Water System (including all revenues, charges, income and receipts received by the City from the services, facilities and distribution of water by the City), including, but not limited to income from investments, but excepting therefrom all refundable charges and deposits to secure service. Independent Certified Public Accountant means any certified public accountant or firm of such accountants duly licensed and entitled to practice and practicing as such under the laws of the State or a comparable successor, appointed and paid by the City, and who, or each of whom: (1) is in fact independent according to the Statement of Auditing Standards No. 1 and not under the domination of the City; (2) does not have a substantial financial interest, direct or indirect, in the operations of the City; and (3) is not connected with the City as a member, officer or employee of the City, but who may be regularly retained to audit the accounting records of and make reports thereon to the City. Net Revenues means Gross Revenues less Operation and Maintenance Expenses. B-3

76 Operation and Maintenance Expenses means the amount required to pay the reasonable expenses of management, repair and other costs of the nature of costs which have historically and customarily been accounted for as such, necessary to operate, maintain and preserve the Water System in good repair and working order, including but not limited to, the cost of supply and transmission of water under long-term contracts or otherwise and the expenses of conducting the activities of the water division of the City, but excluding depreciation. Operation and Maintenance Expenses shall not include any payments to the City for special franchise fees or any transfers to the City s general fund. Opinion of Counsel means a written opinion of Hawkins Delafield & Wood LLP or such other counsel of recognized national standing in the field of law relating to municipal bonds appointed by the City. Outstanding means (subject to the provisions described under Events of Default and Remedies of Owners - Application of Funds Upon Event of Default ) all Bonds except: (1) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (2) Bonds paid or deemed to have been paid as described under Defeasance - Discharge of Bonds ; and (3) Bonds in lieu of or in substitution for which other Bonds shall have been executed, issued and delivered by the City pursuant hereto. Owner, when used in connection with the Indenture, means any person who shall be the registered owner of any Outstanding Bond. Parity Obligation means any Revenue Bond or any contract, instrument or other agreement for the purchase, acquisition or lease of facilities, properties, structures or equipment (or the refinancing thereof) for the Water System, designated by the City at the initial delivery thereof as payable from Net Revenues to be transferred to the Payment Fund and any other corresponding fund or account relating to any other Parity Obligations, to the extent the payments under such Bond, contract, instrument or agreement are payable from such Net Revenues, and the final payments under which are due more than one year following the incurrence thereof. Parity Obligation includes the Bonds issued pursuant to the Indenture and the 2012 Bonds. Parity Obligation Service means, with respect to any period, the amount of principal and interest or other payments accrued or to accrue in such period with respect to all outstanding Parity Obligations (excluding the amount of proceeds of Parity Obligations held in any fund or account for the payment of Parity Obligation Service accrued or to accrue during such period). For purposes of accrual under this definition, all payments with respect to Parity Obligations due in a calendar month shall be deemed due on the first day of such calendar month. Parity Obligation Service includes the principal and interest payments with respect to the 2015 Bonds issued under the Indenture. Indenture. Payment Fund means the fund by that name established and maintained pursuant to the Permitted Investments means any of the following: 1. Direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America ( United States Treasury Obligations ), (b) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (c) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or (d) evidences of ownership of proportionate interests in future interest and principal B-4

77 payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated. 2. Federal Housing Administration debentures 3. The listed obligations of government-sponsored agencies which are not backed by the full faith and credit of the United States of America: a) Federal Home Loan Mortgage Corporation (FHLMC); b) Participation certificates (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts) - Senior Debt obligations; c) Farm Credit Banks (formerly: Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) Consolidated system-wide bonds and notes; d) Federal Home Loan Banks (FHL Banks) Consolidated debt obligations; e) Federal National Mortgage Association (FNMA) Senior debt obligations Mortgage-backed securities (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts); f) Student Loan Marketing Association (SLMA) Senior debt obligations (excluded are securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date); g) Financing Corporation (FICO) Debt obligations; and h) Resolution Funding Corporation (REFCORP) Debt obligations. 4. Unsecured certificates of deposit, time deposits, and bankers acceptances (having maturities of not more than 30 days) of any bank the short-term obligations of which are rated A-1 or better by S&P. 5. Deposits the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation (FDIC), in banks which have capital and surplus of at least $5 million. 6. Commercial paper (having original maturities of not more than 270 days) rated `A-1+ by S&P and Prime-1 by Moody s. 7. Money market funds rated `AAm or `AAm-G by S&P, or better. 8. State Obligations, which means: a) Direct general obligations of any state of the United States of America or any subdivision or agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated A3 by Moody s and A by S&P, or better, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated; b) Direct general short-term obligations of any state agency or subdivision or agency thereof described in (A) above and rated A-1+ by S&P and `MIG-1 by Moody s; and c) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any state, state agency or subdivision described in (A) above and rated AA or better by S&P and `Aa or better by Moody s. B-5

78 9. Pre-refunded municipal obligations rated AAA by S & P and Aaa by Moody s meeting the following requirements: a) the municipal obligations are (1) not subject to redemption prior to maturity or (2) the trustee for the municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of the municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions; b) the municipal obligations are secured by cash or United States Treasury Obligations which may be applied only to payment of the principal of, interest and premium on such municipal obligations; c) the principal of and interest on the United States Treasury Obligations (plus any cash in the escrow) has been verified by the report of independent certified public accountants to be sufficient to pay in full all principal of, interest, and premium, if any, due and to become due on the municipal obligations ( Verification ); d) the cash or United States Treasury Obligations serving as security for the municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations; e) no substitution of a United States Treasury Obligation shall be permitted except with another United States Treasury Obligation and upon delivery of a new Verification; and f) the cash or United States Treasury Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent. 10. Repurchase agreements: With (1) any domestic bank, or domestic branch of a foreign bank, the long term debt of which is rated at least A- by S&P or A3 by Moody s or A- by Fitch; or (2) any broker-dealer with retail customers or a related affiliate thereof which broker-dealer has, or the parent company (which guarantees the provider) of which has, long-term debt rated at least A by S&P and Moody s, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corporation; or (3) any other entity rated A- or better by S&P or A3 by Moody s or A- by Fitch and acceptable to the City, provided that: a) The market value of the collateral is maintained at 102% or higher; b) The Trustee or a third party acting solely as agent therefor or for the City (the Holder of the Collateral ) has possession of the collateral or the collateral has been transferred to the Owner of the Collateral in accordance with applicable state and federal laws (other than by means of entries on the transferor s books); c) The repurchase agreement shall state and an opinion of counsel shall be rendered at the time such collateral is delivered that the Owner of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Owner of the Collateral is in possession); 11. Investment agreements with a domestic or foreign bank or corporation (other than a life or property casualty insurance company) the long-term debt of which, or, in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guaranty insurance company, claims paying ability, of the guarantor is rated at least A- by S&P or A3 by Moody s or A- by Fitch; provided that, by the terms of the investment agreement: B-6

79 a) interest payments are to be made to the Trustee at times and in amounts as necessary to pay debt service (or, if the investment agreement is for the construction fund, construction draws) on the Bonds; b) the invested funds are available for withdrawal without penalty or premium for purposes permitted under the Indenture, at any time upon not more than seven days prior notice; the City and the Trustee agree to give or cause to be given notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid; c) the investment agreement shall state that it is the unconditional and general obligation of, and is not subordinated to any other obligation of, the provider thereof or, if the provider is a bank, the agreement or the opinion of counsel shall state that the obligation of the provider to make payments thereunder ranks pari passu with the obligations of the provider to its other depositors and its other unsecured and unsubordinated creditors; d) the City or the Trustee receives the opinion of domestic counsel (which opinion shall be addressed to the City) that such investment agreement is legal, valid, binding and enforceable upon the provider in accordance with its terms and of foreign counsel (if applicable) in form and substance acceptable, and addressed to, the City; e) the investment agreement shall provide that if during its term the provider s rating by either S&P or Moody s or Fitch falls below A- by S&P and A3 by Moody s and A- by Fitch, the provider shall, at its option, within 10 days of receipt of publication of such downgrade, either (i) collateralize the investment agreement by delivering or transferring in accordance with applicable state and federal laws (other than by means of entries on the provider s books) to the City, the Trustee or a third party acting solely as agent therefor (the Holder of the Collateral ) collateral free and clear of any third-party liens or; or (ii) repay the principal of and accrued but unpaid interest on the investment, (iii) or take other action acceptable to the City; f) The investment agreement shall state and an opinion of counsel shall be rendered, in the event collateral is to be pledged by the provider under the terms of the investment agreement, at the time such collateral is delivered, that the Owner of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Owner of the Collateral is in possession); and g) the investment agreement must provide that if during its term i) the provider shall default in its payment obligations, the provider s obligations under the investment agreement shall, at the direction of the City or the Trustee, be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the City or Trustee, as appropriate, and ii) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. ( event of insolvency ), the provider s obligations shall automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the City or Trustee, as appropriate. 12. The Local Agency Investment Fund of the State of California, created pursuant to Section of the California Government Code. B-7

80 Person means an individual, corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof. Principal Corporate Trust Office means the corporate trust office of the Trustee located at 700 Wilshire Boulevard, 17th Floor, Los Angeles, California or such other office or offices as the Trustee shall designate from time to time. Principal Payment Date means July 1 of each year, as set forth in the forepart of the Official Statement for the 2015 Bonds. Rating Agency means Standard & Poor s, a Division of The McGraw Hill Companies, Inc., or in the event that Standard & Poor s no longer maintains a rating on the Bonds, any other nationally recognized bond rating agency then maintaining a rating on the Bonds, but, in each instance, only so long as Standard & Poor s or such other nationally recognized rating agency then maintains a rating on the Bonds. Record Date means the 15th day of the calendar month immediately preceding each Interest Payment Date. Redemption Price means such amount, together with investment earnings thereon when invested in Defeasance Securities, as shall be sufficient to pay, at the earlier of their stated maturity or the next applicable optional redemption date, the principal of, plus the applicable redemption premium, if any, and accrued interest on the applicable Bonds of a Series to the date fixed for their redemption in connection with such prepayment. Representation Letter means a letter of representation in customary form with with The Depository Trust Company, New York, New York. Reserve Account shall have the meaning ascribed thereto pursuant to a Supplemental Indenture. There is no Reserve Account for the 2015 Bonds. Reserve Account Requirement shall have the meaning ascribed thereto pursuant to a Supplemental Indenture. There is no Reserve Account Requirement for the 2015 Bonds. Revenue Bonds means any revenue bond, revenue note, warrant or other evidence of indebtedness issued, incurred or delivered for the financing or refinancing or extensions of, additions to, repairs and replacements to, renewals of, and improvements of, the Water System, designated by the City at the initial delivery thereof as payable from Net Revenues to be transferred to the Water Trustee for deposit in the Payment Fund and any other corresponding fund or account relating to any other Parity Obligations, to the extent the payments under such revenue bond, revenue note, warrant or other evidence of indebtedness are payable from such Net Revenues. Securities Depositories means The Depository Trust Company, 55 Water Street, 50th Floor, New York, New York , Attention: Call Notification Department, Fax (212) ; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the City may designate in a Written Request of the City delivered to the Trustee. Supplemental Indenture means any indenture then in full force and effect which has been duly executed and delivered by the City and the Trustee amendatory of the Indenture or supplemental hereto; but only if and to the extent that such Supplemental Indenture is specifically authorized hereunder. Tax Certificate means the Tax Certificate delivered by the City at the time of the issuance and delivery of a series of Bonds, as the same may be amended or supplemented in accordance with its terms. B-8

81 Trustee means Wells Fargo Bank, National Association, or any other association or corporation that may at any time be substituted in its place pursuant to the Indenture. Water Fund means the existing Water Fund established and held by the City with respect to the Water System. Water System means the water system of the City, including all facilities, properties and improvements at any time owned, controlled or operated by the City for the water system, and any necessary lands, rights, entitlements and other property useful in connection therewith, together with all extensions thereof and improvements thereto at any time acquired, constructed or installed by the City. Written Certificate or Written Request of the City means a written certificate statement or request signed in the name of the City by an authorized representative of the City. General Terms of Bonds General. Except as otherwise provided in the Representation Letter, the principal of the Bonds shall be payable in lawful money of the United States of America by check at the Principal Corporate Trust Office of the Trustee. The Bonds shall bear interest payable semiannually on each Interest Payment Date. Each Bond shall bear interest from the Interest Payment Date next preceding the date of authentication thereof, unless such date of authentication is an Interest Payment Date, in which event such Bond shall bear interest from such date, or unless such date of authentication is prior to the Record Date for the first Interest Payment Date, in which event such Bond shall bear interest from its date of issuance; provided, however, that if at the time of authentication of any Bond interest is then in default on the Outstanding Bonds, such Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment on the Outstanding Bonds. Except as otherwise provided in the Representation Letter, payment of interest on the Bonds due on or before the maturity or prior redemption thereof shall be made to the person whose name appears in the Bonds registration books kept by the Trustee, as described under General Terms of Bonds - Bond Registration Books, as the registered owner thereof as of the close of business 15 days immediately preceding an Interest Payment Date (the Record Date ), whether or not such day is a Business Day, such interest to be paid by check mailed by first class mail to such registered owner at the address as it appears in such books. The Owner of $1,000,000 or more in aggregate principal amount of Bonds may request in writing that the Trustee pay the interest thereon by wire transfer to an account in the United States, such request to be filed with the Trustee not later than the applicable Record Date. Payment of the principal of the Bonds shall be made upon the surrender thereof at maturity or on redemption prior to maturity at the Principal Corporate Trust Office of the Trustee. Execution of Bonds. The City Manager of the City is authorized and directed to execute each of the Bonds on behalf of the City and the City Clerk of the City is authorized and directed to countersign each of the Bonds on behalf of the City. The signatures of such City Manager and City Clerk may be manual, printed, lithographed or engraved by facsimile reproduction. In case any officer whose signature appears on the Bonds shall cease to be such officer before the delivery of the Bonds to the purchaser thereof, such signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained. in office until such delivery of the Bonds. Only those Bonds bearing thereon a certificate of authentication in the form hereinbefore recited, executed manually and dated by the Trustee, shall be entitled to any benefit, protection or security under the Indenture or be valid or obligatory for any purpose, and such certificate of the Trustee shall be conclusive evidence that the Bonds so authenticated and registered have been duly authorized, executed, issued and delivered under the Indenture and are entitled to the benefit, protection and security hereof. B-9

82 Transfer and Payment of Bonds. Any Bonds may, in accordance with its terms, be transferred in the books required to be kept, as described under General Terms of Bonds - Bond Registration Books, by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Bonds for cancellation accompanied by delivery of a duly executed written instrument of transfer in a form acceptable to the Trustee. Whenever any Bond or Bonds shall be surrendered for transfer, the City shall execute and the Trustee shall authenticate and deliver to the transferee a new Bond or Bonds of the same series and maturity for a like aggregate principal amount in authorized denominations. The Trustee shall require the payment by the Owner requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer as a condition precedent to the exercise of such privilege. The City and the Trustee may deem and treat the registered owner of any Bonds as the absolute owner of such Bonds for the purpose of receiving payment thereof and for all other purposes, whether such Bonds shall be overdue or not, and neither the City nor the Trustee shall be affected by any notice or knowledge to the contrary; and payment of the interest on and principal of and redemption premium, if any, on such Bonds shall be made only to such registered owner, which payments shall be valid and effectual to satisfy and discharge liability on such Bonds to the extent of the sum or sums so paid. The Trustee shall not be required to issue, register the transfer of or exchange any Bonds during the fifteen (15) days preceding each Interest Payment Date, or to register the transfer of or exchange any Bonds which has been selected for redemption in whole or in part, from and after the day of mailing of a notice of redemption of such Bonds selected for redemption in whole or in part as described under General Terms of Bonds - Redemption of 2015 Bonds. Exchange of Bonds. Bonds may be exchanged at the Principal Corporate Trust Office of the Trustee for a like aggregate principal amount of Bonds of the same series and maturity of other authorized denominations. The Trustee shall require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange as a condition precedent to the exercise of such privilege. The Trustee shall not be required to make any such exchange during the fifteen (15) days preceding each Interest Payment Date. Bond Registration Books. The Trustee will keep at its Principal Corporate Trust Office sufficient books for the registration and transfer of the Bonds which shall at all times be open to inspection by the City during regular business hours with reasonable prior notice, and upon presentation for such purpose the Trustee shall, under such reasonable regulations as it may prescribe, register or transfer the Bonds in such books as hereinabove provided. Mutilated, Destroyed, Stolen or Lost Bonds. If any Bond shall become mutilated the Trustee at the expense of the Owner shall thereupon authenticate and deliver a new Bond of like tenor in exchange and substitution for the Bond so mutilated, but only upon surrender to the Trustee of the Bond so mutilated. Every mutilated Bond so surrendered to the Trustee shall be cancelled. If any Bond shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee and, if such evidence be satisfactory to the Trustee and indemnity satisfactory to the Trustee shall be given, the Trustee, at the expense of the Holder, shall thereupon authenticate and deliver, a new Bond of like tenor in lieu of and in substitution for the Bond so lost, destroyed or stolen. The Trustee may require payment of a reasonable sum for each new Bond issued as described under this heading and of the expenses which may be incurred by the City and the Trustee in the premises. Any Bond issued under the provisions under this heading in lieu of any Bond alleged to be lost, destroyed or stolen shall be equally and proportionately entitled to the benefits of the Indenture with all other Bonds of the same series secured by the Indenture. Neither the City nor the Trustee shall be B-10

83 required to treat both the original Bond and any replacement Bond as being Outstanding for the purpose of determining the principal amount of Bonds which may be issued under the Indenture or for the purpose of determining any percentage of Bonds Outstanding hereunder, but both the original and replacement Bond shall be treated as one and the same. Acquisition of Bonds by City. All Bonds acquired by the City, whether by purchase or gift or otherwise, shall be surrendered to the Trustee for cancellation. Destruction of Cancelled Bonds. Whenever provision is made for the return to the City of any Bonds which have been cancelled pursuant to the provisions hereof, the City may, by a Written Request of the City, direct the Trustee to destroy such Bonds and furnish to the City a certificate of such destruction. Deposit and Use of Proceeds of in the Expense Fund. The Trustee agrees to establish and maintain the Expense Fund. Amounts in the Expense Fund shall be withdrawn by the Trustee for the purpose of paying costs of issuance of the Series A Bonds. Any amounts remaining on deposit in the Expense Fund on January 1, 2016 shall be withdrawn and transferred to the Trustee for deposit in the Principal Account. Validity of Bonds. The recital contained in the Bonds that the same are issued pursuant to the Act and pursuant hereto shall be conclusive evidence of their validity and of the regularity of their issuance, and all Bonds shall be incontestable from and after their issuance. The Bonds shall be deemed to be issued, within the meaning hereof, whenever the definitive Bonds shall have been delivered to the purchaser thereof and the proceeds of sale thereof received. Special Covenants as to Book-Entry Only System for Bonds. (a) Except as otherwise provided in subsections (b) and (c) under this heading, all of the Bonds initially issued shall be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ( DTC ), or such other nominee as DTC shall request pursuant to the Representation Letter. Payment of the interest on any Bond registered in the name of Cede & Co. shall be made on each Interest Payment Date for such Bonds to the account, in the manner and at the address indicated in or pursuant to the Representation Letter. (b) The Bonds initially shall be issued in the form of a single authenticated fully registered bond for each stated maturity of such Bonds, representing the aggregate principal amount of the Bonds of such maturity. Upon initial issuance, the ownership of all such Bonds shall be registered in the registration records maintained by the Trustee as described under General Terms of Bonds - Bond Registration Books in the name of Cede & Co., as nominee of DTC, or such other nominee as DTC shall request pursuant to the Representation Letter. The Trustee, the City and any paying agent may treat DTC (or its nominee) as the sole and exclusive owner of the Bonds registered in its name for the purposes of payment of the principal or redemption price of and interest on such Bonds, selecting the Bonds or portions thereof to be redeemed, giving any notice permitted or required to be given to Owners hereunder, registering the transfer of Bonds, obtaining any consent or other action to be taken by Owners of the Bonds and for all other purposes whatsoever; and neither the Trustee nor the City or any paying agent shall be affected by any notice to the contrary. Neither the Trustee nor the City or any paying agent shall have any responsibility or obligation to any Participant (which shall mean, for purposes under this heading, securities brokers and dealers, banks, trust companies, clearing corporations and other entities, some of whom directly or indirectly own DTC), any person claiming a beneficial ownership interest in the Bonds under or through DTC or any Participant, or any other person which is not shown on the registration records as being a Holder, with respect to (i) the accuracy of any records maintained by DTC or any Participant, (ii) the payment by DTC or any Participant of any amount in respect of the principal or redemption price of or interest on the Bonds (iii) any notice which is permitted or required to be given to Owners of Bonds hereunder, (iv) the selection by DTC or any Participant of any person to receive payment in the event of a partial redemption of the Bonds, or (v) any consent given or other action taken B-11

84 by DTC as Owner of Bonds. The Trustee shall pay all principal of and premium, if any, and interest on the Bonds only at the times, to the accounts, at the addresses and otherwise in accordance with the Representation Letter, and all such payments shall be valid and effective to satisfy fully and discharge the City s obligations with respect to the principal of and premium, if any, and interest on the Bonds to the extent of the sum or sums so paid. Upon delivery by DTC to the Trustee of written notice to the effect that DTC has determined to substitute a new nominee in place of its then existing nominee, the Bonds will be transferable to such new nominee in accordance with subsection (f) under this heading. (c) In the event that the City determines that it is in the best interests of the beneficial owners of the Bonds that they be able to obtain bond certificates, the Trustee shall, upon the written instruction of the City, so notify DTC, whereupon DTC shall notify the Participants of the availability through DTC of bond certificates. In such event, the Bonds will be transferable in accordance with subsection (f) under this heading. DTC may determine to discontinue providing its services with respect to the Bonds at any time by giving written notice of such discontinuance to the City and the Trustee and discharging its responsibilities with respect thereto under applicable law. In such event, the Bonds will be transferable in accordance with subsection (f) under this heading. Whenever DTC requests the City and the Trustee to do so, the Trustee and the City will cooperate with DTC in taking appropriate action after reasonable notice to arrange for another securities depository to maintain custody of all certificates evidencing the Bonds then Outstanding. In such event, the Bonds will be transferable to such securities depository in accordance with subsection (f) under this heading, and thereafter, all references in the Indenture to DTC or its nominee shall be deemed to refer to such successor securities depository and its nominee, as appropriate. (d) Notwithstanding any other provision of the Indenture to the contrary, so long as all Bonds Outstanding are registered in the name of any nominee of DTC, all payments with respect to the principal of and premium, if any, and interest on each such Bond and all notices with respect to each such Bond shall be made and given, respectively, to DTC as provided in the Representation Letter. (e) The Trustee is authorized and requested to execute and deliver the Representation Letter and, in connection with any successor nominee for DTC or any successor depository, enter into comparable arrangements, and shall have the same rights with respect to its actions thereunder as it has with respect to its actions under the Indenture. (f) In the event that any transfer or exchange of Bonds is authorized under subsection (b) or (c) under this heading, such transfer or exchange shall be accomplished upon receipt by the Trustee from the registered owner thereof of the Bonds to be transferred or exchanged and appropriate instruments of transfer to the permitted transferee, all in accordance with the applicable provisions described under General Terms of Bonds - Transfer and Payment of Bonds and - Exchange of Bonds. In the event Bond certificates are issued to Owners other than Cede & Co., its successor as nominee for DTC as holder of all the Bonds, another securities depository as holder of all the Bonds, or the nominee of such successor securities depository, the provisions described under under General Terms of Bonds - Transfer and Payment of Bonds and - Exchange of Bonds shall also apply to, among other things, the registration, exchange and transfer of the Bonds and the method of payment of principal of, premium, if any, and interest on the Bonds. Conditions for the Issuance of Additional Refunding Bonds. The City may at any time issue Additional Bonds payable from the Net Revenues as provided in the Indenture and secured by a pledge of the Net Revenues as provided in the Indenture on a parity with the pledge securing the Outstanding Bonds theretofore issued hereunder, but only subject to the following specific conditions, which are made conditions precedent to the issuance of any such Additional Bonds: the Indenture; (a) The City shall be in compliance with all agreements and covenants contained in B-12

85 (b) The issuance of such Additional Bonds shall have been authorized by the City and shall have been provided for by Supplemental Indenture which shall specify the following: (1) the proceeds of such Additional Bonds shall be applied solely for the purpose of refunding any Revenue Bonds then Outstanding, including payment of all costs incidental to or connected with such refunding; (2) the authorized principal amount and designation of such Additional Bonds; (3) the dated date and the maturity dates of, and the sinking fund payment dates, if any, for such Additional Bonds; provided, that (A) each maturity and sinking fund date shall fall upon July 1; (B) all such Additional Bonds of like maturity shall be identical in all respects, except as to number and denomination; and (C) serial maturities for Serial Bonds or sinking fund payments for Term Bonds, or any combination thereof, shall be established to provide for the retirement of such Additional Bonds on or before their respective longest maturity dates; (4) the interest payment dates for such Additional Bonds, which shall be Interest Payment Dates; (5) the redemption premiums, if any, and the redemption terms, if any, for such Additional Bonds; (6) the amount, if any, from the proceeds of sale of such Additional Bonds to be applied to refund Revenue Bonds; (7) the amount to be deposited from the proceeds of sale of such Additional Bonds in the related Reserve Account (if any), which amount shall be sufficient to cause the amount on deposit in the related Reserve Account (if any) to equal the related Reserve Requirement for such series of Additional Bonds upon the issuance of such Additional Bonds; (8) the forms of such Additional Bonds; and (9) such other provisions as are necessary or appropriate and not inconsistent herewith. (c) The annual amount of interest and principal, including sinking fund payments, payable on the Additional Bonds, does not exceed the corresponding amount of such payments on the Revenue Bonds being refunded. Procedure for the Issuance of Additional Bonds. The City may, at any time, execute Additional Bonds for issuance under the Indenture and deliver them to the Trustee, and thereupon such Additional Bonds shall be authenticated and delivered by the Trustee to the purchaser thereof upon the Written Request of the City, but only upon receipt by the Trustee of the following documents or money or securities, all of such documents dated or certified, as the case may be, as of the date of authentication of such Additional Bonds by the Trustee (unless the Trustee shall accept any of such documents bearing a prior date): (a) Additional Bonds; (b) an executed copy of the Supplemental Indenture authorizing the issuance of such a Written Request of the City as to the authentication of such Additional Bonds; (c) an Opinion of Counsel to the effect that (i) the City has the right and power to execute and deliver the Supplemental Indenture and the Supplemental Indenture has been duly and lawfully executed and delivered by the City, is in full force and effect and is valid and binding upon the City and enforceable in accordance with its terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization and other similar laws relating to the enforcement of creditors rights and by equitable principles) and no other authorization for the execution and delivery thereof is required; (ii) B-13

86 such Additional Bonds are valid and binding special obligations of the City, enforceable in accordance with their terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization and other similar laws relating to the enforcement of creditors rights and by equitable principles) and the terms of the Indenture and entitled to the benefits hereof, and such Additional Bonds have been duly and validly authorized, executed, issued and delivered in accordance herewith; and (iii) the issuance of such Additional Bonds will not adversely affect the exclusion from gross income for federal tax purposes of interest on the Bonds then Outstanding; and (d) such further documents, opinions, money or securities as are required by the provisions of the Supplemental Indenture providing for the issuance of such Additional Bonds. Net Revenues Pledge of Net Revenues; Special Limited Obligations. To secure the payment of the Bonds, the City pledges to the Owners of the Bonds and for such purpose grants the Owners a lien upon the Net Revenues in the Water Fund held by the City and any other amounts (including proceeds of the sale of the Bonds) held by the Trustee in any fund or account established hereunder; provided, however, that out of the Net Revenues and other moneys there may be applied such sums for such purposes as are permitted hereunder. This pledge of Net Revenues constitutes a pledge of and charge and lien upon the Net Revenues for the payment of the interest on and principal of the Bonds in accordance with the terms of the Indenture on parity with the pledge of Net Revenues for the City s other Parity Obligations. Payment of principal of and interest on the Bonds and all other payments with respect to other Parity Obligations shall be equally secured by Net Revenues without priority for number or date of issuance or incurrence of such Bonds or Parity Obligations. The Bonds are limited obligations of the City and are payable, as to interest thereon, principal thereof and any premiums upon the redemption of any thereof, solely from the Net Revenues as provided herein, and the City is not obligated to pay them except from the Net Revenues. All the Bonds are equally secured by a pledge of and charge and lien upon the Net Revenues. The Bonds are not a debt of the State of California or any of its political subdivisions, and neither the State nor any of its political subdivisions is liable thereon, nor in any event shall the Bonds be payable out of any funds or properties other than those of the City as provided in the Indenture. The pledge under the Indenture does not constitute a pledge of general revenues, funds or moneys of the City or an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The full faith and credit of the City is not pledged for the payment of the principal of or interest on the Bonds and no tax or other source of funds other than the net revenues hereinafter referred to is pledged to pay the principal of or interest on the Bonds. Receipt and Deposit of Amounts in the Payment Fund. In order to carry out and effectuate the pledge, charge and lien contained herein, the Trustee agrees and covenants that all pledged amounts when and as received shall be received by the Trustee in trust under the Indenture for the benefit of the Owners and shall be deposited when and as received by the Trustee in the Payment Fund (the Payment Fund ), which fund is created, to be maintained with the Trustee so long as any Bonds shall be Outstanding hereunder. All such pledged amounts shall be accounted for through and held in trust in the Payment Fund, and the City shall have no beneficial right or interest in any of such pledged amounts except only as in the Indenture provided. All such pledged amounts shall be allocated, applied and disbursed solely to the purposes and uses hereinafter in this Article set forth, and shall be accounted for separately and apart from all other accounts, funds, money or other resources of the City. The City agrees to make payments, as further described below, for deposit in the Payment Fund held by the Trustee which, in the aggregate, shall be in an amount sufficient for the payment in full of all obligations to the Owners of the Bonds from time to time Outstanding under the Indenture, including (i) the total interest payments due and payable on the Bonds and (ii) the total principal B-14

87 payments due and payable on the Bonds; less the amount of other funds available for such payment as provided in the Indenture. The City shall pay to the Trustee for deposit in the Payment Fund not less than three Business Days prior to January 1 and July 1 of each year the amount of the principal and/or interest payments due on such January 1 or July 1, respectively. Each payment under the Indenture shall be paid by the City in funds available on the due date thereof in lawful money of the United States of America to the Trustee at its Corporate Trust Office, and the City agrees that such amounts shall be held, invested, disbursed and applied as provided in the Indenture. Establishment and Maintenance of Accounts for Use of Money in the Payment Fund. (a) The following accounts within the Payment Fund are created, to be maintained with the Trustee so long as any Bonds shall be Outstanding hereunder: (i) Interest Account, (ii) Principal Account, and (iii) Reserve Account. Subject to the provisions described under Representations, Warranties and Covenants of the City - Tax Covenants, all money in the Payment Fund shall be set aside by the Trustee in the following order of priority: (i) Interest Account, (ii) Principal Account, and (iii) Reserve Account. All money in each of such accounts shall be held in trust by the Trustee and shall be applied, used and withdrawn only for the purposes hereinafter described. If at any time it is deemed necessary or desirable by the City in connection with the issuance of Additional Bonds or otherwise, the City may establish additional accounts or subaccounts within any of the Payment Fund or any of the accounts established hereunder. The following accounts are created for the 2015 Bonds and the City covenants and agrees to cause to be maintained with the Trustee such accounts so long as the 2015 Bonds remain Outstanding: (i) 2015 Interest Account, and (ii) 2015 Principal Account Interest Account. On or before each January 1 and July 1 and any redemption date, the Trustee shall set aside from the Payment Fund and deposit in the 2015 Interest Account that amount of money which is equal to the aggregate amount of interest becoming due and payable on all Outstanding 2015 Bonds on such January 1 or July 1, as the case may be. No deposit need be made in the 2015 Interest Account if the amount contained therein is at least equal to the aggregate amount of interest becoming due and payable on all Outstanding 2015 Bonds on such Interest Payment Date. All money in the 2015 Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on the 2015 Bonds as it shall become due and payable (including accrued interest on any 2015 Bonds purchased or redeemed prior to maturity) Principal Account. On or before each Principal Payment Date, the Trustee shall set aside from the Payment Fund and deposit in the 2015 Principal Account an amount of money equal to the aggregate principal amount of all Outstanding Serial Bonds maturing on such July 1. No deposit need be made in the 2015 Principal Account if the amount contained therein is at least equal to the aggregate amount of the principal of all Series 2015 Outstanding Serial Bonds maturing by their terms on such July 1. All money in the 2015 Principal Account shall be used and withdrawn by the Trustee solely for the purpose of paying the principal of the 2015 Bonds as they shall become due and payable, whether at maturity or redemption. Deposit and Investments of Money in Accounts and Funds. Subject to the provisions described under Representations, Warranties and Covenants of the City - Tax Covenants, all money held by the Trustee in any of the accounts or funds established pursuant hereto shall be invested in Permitted Investments at the Written Request of the City. If the City fails to direct the Trustee to invest any such moneys, they shall be invested in Permitted Investments of the type described in paragraph (7) thereof. All money held in the Reserve Account (if any) shall be invested in Permitted Investments with a B-15

88 term to maturity not exceeding five years or invested in Permitted Investments of the type described in paragraph (11) thereof. All investments under the Indenture shall be valued by the Trustee semi-annually, as follows: (a) as to investments the bid and asked prices of which are published on a regular basis in The Wall Street Journal (or, if not there, then in The New York Times), the average of the bid and asked prices for such investments so published on or most recently prior to such time of determination; (b) as to investments the bid and asked prices of which are not published on a regular basis in The Wall Street Journal or The New York Times, the average bid price at such time of determination for such investments by any two nationally recognized government securities dealers (selected by the Trustee in its absolute discretion) at the time making a market in such investments or the bid price published by a nationally recognized pricing service; (c) as to certificates of deposit and bankers acceptances, the face amount thereof, plus accrued interest; and (d) as to any investment not specified above, the value thereof established by prior agreement between the City and the Trustee. Except as otherwise determined from time to time by the City, securities purchased as an investment of moneys in any fund or account created under the Indenture and held by the Trustee shall be deemed at all times to be a part of such fund or account. Subject to the provisions described under Representations, Warranties and Covenants of the City - Tax Covenants, all investment earnings or profits received on any money held in the funds and accounts established under the Indenture and held by the Trustee shall be deposited in the Payment Fund and any loss resulting from the liquidation of such investment shall be charged to the respective fund or account. The City acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the City the right to receive brokerage confirmations of security transactions as they occur, the City specifically waives receipt of such confirmations to the extent permitted by law. The Trustee will furnish the City with periodic cash transaction statements that include detail for all investment transactions made by the Trustee under the Indenture. Representations, Warranties and Covenants of the City Establishment of the Water Fund. The City represents and warranties that the City has heretofore established the Water Fund into which the City deposits and will continue to deposit all Gross Revenues, and which the City will maintain throughout the term of the Bonds. Punctual Payment and Performance. The City will cause the punctual payment out of the Net Revenues the interest on and the principal of and redemption premiums, if any, to become due on every Bond issued under the Indenture in strict conformity with the terms of the Indenture and of the Bonds, and will faithfully observe and perform all the agreements and covenants to be observed or performed by the City contained in the Indenture and in the Bonds. Inclusion of Principal and Interest Payments in Budget. The City covenants to take such action as may be necessary to include and maintain the applicable principal and interest payments and administrative fee and tax payments due under the Indenture in its applicable budget for the appropriate Fiscal Year or pursuant to separate resolution of the City and further shall make the necessary appropriations for all such principal and interest payments and any administrative fee and tax payments (to the extent necessary) required in the Indenture. The covenant on the part of the City contained in this heading shall be deemed to be and shall be construed to be a ministerial duty and it shall be the ministerial duty of each and every public official of the City to take such action and do such things as are required by law in the performance of such official duty of such officials to enable the City to carry out and perform such covenant. Limitation on Encumbrances on the Water System. The City covenants and agrees that it will not create, assume or suffer to exist any mortgage, deed of trust, pledge, security interest, encumbrance, lien or charge of any kind (including the charge upon property purchased under conditional B-16

89 sales or other title retention agreements) upon the Water System which impairs the ability of the City to comply with its covenants set forth in this Article IV. Accounting Records. The City covenants and agrees at all times to keep, or cause to be kept, proper books of record and account, prepared in accordance with generally accepted accounting principles, in which complete and accurate entries shall be made of all transactions of or in relation to the business, properties and operations of the Water System. Such books of record and account shall be available for inspection by the Trustee at reasonable hours and under reasonable circumstances. Tax Covenants. The City shall not use or permit the use of any proceeds of a series of Bonds to acquire any securities or obligations that would cause the interest on such series of Bonds to become subject to federal income taxation, and shall not take or permit to be taken any other action or actions, which would cause any such Bond to be an arbitrage bond within the meaning of Section 148 of the Code or federally guaranteed within the meaning of Section 149(b) of the Code and any such applicable regulations promulgated from time to time thereunder. The City covenants to comply with the provisions and procedures of each Tax Certificate. Notwithstanding any provisions of this heading or any Tax Certificate, if the City shall provide to the Trustee an opinion of Bond Counsel to the effect that any specified action required under this heading is no longer required or that some further or different action is required to maintain the exclusion from gross income for federal income tax purposes of interest on any series of Bonds, the Trustee may conclusively rely on such opinion in complying with the requirements of this heading, and, notwithstanding any other provision of the Indenture or any Tax Certificate, the covenants under the Indenture shall be deemed to be modified to that extent. Within 55 days of the end of each fifth Bond Year (as such term is defined in the Tax Certificate), the City shall calculate or cause to be calculated the amount of rebatable arbitrage, in accordance with Section 148(f)(2) of the Code and Section of the Treasury Regulations (taking into account any applicable exceptions with respect to the computation of the rebatable arbitrage, described, if applicable, in the Tax Certificate), for this purpose treating the last day of the applicable Bond Year as a computation date (the Rebatable Arbitrage ). Within 55 days of the end of each fifth Bond Year, upon the written Request of the City, the City shall transfer to the Trustee an amount equal to the Rebatable Arbitrage so calculated. The Trustee shall pay the Rebatable Arbitrage, as directed by the City, to the United States Treasury, (i) not later than 60 days after the end of (X) the fifth Bond Year, and (Y) each applicable fifth Bond Year thereafter, an amount that, together with all previous rebate payments, is equal to at least 90% of the Rebatable Arbitrage calculated as of the end of such Bond Year; and (ii) not later than 60 days after the payment of all the Bonds, an amount equal to 100% of the Rebatable Arbitrage calculated as of the date of such payment and any income attributable to the Rebatable Arbitrage determined to be due and payable, computed in accordance with Section of the Treasury Regulations. Each payment required to be made pursuant to this heading shall be made to the Internal Revenue Service Center, Philadelphia, Pennsylvania on or before the date on which such payment is due, and shall be accompanied by Internal Revenue Service Form 8038-T, or shall be made in such other manner as provided under the Code. Notwithstanding anything in this heading to the contrary, the obligation to comply with the requirements of this paragraph shall survive the defeasance or payment in full of the Bonds. The City shall retain records of all determinations made under the Indenture until six years after the complete retirement of the Bonds. Continuing Disclosure. The City covenants and agrees that it will comply with and carry out, or cause to be complied with and carried out, all of the provisions of the Continuing Disclosure Agreement with respect to each series of Bonds. Notwithstanding any other provision of the Indenture to the contrary, failure to comply with any Continuing Disclosure Agreement shall not constitute an Event of Default; however, the Trustee, who shall be entitled to adequate indemnification (to the extent permitted by law) may, or any Owner or Beneficial Owner (as defined in the related Continuing Disclosure B-17

90 Agreement) may, take such actions as may be necessary and appropriate, including seeking mandamus or specific performance by court order, to cause the City to comply with its obligations under this heading. The sole remedy under each Continuing Disclosure Agreement in the event of any failure of the City to comply with the Continuing Disclosure Agreement shall be an action to compel performance, and no Person or entity shall be entitled to recover monetary damages under such Continuing Disclosure Agreement. Flow of Gross Revenues. The City agrees and covenants that all Gross Revenues received by it shall be deposited when and as received in the Water Fund, and all money on deposit in the Water Fund shall be applied and used only as provided in the Indenture and each other instrument authorizing the other Parity Obligations. The City shall pay all Operation and Maintenance Expenses (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Expenses the payment of which is not then immediately required) from the Water Fund as they become due and payable, and remaining Net Revenues on deposit in the Water Fund shall be transferred or expended by the City at the following times in the following order of priority: (a) Parity Obligation Service; Transfers. On or before the third Business Day before each date on which Parity Obligation Service becomes due and payable (whether at maturity or prior redemption or otherwise) the City shall, from the Net Revenues in the Water Fund, transfer to the Trustee for deposit in the Payment Fund and to the trustee or trustees for any corresponding funds or accounts relating to any other Parity Obligations, sums equal to the amount of principal of and interest on the Bonds and other Parity Obligation Service, respectively, becoming due and payable on such due date, except that no such deposit need be made if the Trustee or such other trustees, as the case may be, then holds monies in the Payment Fund or any corresponding funds or accounts, respectively, at least equal to the amount of principal of and interest on the Bonds or other Parity Obligation Service (including mandatory sinking account payments) becoming due and payable on the next succeeding date on which Parity Obligation Service becomes due and payable; provided, however, that if Net Revenues are not sufficient to make such transfers, then such transfers shall be made on a pro rata basis based upon the amounts due on each such series of Parity Obligations. (b) Reserve Account; Transfers. On or before the third Business Day before each date on which Parity Obligation Service becomes due and payable, the City shall, from the remaining Net Revenues on deposit in the Water Fund after transfers pursuant to subsection (a) above, transfer to the Trustee for deposit in the Reserve Account and to the trustee or trustees for any corresponding funds or accounts relating to any other Parity Obligations the respective amounts, if any, required to be so transferred to satisfy the Reserve Account Requirement (if any) pursuant to the Indenture and the reserve requirements of each other instrument authorizing the other Parity Obligations; provided, however, that if Net Revenues are not sufficient to make such transfers, then such transfers shall be made on a pro rata basis based upon the amount of the deficiency in each fund or account (including the accounts in the Payment Fund) to which transfers are to be made. (c) Rebate Payments. The City shall, from the remaining Net Revenues on deposit in the Water Fund after transfers pursuant to subsections (a) and (b) above, make when due any payments required to be made to the United States as described under Representations, Warranties and Covenants of the City - Tax Covenants and any tax certificate relating to the Water System. (d) Administrative Fee and Tax Payments. The City shall, from the remaining Net Revenues on deposit in the Water Fund after transfers pursuant to subsections (a), (b) and (c) above, transfer to the Trustee amounts in payment of administrative fee and tax payments relating to the Bonds and transfer to any other trustees for deposit into any corresponding administrative fee and tax payments funds or accounts relating to any other Parity Obligations the amount necessary to pay when due all administrative fee and tax payments as provided in the Indenture and other payments required to be made from any other corresponding funds or accounts. B-18

91 (e) Remaining Net Revenues. All Net Revenues remaining on deposit in the Water Fund after transfers pursuant to subsections (a), (b), (c) and (d) above shall be held free and clear of the Indenture by the City, and the City may use and apply such remaining amount for any lawful purpose of the City, including, but not limited to, replenishing any deficiencies under the Indenture or any other instrument authorizing Parity Obligations, payment of any repairs, replacements, improvements or renewals of or to the Water System, payment of any cost or funding of any reserve or fund, the redemption, prepayment or payment of Bonds or other Parity Obligations upon the terms and conditions set forth in the Indenture or the instrument authorizing such other Parity Obligations, the purchase of Bonds or other Parity Obligations as and when and at such prices as the City may determine, the payment of any subordinate obligations in accordance with the instruments authorizing such subordinate obligations, and transfers to the City s general fund, including but not limited to special franchise fees or other similar fees or taxes. Security and Source for Principal and Interest Payments. The City is obligated to make payments of principal of and interest on the Bonds and administrative fee and tax payments solely from Net Revenues. Payments of principal of and interest on the Bonds and all other payments with respect to other Parity Obligations shall be equally secured by Net Revenues without priority for number or date of incurrence of such Parity Obligations. Subject to the foregoing provisions of this heading, nothing in the Indenture shall preclude the City from making principal and interest payments with respect to the Bonds and administrative fee and tax payments from other lawfully available moneys of the City. Rates and Charges. The rates to be charged for services furnished by the Water System shall be fixed so as to provide Gross Revenues for each Fiscal Year at least sufficient to pay, as the same become due, all Operation and Maintenance Expenses for such Fiscal Year and so as to provide Net Revenues for each Fiscal Year at least 1.25 times the amount necessary to pay, as the same become due, all Parity Obligation Service (including mandatory sinking account payments) on the Bonds and any other Parity Obligations for such Fiscal Year and to pay all other obligations and indebtedness payable under the Indenture or similar agreement for any other Parity Obligation for such Fiscal Year (including the payment of any amounts owing to any provider of any surety bond, insurance policy or letter of credit with respect to the Bonds and any other Parity Obligations, which amounts are payable under the Indenture or other applicable instrument). The City shall have in effect at all times rules and regulations requiring each consumer or customer located on any premises connected with the Water System to pay the rates and charges applicable to the Water System provided to such premises and providing for the billing thereof and for a due date and a delinquency date for each bill. The City shall not permit any part of the Water System or any facility thereof to be used or taken advantage of free of charge by any corporation, firm or Person, or by any public agency (including the United States of America, the State of California and any city, county, district, political subdivision, public corporation or agency of any thereof). Additional Indebtedness. The City shall not issue or incur any Revenue Bonds, indebtedness or obligations (excluding obligations for payment of Operation and Maintenance Expenses) that would be payable out of Net Revenues prior to Parity Obligations. Except for Revenue Bonds or other indebtedness issued to refund Bonds or other Parity Obligations payable from Net Revenues as described under General Terms of Bonds - Conditions for the Issuance of Additional Refunding Bonds and - Procedure for the Issuance of Additional Refunding Bonds or otherwise, which may be issued at any time without meeting the test set forth below, no additional indebtedness of the City payable out of Net Revenues on a parity with the Bonds and other Parity Obligations shall be created or incurred unless: (i) the Net Revenues during any twelve (12) consecutive calendar months out of the immediately preceding eighteen (18) calendar month period, plus, at the option of the City, any or all of the items hereinafter designated in (a) and (b) in this heading, shall have amounted to at least one hundred B-19

92 twenty-five percent (125%) of the greatest amount of Annual Parity Obligation Service immediately subsequent to the incurring of such additional Parity Obligations, as certified by the City; or (ii) the projected Net Revenues during the first complete Fiscal Year following issuance of such Parity Obligations when the improvements to the Water System financed with the proceeds of the Parity Obligations shall be in operation, plus, at the option of the City, any or all of the items hereinafter designated in (a) and (b) in this heading, shall amount to at least one hundred twentyfive percent (125%) of the greatest amount of Annual Parity Obligation Service immediately subsequent to the incurring of such additional Parity Obligations, as certified by the City. The items any or all of which may be added to such Net Revenues for the purpose of meeting either of the requirements set forth in clause (i) or (ii) of this heading are the following: (a) An allowance for any increase in Net Revenues (including, without limitation, a reduction in Operation and Maintenance Expenses) which may arise from any additions to or extensions or improvements of the Water System to be made or acquired with the proceeds of such additional Parity Obligations or with the proceeds of indebtedness previously issued, and also for Net Revenues from any such additions, extensions or improvements which have been made or acquired with moneys from any source but which, during all or any part of such Fiscal Year or such twelve (12) consecutive calendar month period out of the immediately preceding eighteen (18) calendar month period, were not in service, all in an amount equal to the estimated additional average annual Net Revenues (or estimated average annual reduction in Operation and Maintenance Expenses) to be derived from such additions, extensions or improvements for the first thirty- six (36) month period in which each addition, extension or improvement is to be in operation, all as certified by the City. (b) An allowance for earnings arising from any increase in the charges made for the use of the Water System which has become effective prior to the incurring of such additional Parity Obligations but which, during all or any part of such Fiscal Year or such twelve (12) consecutive calendar month period out of the immediately preceding eighteen (18) calendar month period, was not in effect, in an amount equal to the amount by which the Net Revenues would have been increased if such increase in charges had been in effect during the whole of such Fiscal Year or such twelve (12) consecutive calendar month period out of the immediately preceding eighteen (18) calendar month period, as certified by the City. Nothing in the Indenture shall limit the ability of the City to issue or incur obligations that are junior and subordinate to the payment of the principal, premium, interest and reserve fund requirements for the Bonds and all other Parity Obligations and which subordinate obligations are payable as to principal, premium, interest and reserve fund requirements, if any, only out of Net Revenues after the prior payment of (i) all amounts then due and required to be paid or set aside under the Indenture from Net Revenues for principal, premium, if any, interest and reserve fund requirements for the Bonds and other Parity Obligations, as the same become due and payable and at the times and in the manner as required in the Indenture or any documents providing for the issuance or incurrence of other Parity Obligations and (ii) any rebate amount to the United States as described under subsection (c) under Representations, Warranties and Covenants of the City - Flow of Gross Revenues. No Encumbrances. The City shall not create any pledge, lien or charge upon any of the Net Revenues having priority over the lien of the Bonds and the other Parity Obligations with respect to Net Revenues. The City covenants that in order to fully preserve and protect the priority and security of the Bonds, the City shall pay from the Water Fund and discharge all lawful claims for labor, materials and supplies furnished for or in connection with the Water System which, if unpaid, may become a lien or charge upon the revenues prior or superior to the lien of the Bonds and impair the security of the Bonds. Except as expressly otherwise provided in the Indenture, the City shall also pay from the Water Fund all B-20

93 taxes and assessments or other governmental charges lawfully levied or assessed upon or in respect of the Water System or upon any part thereof or upon any of the revenues therefrom. Sale of Water System. The Water System shall not be sold or leased or otherwise disposed of as a whole, or substantially as a whole, unless such sale, lease or other disposition be so arranged as to provide for a continuance of payments into the Water Fund sufficient in amount to permit payment therefrom of the principal of and interest on, and premiums, if any, due upon the maturity or redemption of, all Bonds and other Parity Obligations payable out of Net Revenues, or to provide for such payments into some other fund charged with such payments. None of the works, plant, properties, facilities or other part of the Water System or any real or personal property comprising a part of the Water System shall be sold, leased or otherwise disposed of if such sale, lease or disposition would cause the City to be unable to satisfy the requirements described under Representations, Warranties and Covenants of the City - Rates and Charges. Maintenance and Operation of the Water System. The City covenants and agrees that it will operate and maintain the Water System in an efficient and economic manner and to operate, maintain and preserve the Water System in good repair and working order. Insurance. The City covenants that it shall at all times maintain with responsible insurers, to the extent available from such insurers at reasonable rates as determined by the City, all such insurance on the Water System as is customarily maintained with respect to works and properties of like character against accident, loss of or damage to such works or properties and against loss of revenues. If any useful part of the Water System shall be damaged or destroyed such part shall be restored to use unless the City provides a Written Certificate to the Trustee to the effect that in the opinion of the City such restoration would not be prudent. The money collected from insurance against accident, loss or damage shall be used for repairing or rebuilding the lost, damaged or destroyed works and properties, and to the extent not so applied, shall be applied to the retirement of outstanding Parity Obligations of the City and for such purpose paid into the appropriate funds or accounts. The City shall also maintain with responsible insurers to the extent available from such insurers at reasonable rates worker s compensation insurance and insurance against public liability and property damage to the extent reasonably necessary and obtainable. Notwithstanding the foregoing, the City may provide any insurance required by this covenant through a self-insurance program or it may provide such insurance as part of any blanket coverages maintained by the City. The Trustee Duties, Immunities and Liabilities of Trustee. (a) The Trustee shall, prior to any Event of Default, and after the curing of all Events of Default that may have occurred, perform such duties and only such duties as are specifically set forth in the Indenture and no implied duties or obligations shall be read into the Indenture against the Trustee. The Trustee shall, during the existence of any Event of Default (which has not been cured), exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) The Trustee may be removed with cause or without cause so long as no Event of Default has occurred and is continuing by written notice from the City if there is no Event of Default or from the Owners of a majority of the principal amount of the Outstanding Bonds to the Trustee and the City. Such resignation or removal shall not take effect until a successor has been appointed and has accepted the duties of Trustee. (c) The Trustee may resign by giving written notice of such resignation to the City and by giving notice of such resignation by mail, first class postage prepaid, to the Owners at the B-21

94 addresses listed in the note register. Upon receiving such notice of resignation, the City shall promptly appoint a successor Trustee by an instrument in writing. (d) Any removal or resignation of the Trustee and appointment of a successor Trustee shall become effective upon acceptance of appointment by the successor Trustee. If no successor Trustee shall have been appointed and shall have accepted appointment within 45 days of giving notice of removal or notice of resignation as aforesaid, the resigning Trustee, at the expense of the City or any Owner (on behalf of himself and all other Owners) may petition any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Trustee. Any successor Trustee appointed under the Indenture shall signify its acceptance of such appointment by executing and delivering to the City and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee, with like effect as if originally named Trustee in the Indenture; but, nevertheless, at the written request of the City or of the successor Trustee, such predecessor Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under the Indenture and shall pay over, transfer, assign and deliver to the successor Trustee any money or other property subject to the trusts and conditions in the Indenture set forth. Upon request of the successor Trustee, the City shall execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such moneys, estates, properties, rights, powers, trusts, duties and obligations. Upon acceptance of appointment by a successor Trustee as provided in this subsection, such successor Trustee shall mail a notice of the succession of such Trustee to the trusts under the Indenture by first class mail, postage prepaid, to the Owners at their addresses listed in the note register. (e) Any Trustee appointed under the provisions of the Indenture shall be a trust company or bank having trust powers, having a corporate trust office in California, having (or whose parent holding company shall have) a combined capital and surplus of at least one hundred million dollars ($100,000,000), subject to supervision or examination by federal or state authority. If such bank or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purpose of this subsection (e) of this heading the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this subsection (e) of this heading the Trustee shall resign immediately in the manner and with the effect specified in this heading. (f) No provision in the Indenture shall require the Trustee to risk or expend its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. (g) The Trustee shall not be responsible for the sufficiency, timeliness or enforceability of the Revenues. (h) The Trustee shall not be accountable for the use or application by the City or any other party of any funds which the Trustee has released under the Indenture. (i) of its duties hereunder. The Trustee may employ attorneys, agents or receivers in the performance of any (j) Notwithstanding any other provision of the Indenture, in determining whether the rights of the Owners will be adversely affected by any action taken pursuant to the terms and provisions of the Indenture. B-22

95 Merger or Consolidation. Any entity into which the Trustee may be merged or converted or with which it may be consolidated or any entity resulting from any merger, conversion or consolidation to which it shall be a party or any entity to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided, in each case, such company shall be eligible under subsection (e) of the preceding heading shall succeed to the rights and obligations of such Trustee without the execution or filing of any paper or any further act, anything in the Indenture to the contrary notwithstanding. The Trustee shall give written notice of any merger, conversion or consolidation to which the Trustee shall be a party to the City no later than the effectiveness of such merger, conversion or consolidation. Compensation; Expenses. The Trustee shall receive as compensation for its services under the Indenture such fees as agreed to with the City, and the Trustee shall be entitled to be reimbursed from the City for other reasonable administrative fee and tax payments incurred by the Trustee in the performance of its obligations hereunder. The City agrees, to the extent permitted by law, to indemnify the Trustee and its respective officers, directors, members, employees, attorneys and agents for, and to hold them harmless against, any loss, liability or expense incurred without negligence or willful misconduct on their part arising out of or in connection with the acceptance or administration of the trusts imposed by the Indenture, including performance of their duties hereunder, including the costs and expenses of defending themselves against any claims or liability in connection with the exercise or performance of any of their powers or duties hereunder. Such indemnity shall survive the termination or discharge of the Indenture and resignation or removal of the Trustee. Liability of Trustee. The recitals of facts in the Indenture and in the Bonds contained shall be taken as statements of the City, and the Trustee assumes no responsibility for the correctness of the same, and makes no representations as to the validity or sufficiency of the Indenture or of the Bonds, and shall incur no responsibility in respect thereof, other than in connection with the duties or obligations in the Indenture or in the Bonds assigned to or imposed upon it. The Trustee shall, however, be responsible for its representations contained in its certificate of authentication on the Bonds. The Trustee shall not be liable in connection with the performance of its duties hereunder, except for its own negligence or willful misconduct. The Trustee may become the Owner of Bonds with the same rights it would have if it were not Trustee and, to the extent permitted by law, may act as depositary for and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of Owners, whether or not such committee shall represent the Owners of a majority in principal amount of the Bonds then Outstanding. The Trustee shall not be liable for any error of judgment made in good faith by a responsible officer, unless the Trustee shall have been negligent in ascertaining the pertinent facts. The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Owners of 100% in aggregate principal amount of the Bonds at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under the Indenture. The Trustee shall not be liable for any action taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by the Indenture, except for actions arising from the negligence or willful misconduct of the Trustee. The permissive right of the Trustee to do things enumerated under the Indenture shall not be construed as a mandatory duty. The Trustee shall not be deemed to have knowledge of any Event of Default under the Indenture unless and until it shall have actual knowledge thereof, or shall have received written notice thereof at the Corporate Trust Office of the Trustee. Except as otherwise expressly provided herein, and subject to the provisions described under The Trustee - Merger or Consolidation, the Trustee shall not be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements in the Indenture or of any of the documents executed in connection with the Bonds, or as to the existence of an Event of Default under the Indenture or thereunder. The Trustee shall not be responsible for the validity or effectiveness of any collateral given to or held by it. Without limiting the generality of the foregoing, the Trustee shall not be responsible for B-23

96 reviewing the contents of any financial statements furnished to the Trustee and may rely conclusively on the certificates provided under the Indenture to establish the compliance with its duties. Right to Rely on Documents. The Trustee shall be protected in acting upon any notice, resolution, request, requisition, consent, order, certificate, report, opinion, bond or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee may consult with counsel, who may but need not be counsel to the City, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it under the Indenture in good faith and in accordance therewith. Whenever in the administration of the trusts imposed upon it by the Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be in the Indenture specifically prescribed) may be deemed to be conclusively proved and established by a Certificate of the City, and such Certificate shall be full warrant to the Trustee for any action taken or suffered in good faith under the provisions of the Indenture in reliance upon such Certificate, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable. Preservation and Inspection of Documents. All documents received by the Trustee under the provisions of the Indenture shall be retained in its possession and shall be subject at all reasonable times to the inspection of the City and any Owner, and their agents and representatives duly authorized in writing, at reasonable hours and under reasonable conditions. Amendment of the Indenture Amendment of the Indenture. The Indenture and the rights and obligations of the City and of the Owners may be amended at any time by a Supplemental Indenture which shall become binding when the written consents of the Owners of a majority in aggregate principal amount of the Bonds of each series then Outstanding, exclusive of Bonds disqualified as described under Amendment of the Indenture - Disqualified Bonds. No such amendment shall (1) extend the maturity of or reduce the interest rate on or amount of interest on or principal of or redemption premium, if any, on any Bond without the express written consent of the Owner of such Bond, or (2) permit the creation by the City of any pledge of or charge or lien upon the Net Revenues as provided in the Indenture superior to the pledge, charge and lien created for the benefit of the Bonds, or (3) reduce the percentage of Bonds required for the written consent to any such amendment, or (4) modify any rights or obligations of the Trustee or the City without their prior written assent thereto, respectively. The Indenture and the rights and obligations of the City and of the Owners may also be amended at any time by a Supplemental Indenture, which shall become binding upon adoption, without the consent of any Owners and only to the extent permitted by law and after receipt of an approving Opinion of Counsel, for any purpose that will not materially adversely affect the interests of the Owners, including (without limitation) for any one or more of the following purposes (a) to add to the agreements and covenants required in the Indenture to be performed by the City other agreements and covenants thereafter to be performed by the City, or to surrender any right or power reserved in the Indenture to or conferred in the Indenture on the City; (b) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained in the Indenture or in regard to questions arising under the Indenture which the City may deem desirable or necessary and not inconsistent herewith; (c) to add to the agreements and covenants required herein, such agreements and covenants as may be necessary to qualify the Indenture under the Trust Indenture Act of 1939; or B-24

97 (d) to issue Additional Bonds as described under General Terms of Bonds - Conditions for the Issuance of Additional Refunding Bonds and - Procedure for the Issuance of Additional Refunding Bonds. Notwithstanding the foregoing, any amendment or supplement to the Indenture shall only become effective fifteen (15) days after written notice of such amendment or supplement, together with a copy thereof, has been provided to the Rating Agency. Disqualified Bonds. Bonds owned or held by or for the account of the City shall not be deemed Outstanding for the purpose of any consent or other action or any calculation of Outstanding Bonds provided in this article, and shall not be entitled to consent to or take any other action provided in this article. Endorsement or Replacement of Bonds After Amendment. After the effective date of any action taken as hereinabove provided, the City may determine that the Bonds may bear a notation by endorsement in form approved by the City as to such action, and in that case upon demand of the Owner of any Outstanding Bonds and presentation of his Bond for such purpose at the corporate trust office of the Trustee a suitable notation as to such action shall be made on such Bond. If the City shall so determine, new Bonds so modified as, in the opinion of the City, shall be necessary to conform to such action shall be prepared and executed, and in that case upon demand of the Owner of any Outstanding Bond a new Bond or Bonds shall be exchanged at the corporate trust office of the Trustee without cost to each Owner for its Bond or Bonds then Outstanding upon surrender of such Outstanding Bonds. Amendment by Mutual Consent. The provisions of this article shall not prevent any Owner from accepting any amendment as to the particular Bonds held by him, provided that due notation thereof is made on such Bonds. Events of Default and Remedies of Owners Events of Default. If one or more of the following events (herein called Events of Default ) shall happen, that is to say: (a) if default shall be made by the City in the due and punctual payment of the interest on any Bond when and as the same shall become due and payable; (b) if default shall be made by the City in the due and punctual payment of the principal of or redemption premium, if any, on any Bond when and as the same shall become due and payable, whether at maturity as therein expressed or by proceedings for redemption; (c) if the City shall fail to observe or perform any covenant, condition, agreement or provision in the Indenture on its part to be observed or performed, other than as referred to in subsections (a) or (b) of this paragraph, or shall breach any warranty by the City in the Indenture contained, for a period of sixty (60) days after written notice, specifying such failure or breach and requesting that it be remedied, has been given to the City by the Trustee; provided that, if in the reasonable opinion of the City such failure or breach can be remedied but not within such sixty (60) day period and if the City has taken all action reasonably possible to remedy such failure or breach within such sixty (60) day period, such failure or breach shall not become an Event of Default for so long as the City shall diligently proceed to remedy it in accordance with and subject to any directions or limitations of time established by the Trustee; (d) if the City files a petition in voluntary bankruptcy for the composition of its affairs or for its corporate reorganization under any state or federal bankruptcy or insolvency law, or makes an assignment for the benefit of creditors, or admits in writing to its insolvency or inability to pay debts as they mature, or consents in writing to the appointment of a trustee or receiver for itself or for the whole or any substantial part of the Water System; B-25

98 (e) if a court of competent jurisdiction shall approve a petition filed with the consent of the City seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein and such petition shall not be vacated or set aside or stayed within sixty (60) days from the date of commencement or entry thereof; or (f) if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the City or the Water System and such custody or control shall not be terminated within sixty (60) days from the date of assumption of such custody or control; then and in each and every such case during the continuance of such Event of Default, the Trustee may, and at the written direction of the Owners of a majority in aggregate principal amount of the Bonds at the time Outstanding shall, upon notice in writing to the City, pursue any available remedy at law or in equity to remedy such Event of Default and to enforce any applicable rights of the Trustee under or with respect to the Indenture; provided, that, such remedies shall not include any remedy of acceleration with respect to the payment of the principal of and interest on the Bonds. If an Event of Default shall have occurred and be continuing and if requested so to do by the Owners of a majority in aggregate principal amount of Outstanding Bonds and indemnified, the Trustee shall be obligated to exercise one or more of the rights and powers conferred by this Article VII, as the Trustee, being advised by counsel, shall deem most expedient in the interests of the Owners of the Bonds. Application of Funds Upon Event of Default. All amounts received by the Trustee pursuant to any right given or action taken by the Trustee under the provisions of the Indenture with respect to an Event of Default or held by the Trustee in any account or fund under the Indenture shall be applied by the Trustee in the following order upon presentation of the Bonds, and the stamping thereon of the amount of the payment if only partially paid, or upon the surrender thereof if fully paid: First, to the payment of the fees, costs and expenses of the Trustee in declaring such Event of Default and in carrying out the provisions of this Article VII, including reasonable compensation to its agents, attorneys and counsel, and any other amounts owning to the Trustee; and Second, to the payment of the whole amount of interest on and principal of the Bonds then due and unpaid; provided, however, that in the event such amounts shall be insufficient to pay in full the full amount of such interest and principal, then such amounts shall be applied in the following order of priority: (1) first, to the payment of all installments of interest on the Bonds then due and unpaid, on a pro rata basis in the event that the available amounts are insufficient to pay all such interest in full, and (2) second, to the payment of principal of the Bonds then due and payable, on a pro rata basis in the event that the available amounts are insufficient to pay all such principal in full. Institution of Legal Proceedings by Trustee. If one or more of the events of default shall happen and be continuing, the Trustee may, and upon the written request of the Owners of a majority in principal amount of the Bonds then Outstanding, or upon being indemnified to its satisfaction therefor, shall, proceed to protect or enforce its rights or the rights of the Owners of Bonds under the Indenture by a suit in equity or action at law, either for the specific performance of any covenant or agreement contained herein, or in aid of the execution of any power in the Indenture granted, or by mandamus or other appropriate proceeding for the enforcement of any other legal or equitable remedy as the Trustee shall deem most effectual in support of any of its rights and duties hereunder. B-26

99 Non-Waiver. Nothing in this article or in any other provision of the Indenture or in the Bonds shall affect or impair the obligation of the City, which is absolute and unconditional, to pay the interest on and principal of and redemption premiums, if any, on the Bonds to the respective Owners of the Bonds at the respective dates of maturity or upon prior redemption as provided in the Indenture from the Net Revenues as provided in the Indenture pledged for such payment, or shall affect or impair the right of such Owners, which is also absolute and unconditional, to institute suit to enforce such payment by virtue of the contract embodied in the Indenture and in the Bonds. A waiver of any default or breach of duty or contract by any Owner shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by any Owner to exercise any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Owners by this Article may be enforced and exercised from time to time and as often as shall be deemed expedient by the Owners. If any action, proceeding or suit to enforce any right or exercise any remedy is abandoned, the City and any Owner shall be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken. Actions by Trustee as Attorney-in-Fact. Any action, proceeding or suit which any Owner shall have the right to bring to enforce any right or remedy under the Indenture may be brought by the Trustee for the equal benefit and protection of all Owners, whether or not the Trustee is a Holder, and the Trustee is appointed (and the successive Owners, by taking and holding the Bonds issued hereunder, shall be conclusively deemed to have so appointed it) the true and lawful attorney-in-fact of the Owners for the purpose of bringing any such action, proceeding or suit and for the purpose of doing and performing any and all acts and things for and on behalf of the Owners as a class or classes as may be advisable or necessary in the opinion of the Trustee as such attorney-in-fact. Remedies Not Exclusive. No remedy in the Indenture conferred upon or reserved to the Owners is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given under the Indenture or now or hereafter existing at law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by applicable law. Limitation on Owners Right to Sue. No Owner of any Bond issued under the Indenture shall have the right to institute any suit, action or proceeding at law or equity, for any remedy under or upon the Indenture, unless (a) such Owner shall have previously given to the Trustee written notice of the occurrence of an event of default as described under Events of Default and Remedies of Owners - Events of Default ; (b) the Owners of at least a majority in aggregate principal amount of all the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers hereinbefore granted or to institute such suit, action or proceeding in its own name; (c) said Owners shall have tendered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (d) the Trustee shall have refused or omitted to comply with such request for a period of sixty (60) days after such request shall have been received by, and said tender of indemnity shall have been made to, the Trustee. Such notification, request, tender of indemnity and refusal or omission are declared, in every case, to be conditions precedent to the exercise by any owner of Bonds of any remedy hereunder; it being understood and intended that no one or more owners of Bonds shall have any right in any manner whatever by his or their action to enforce any right under the Indenture, except in the manner in the Indenture provided, and that all proceedings at law or in equity to enforce any provision of the Indenture shall be instituted, had and maintained in the manner in the Indenture provided and for the equal benefit of all Owners of the Outstanding Bonds. B-27

100 Defeasance Discharge of Bonds. If the City shall pay or cause to be paid or there shall otherwise be paid to the Owners of all Outstanding Bonds of a series the interest thereon and the principal thereof and the redemption premiums, if any, thereon at the times and in the manner stipulated in the Indenture and therein, then the Owners of such series of Bonds shall cease to be entitled to the pledge of and charge and lien upon the Net Revenues as provided herein, and all agreements, covenants and other obligations of the City to the Owners of such series of Bonds under the Indenture shall thereupon cease, terminate and become void and be discharged and satisfied. In such event, the Trustee shall execute and deliver to the City all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, the Trustee shall pay over or deliver to the City all money or securities held by it pursuant hereto which are not required for the payment of the interest on and principal of and redemption premiums, if any, on such series of Bonds. Any Outstanding Bonds of a series shall prior to the maturity date or redemption date thereof be deemed to have been paid within the meaning of and with the effect expressed in subsection (a) of this section if (1) in case any of such Bonds of a series are to be redeemed on any date prior to their maturity date, the City shall have given to the Trustee in form satisfactory to it instructions to provide notice in accordance with the Indenture, (2) there shall have been irrevocably deposited with the Trustee either (A) money in an amount which shall be sufficient or (B) Defeasance Obligations, the interest on and principal of which when paid will provide money which, together with the money, if any, deposited with the Trustee at the same time, shall be sufficient, as set forth in a written report of an Independent Certified Public Accountant, to pay when due the interest to become due on such Bonds of a series on and prior to the maturity date or redemption date thereof, as the case may be, and the principal of and redemption premiums, if any, on such Bonds of a series, and (3) in the event such Bonds of a series are not by their terms subject to redemption within the next succeeding sixty (60) days, the City shall have given the Trustee in form satisfactory to it irrevocable instructions to mail as soon as practicable, a notice to the Owners of such Bonds of a series that the deposit required by clause (2) above has been made with the Trustee and that such Bonds of a series are deemed to have been paid in accordance with this heading and stating the maturity date or redemption date upon which money is to be available for the payment of the principal of and redemption premiums, if any, on such Bonds of a series. If a forward supply contract is employed in connection with such defeasance of the Bonds of a series, (i) the written report of the Independent Certified Accountant shall expressly state that the adequacy of the escrow to accomplish the defeasance relies solely on the initial escrowed investments and the maturing principal thereof and interest income thereon and does not assume performance under or compliance with the forward supply contract, and (ii) the applicable escrow agreement shall provide that in the event of any discrepancy or difference between the terms of the forward supply contract and the escrow agreement and the Indenture, the terms of the escrow agreement and the Indenture shall be controlling. Unclaimed Money. Anything contained in the Indenture to the contrary notwithstanding, any money held by the Trustee in trust for the payment and discharge of any of the Bonds which remains unclaimed for two years after the date when such Bonds have become due and payable, either at their stated maturity dates or by call for redemption prior to maturity, if such money was held by the Trustee at such date, or for two years after the date of deposit of such money if deposited with the Trustee, shall at the Written Request of the City be repaid by the Trustee to the City as its absolute property free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Owners shall look only to the City for the payment of such Bonds, provided, that before being required to make any such payment to the City, the Trustee shall, at the expense of the City, cause to be mailed to the Owners of such Bonds (at the expense of the City) at their addresses as they appear in the registration books maintained by the Trustee, a notice that such money remains unclaimed and that, after a date named in such notice, which date shall not be less than thirty (30) days after the date of the mailing of such notice, the balance of such money then unclaimed will be returned to the City. B-28

101 Miscellaneous Liability of City Limited to Revenues. Notwithstanding anything contained herein, the City shall not be required to advance any money derived from any source other than the Net Revenues as provided in the Indenture for the payment of the interest on or principal of or redemption premiums, if any, on the Bonds or for the performance of any agreements or covenants in the Indenture contained. The City may, however, advance funds for any such purpose so long as such funds are derived from a source legally available for such purpose without incurring any indebtedness. The Bonds are limited obligations of the City and are payable, as to interest thereon, principal thereof and any premiums upon the redemption of any thereof, solely from the Net Revenues as provided herein, and the City is not obligated to pay them except from the Net Revenues. All the Bonds are equally secured by a pledge of and charge and lien upon the Net Revenues. The Bonds are not a debt of the State of California or any of its political subdivisions, and neither the State nor any of its political subdivisions is liable thereon, nor in any event shall the Bonds be payable out of any funds or properties other than those of the City as provided in the Indenture. Benefits of the Indenture Limited to Parties. Nothing contained herein, expressed or implied, is intended to give to any person other than the City, the Trustee and the Owners any right, remedy or claim under or by reason hereof. Any agreement or covenant required in the Indenture to be performed by or on behalf of the City or any member, officer or employee thereof shall be for the sole and exclusive benefit of the Trustee and the Owners. Execution of Documents by Owners. Any declaration, request or other instrument which is permitted or required in the Indenture to be executed by Owners may be in one or more instruments of similar tenor and may be executed by Owners in person or by their attorneys appointed in writing. The fact and date of the execution by any Owner or his attorney of any declaration, request or other instrument or of any writing appointing such attorney may be proved by the certificate of any notary public or other officer authorized to make acknowledgments of deeds to be recorded in the state or territory in which he purports to act that the person signing such declaration, request or other instrument or writing acknowledged to hire the execution thereof, or by an affidavit of a witness of such execution duly sworn to before such notary public or other officer. The ownership of any Bonds and the amount, maturity, number and date of holding the same may be proved by the registration books relating to the Bonds at the corporate trust office of the Trustee. Any declaration, request or other instrument or writing of the Owner of any Bond shall bind all future Owners of such Bond with respect to anything done or suffered to be done by the City in good faith and in accordance therewith. Waiver of Personal Liability. No member, officer or employee of the City shall be individually or personally liable for the payment of the interest on or principal of or redemption premiums, if any, on the Bonds by reason of their issuance, but nothing in the Indenture contained shall relieve any such member, officer or employee from the performance of any official duty provided by the Act or any other applicable provisions of law or hereby. Content of Certificates. Every Certificate of the City, with respect to compliance with any agreement, condition, covenant or provision provided in the Indenture shall include (a) a statement that the person or persons making or giving such certificate have read such agreement, condition, covenant or provision and the definitions in the Indenture relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements contained in such certificate are based; (c) a statement that, in the opinion of the signers, they have made or caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such agreement, condition, covenant or provision has been complied with, and (d) a B-29

102 statement as to whether, in the opinion of the signers, such agreement, condition, covenant or provision has been complied with. Any Certificate of the City may be based, insofar as it relates to legal matters, upon an Opinion of Counsel unless the person making or giving such certificate knows that the Opinion of Counsel with respect to the matters upon which his certificate may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. Any Opinion of Counsel may be based, insofar as it relates to factual matters information with respect to which is in the possession of the City, upon a representation by an officer or officers of the City unless the counsel executing such Opinion of Counsel knows that the representation with respect to the matters upon which his opinion may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. Accounts and Funds; Business Days. Any account or fund required in the Indenture to be established and maintained by the Trustee may be established and maintained in the accounting records of the Trustee either as an account or a fund, and may, for the purposes of such accounting records, any audits thereof and any reports or statements with respect thereto, be treated either as an account or a fund; but all such records with respect to all such accounts and funds shall at all times be maintained in accordance with the Tax Certificate and sound industry practice and with due regard for the protection of the security of the Bonds and the rights of the Owners. Any action required to occur under the Indenture on a day which is not a Business Day shall be required to occur on the next succeeding Business Day. Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required to be performed by or on the part of the City or the Trustee shall be contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof shall be null and void and shall be deemed separable from the remaining agreements and covenants or portions thereof and shall in no way affect the validity of the Indenture or of the Bonds, and the Owners shall retain all the benefit, protection and security afforded to them under the Act or any other applicable provisions of law. The City and the Trustee declare that they would have executed and delivered the Indenture and each and every other article, section, paragraph, subdivision, sentence, clause and phrase of the Indenture and would have authorized the issuance of the Bonds pursuant hereto irrespective of the fact that any one or more articles, sections, paragraphs, subdivisions, sentences, clauses or phrases of the Indenture or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid. of the State. Governing Law. The terms and provisions of the Indenture shall be governed by the laws B-30

103 APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE CITY AS OF JUNE 30, 2014 C-1

104 CITY OF AZUSA, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2014

105 CITY OF AZUSA, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2014 PREPARED BY FINANCE DEPARTMENT

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107 CITY OF AZUSA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2014 INTRODUCTORY SECTION TABLE OF CONTENTS Page Number Letter of Transmittal... i Organizational Chart... v Officials of the City of Azusa... vii FINANCIAL SECTION INDEPENDENT AUDITORS' REPORT... 1 MANAGEMENT S DISCUSSION AND ANALYSIS... 5 BASIC FINANCIAL STATEMENTS Government-Wide Financial Statements: Statement of Net Position Statement of Activities Fund Financial Statements: Balance Sheet - Governmental Funds Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities Statement of Net Position - Proprietary Funds Statement of Revenues, Expenses and Changes in Fund Net Assets - Proprietary Funds Statement of Cash Flows - Proprietary Funds Statement of Fiduciary Net Position - Fiduciary Funds Statement of Changes in Fiduciary Net Position Fiduciary Funds Notes to Financial Statements... 29

108 CITY OF AZUSA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2014 REQUIRED SUPPLEMENTARY INFORMATION TABLE OF CONTENTS Page Number Notes to Required Supplementary Information Budgetary Comparison Statement by Department - General Fund COMBINING AND INDIVIDUAL FUND STATEMENTS AND SCHEDULES Combining Balance Sheet - Nonmajor Governmental Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Governmental Funds Budgetary Comparison Schedules - Special Revenue Funds: State Gasoline Tax Proposition A Proposition C Community Development Block Grant Senior Nutrition Public Benefit Program Air Quality Improvement Grants and Seizure Supplemental Law Enforcement Fire Safety Monrovia Nursery Employee Benefits Utility Mitigation Measure R AB939 Fee Budgetary Comparison Schedules - Capital Projects Funds: Park In-Lieu Public Works Endowment Budgetary Comparison Schedules - Debt Service Fund: Public Financing Authority Combining Statement of Net Position Nonmajor Proprietary Funds Combining Statement of Revenues, Expenses and Changes in Fund Net Position Nonmajor Proprietary Funds Combining Statement of Cash Flows Nonmajor Proprietary Funds Combining Statement of Net Position Internal Service Funds

109 CITY OF AZUSA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2014 TABLE OF CONTENTS COMBINING AND INDIVIDUAL FUND STATEMENTS AND SCHEDULES (CONTINUED) Page Number Combining Statement of Revenues, Expenses and Changes in Fund Net Position Internal Service Funds Combining Statement of Cash Flows Internal Service Funds Combining Statement of Changes in Assets and Liabilities Agency Fund Supplemental Statement of Revenues, Expenses and Changes in Net Position Water Enterprise Fund Supplemental Statement of Revenues, Expenses and Changes in Net Position Light Enterprise Fund STATISTICAL SECTION Table 1 Net Position by Component Table 2 Change in Net Position Table 3 Fund Balances of Governmental Funds Table 4 Changes in Fund Balances of Governmental Funds Table 5 Light Department, Electricity Sold by Type of Customer Table 6 Electricity Rates Table 7 Largest Electrical Customers Table 8 Water Sold by Type of Customer Table 9 Water Rates Table 10 Largest Water Customers Table 11 Assessed Value and Estimated Actual Value of Taxable Property Table 12 Direct and Overlapping Property Rates Table 13 Principal Property Tax Payers Table 14 Property Tax Levies and Collections

110 CITY OF AZUSA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2014 STATISTICAL SECTION (CONTINUED) TABLE OF CONTENTS Page Number Table 15 Ratios of Outstanding Debt by Type Table 16 Ratio of General Bonded Debt Outstanding Table 17 Direct and Overlapping Debt Table 18 Legal Debt Margin Information Table 19 Pledged Revenue Coverage Table 20 Pledged Revenue Coverage, Tax Allocation Bonds Redevelopment Agency Table 21 Demographic and Economic Statistics Table 22 Principal Employers Table 23 Full-time and Part-time Employees by Function Table 24 Operating Indicators by Function Table 25 Capital Asset Statistics by Function Table 26 Schedule of Credits

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115 City of Azusa Organizational Chart Citizens of Azusa Mayor & City Council Utility Board Successor Agency Board City Attorney City Clerk City Treasurer Advisory Boards & Commissions City Manager Administration Economic & Community Development Finance Human Resources Information Technology Library Light and Water Utilities Public Safety Public Works Recreation & Family Services City Manager's Office Building Accounting Personnel City Services General Services Consumer Services Police Engineering Parks Maintenance v Public Information Community Improvement Purchasing Risk Management Police Services Youth and Outreach Services Electric Emergency Services Facilities Recreation Planning Community Facilities Districts L&W Services Refuse Fire Safety Graffiti Abatement Senior Center Successor Agency Debt Service Water Contract Services Sewer Senior Nutirition Business License Streets/ Sidewalk Maintenance Woman's Club Transportation

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117 City of Azusa ELECTED OFFICIALS AND DEPARTMENT HEADS 213 E. Foothill Boulevard Azusa, CA (626) Fax (626) ELECTED OFFICIALS TITLE TERM EXPIRATION Jeffrey Cornejo City Clerk March, 2017 Art Vasquez City Treasurer March, 2017 Joseph Rocha Mayor March, 2015 Edward Alvarez Councilmember March, 2017 Angel Carrillo Councilmember March, 2015 Robert Gonzales Mayor Pro-Tem March, 2017 Uriel Macias Councilmember March, 2015 DEPARTMENT HEADS TITLE PHONE NUMBER James W. Makshanoff City Manager Tito Haes Director of Public Works/Assistant City Manager Kurt Christiansen Director of Economic & Community Development Sam Gonzalez Chief of Police Ann Graf Director of Information Technology and Library /5277 Joe Jacobs Director of Recreation & Family Services George Morrow Director of Utilities Susan Paragas Director of Finance Theresa St. Peter Interim Director of Human Resources Daryl L. Osby Fire Chief City Attorney Best, Best, & Krieger (Marco Martinez) vii

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119 INDEPENDENT AUDITORS REPORT To the Honorable Mayor and Members of the City Council City of Azusa, California Report on Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of City of Azusa, California, (the City) as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the City s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Azusa, California, as of June 30, 2014, and, the respective changes in financial position and, where applicable, and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America.

120 To the Honorable Mayor and Members of the City Council City of Azusa, California Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis and the respective budgetary comparison for the General Fund be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City s basic financial statements. The introductory section, combining and individual nonmajor fund financial statements, budgetary comparison schedules, supplementary statement for water and light enterprise funds and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and budgetary comparison schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual nonmajor fund financial statements and schedules are fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. 2

121 To the Honorable Mayor and Members of the City Council City of Azusa, California Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 28, 2015 on our consideration of the City s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering City s internal control over financial reporting and compliance. Brea, California January 28,

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123 City of Azusa Management s Discussion and Analysis June 30, 2014 As management of the City of Azusa, California, we offer readers of the City of Azusa s financial statements this narrative overview and analysis of the financial activities of the City of Azusa for the fiscal year ended June 30, We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal, which can be found on pages i through iv of this report. All amounts, unless otherwise indicated, are expressed in whole dollars. Financial Highlights The assets of the City exceeded its liabilities at the close of fiscal year 2014 by $144,241,259 (net position). Total City assets of $277,971,359 include $157,093,769 or 56.5% of non-current assets attributed to capital assets, net of depreciation. Total City liabilities of $134,928,451 include $121,529,891 or 89.9% of long-term liabilities attributed mainly to tax allocation bonds and certificates of participation. As of June 30, 2014, the City s governmental funds reported combined fund balances of $29,525,901. At the end of the current fiscal year, the total fund balance for the General Fund was increased by $3,119,100 to $20,417,948. Total General Fund revenues received for the year were $36,130,542 and total General Fund expenditures for the year were $30,102,618, an excess of revenues over expenditures amounting to $6,027,924. This does not include transfers. Details are located within the General Fund Budgetary Highlights within the M D & A. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the City s basic financial statements, which are comprised of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. 1) Government-wide financial statements. The government-wide financial statements are designed to provide readers with a broad overview of the City s finances, in a manner similar to a private-sector business. The statement of net position presents information on all of the City s assets and liabilities, with the difference between the two reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City of Azusa is improving or deteriorating. The statement of activities presents information showing how the government s net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g. uncollected taxes and earned but unused vacation leave). 5

124 City of Azusa Management s Discussion and Analysis June 30, 2014 Both of the government-wide financial statements distinguish functions of the City of Azusa that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include General Government, Public Safety, Community Development, Parks and Recreation, and Public Works. The business-type activity of the City includes the City s Water, Light, Sewer/Wastewater, and Refuse Contract Utility operations. The government-wide financial statements include not only the City of Azusa itself (known as the primary government), but also the legally separate City of Azusa Redevelopment Agency and the Azusa Public Financing Authority for which the City of Azusa is financially accountable. Financial information for these component units has been included as an integral part of the primary government. Separate financial statements are prepared for the City of Azusa Redevelopment Agency and may be obtained from the City s Administrative Services-Finance Division. 2) Fund financial statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City of Azusa, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds and fiduciary funds. Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government s near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government s near-term financing decisions. Both the governmental fund balance sheet and governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City of Azusa maintains 20 individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balance for the General Fund is considered to be a major fund. Data from the other 19 governmental funds are combined into a single, aggregate presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements elsewhere in this report. The City of Azusa adopts an annual appropriated budget for each of its governmental funds. A budgetary comparison statement has been provided for the General Fund and all Special Revenue Funds, Capital Project Funds, and Debt Service Funds to demonstrate compliance with this budget. Proprietary funds. The City of Azusa maintains two different types of proprietary funds, enterprise and internal service funds. Enterprise funds are used to report the same functions presented as business type activities in the government-wide financial statements. The City uses an enterprise fund to account for its Water, Light, Sewer/Wastewater and Refuse Contract Utilities. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City s various functions. The City uses an internal service fund to account for its Consumer Services, Self Insurance, Central Services, Equipment Replacement, Intra-Governmental Loan and IT Services activity. Because these services predominantly benefit governmental rather than business type functions, they have been included within governmental activities in the government-wide financial statements. 6

125 City of Azusa Management s Discussion and Analysis June 30, 2014 Proprietary funds provide the same type of information as the government-wide financial statements (business type activities), only in more detail. Information is presented separately in the proprietary fund statement of net position and in the proprietary fund statement of revenues, expenditures, and changes in net position for the Water and Light funds. The Water and Light funds are considered to be major funds. The internal service funds are also presented in the proprietary fund financial statements. Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the government, and the City s role is purely custodial. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the City s own programs. All assets reported in Fiduciary funds are offset by a liability; the accrual basis of accounting is used to recognize receivables and payables. 3) Notes to the basic financial statements. The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. Other supplementary information. The combining financial statements and schedules referred to earlier in connection with non-major governmental funds and internal service funds are presented immediately following the notes to the basic financial statements. Government-wide Financial Analysis The following table presents a summary of the City s assets, liabilities and net position for its governmental and business type activities. As noted earlier, a government s net position may serve over time as a useful indicator of its financial position. City of Azusa - Summary of Net Position Governmental Business Type Activities Activities Total Current and other assets $ 46,008,111 $ 43,699,826 $ 74,869,479 $ 72,248,399 $ 120,877,590 $ 115,948,225 Capital assets, net 29,959,431 29,086, ,134, ,071, ,093, ,157,812 Total assets 75,967,542 72,786, ,003, ,319, ,971, ,106,037 Deferred charge on refunding - - 1,198,351 1,258,269 1,198,351 1,258,269 Total deferred outflow of resources - - 1,198,351 1,258,269 1,198,351 1,258,269 Current liabilities 4,541,446 3,543,881 8,857,114 9,806,489 13,398,560 13,350,370 Long-term liabilities 42,030,353 41,413,513 79,499,538 81,787, ,529, ,200,884 Total liabilities 46,571,799 44,957,394 88,356,652 91,593, ,928, ,551,254 Net position: Net investment in capital assets 29,959,431 29,086,566 58,465,869 55,086,846 88,425,300 84,173,412 Restricted 9,222,166 8,800,537 9,845,901 11,554,302 19,068,067 20,354,839 Unrestricted (9,785,854) (10,058,105) 46,533,746 42,342,906 36,747,892 32,284,801 Total net position $ 29,395,743 $ 27,828,998 $ 114,845,516 $ 108,984,054 $ 144,241,259 $ 136,813,052 As of June 30, 2014, the City s assets exceeded liabilities by $144,241,259. This represents an increase from the prior year and can be attributed to the increase in net investment for capital projects and a decrease in long-term liabilities for business type as evidenced in the Proprietary Funds Statement of Net Position. Increases in revenues resulted in a net position increase for the Water Fund $3,206,531 and the Electric Fund $120,996. 7

126 City of Azusa Management s Discussion and Analysis June 30, 2014 In evaluating the net position in capital assets for both governmental and business-type activities in the City of Azusa, $88,425,300 (61.3%) denotes net position invested in capital assets (net of related debt) and $24,124,344 (16.7%) represents resources that are subject to external restrictions. The remaining balance represents unrestricted net position of $31,691,615 (22.0 %). The following chart shows the comparison of the three components of net position for Fiscal Years and (in millions) Governmental activities. The following condensed summary of activities of the City s governmental activities for the year ended June 30, 2014 shows total net position equal $29,395,743, an increase of $1,566,745 (7.07%) from the prior year. The primary increase is due to the increases in program revenues and reductions in general government expenses. Revenue and expense graphs are included to aid the reader in understanding the results of the current year s activities. Business type activities. Business type activities net position totaled $114,845,516, an increase of $5,861,462 (5.4%) from the prior year. Key elements of the increase are due to program revenues and decrease in Sewer/Wastewater expenses. 8

127 City of Azusa Management s Discussion and Analysis June 30, 2014 City of Azusa - Summary of Changes in Net Position (Deficits) Governmental Business Type Activities Activities Total Program Revenues: Charges for services $ 9,752,821 $ 7,408,567 $ 72,389,622 $ 69,416,979 $ 82,142,443 $ 76,825,546 Operating contributions and grants 3,836,479 2,121, ,836,479 2,121,638 Capital contributions and grants 442,727 2,988, ,727 2,988,760 General Revenues: Taxes 29,315,094 29,220, , ,161 29,857,503 29,776,850 Motor vehicle in lieu 20,876 25, ,876 25,224 Investment earnings (423,898) 166, , ,573 (123,383) 526,247 Gain on sale of assets (3,690) - (3,690) Miscellaneous 759, , , ,380 1,158, ,827 Total Revenues 43,703,231 42,210,999 73,631,839 70,444, ,335, ,655,402 Expenses: General Government 8,843,327 9,208, ,843,327 9,208,777 Public Safety 21,284,020 20,157, ,284,020 20,157,469 Community Development 2,593,720 3,094, ,593,720 3,094,737 Parks and Recreation 3,808,038 3,823, ,808,038 3,823,597 Public Works 5,412,524 5,210, ,412,524 5,210,465 Interest and Fiscal Charges 1,330,555 1,362, ,330,555 1,362,362 Water ,345,227 18,975,068 18,345,227 18,975,068 Light ,011,550 44,121,911 45,011,550 44,121,911 Sewer/Wastewater - - 2,434,295 4,573,251 2,434,295 4,573,251 Refuse Contract - - 2,938,255 2,835,041 2,938,255 2,835,041 Total Expenses 43,272,184 42,857,407 68,729,327 70,505, ,001, ,362,678 Increase (decrease) in net position before transfers 431,047 (646,408) 4,902,512 (60,868) 5,333,559 (707,276) Transfers 1,535,996 1,309,808 (1,535,996) (1,309,808) - - Extraordinary gain/loss on dissolution of redevelopment agency - (28,165,584) - (13,351,770) - (41,517,354) Change in Net Position 1,967,043 (27,502,184) 3,366,516 (14,722,446) 5,333,559 (42,224,630) Net Position (Deficits) - Beginning 27,828,998 56,565, ,984, ,872, ,813, ,437,080 Restatement of Net Position (400,298) (1,233,862) 2,494,946 (1,165,536) 2,094,648 (2,399,398) Net Position (Deficits) - Ending $ 29,395,743 $ 27,828,998 $ 114,845,516 $ 108,984,054 $ 144,241,259 $ 136,813,052 The City s total revenues are $117,335,070 and the costs of all programs and services are $112,001,511. Fiscal year revenues increased by $4,679,668 (4.2%). Expenses decreased by $1,361,167 (-1.2%) from prior year. Key factors include: The increase in the governmental activities revenue was mainly due to a rise in charges for services from building permits and business license activities. It also included a one time reimbursement from the Successor Agency of approximately $360,000. The City experienced an increase in Franchise Fees and Utility User Tax related to increases in Electric and Water Sales that experienced a 6.2% and 0.7% increases in sales and service charges, respectively. Building revenues increased by $561,841 (14.9%) compared to FY The increase was due to increased development in the City such as the construction of new housing in the Rosedale housing development project. The materials recovery facility became operational during the second quarter of the fiscal year and resulted in new revenues of $357,397. 9

128 City of Azusa Management s Discussion and Analysis June 30, 2014 Revenues by Source-Governmental Activities Year Ended June 30, 2014 Utility users taxes 3.2% Other taxes 4.5% Investment earnings/other 0.8% Charges for services 22.3% Business licenses taxes 4.4% Franchise taxes 15.5% Contributions & grants 9.8% Sales taxes 16.4% Property taxes 18.4% Key elements of this year s summary of activities are as follows: Property tax revenue increased by $480,682, Sales tax revenue increased by a $95,344 and Franchise fees increased by $241,662 from the prior year. Charges for services revenue increased by $824,060; investment earnings decreased by $15,423 primarily due to continued low interest rates. Fines and Forfeitures increased by $353,702 primarily due to a correction in the application of late fee assessments for utility bills. 10

129 City of Azusa Management s Discussion and Analysis June 30, 2014 Total Governmental Activities expenses increased $414,777 (0.9%) over prior year. Total General Government expenses decreased $364,450 (-3.9%) compared to prior year. The reduction is mainly due to a non-election year and a decrease in public benefit program projects. Community development expenditures decreased $501,017 (19.3%) primarily due to reductions in capital and building improvement project activities. Financial Analysis of the City s Funds As noted earlier, the City of Azusa uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds. The focus of the City s governmental funds is to provide information on near-term inflows, outflows and balances of spendable resources. This information is useful in assessing the City s financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government s net resources available for spending during the fiscal year. At the end of the current fiscal year, the City s governmental funds reported combined ending fund balances of $29,525,901, an increase of $3,575,124 in comparison with the prior year s revised fund balance. Fund balance may be reserved to indicate that it is not available for new spending. This includes $20,773,838 in land held for resale. 11