$29,735,000 COSTA MESA FINANCING AUTHORITY 2017 LEASE REVENUE BONDS

Transcription

1 NEW ISSUE BOOK-ENTRY ONLY Rating: Standard & Poor s: AA+ See RATING. In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Bond Counsel, under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described in this Official Statement, interest (and original issue discount) on the Series 2017 Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, interest (and original issue discount) on the Series 2017 Bonds is exempt from State of California personal income tax. See the caption TAX MATTERS with respect to tax consequences relating to the Series 2017 Bonds. $29,735,000 COSTA MESA FINANCING AUTHORITY 2017 LEASE REVENUE BONDS Dated: Date of Delivery Due: October 1, as shown on inside cover The captioned bonds (the Series 2017 Bonds ) are issued by the Costa Mesa Financing Authority (the Authority ) and are payable from base rental payments (the Base Rental Payments ) to be made by the City of Costa Mesa (the City ) for the right to the use of certain real property, consisting of certain real property and improvements of the City (the Property ) pursuant to a Lease Agreement, dated as of October 1, 2017 (the Lease Agreement ), between the City, as lessee, and the Authority, as lessor. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS. The Series 2017 Bonds will be issued pursuant to an Indenture, dated as of October 1, 2017 (the Indenture ) among the City, the Authority and U.S. Bank National Association, as trustee (the Trustee ). The Series 2017 Bonds are issued to provide funds to (i) finance certain capital improvements in the City, as described herein (the Project ), (ii) refund all of the outstanding City of Costa Mesa 2007 Certificates of Participation (Police Facility Expansion Project) (the 2007 Certificates ), and (iii) pay the costs of issuing the Series 2017 Bonds. See THE PROJECT and REFUNDING PLAN. The City has covenanted under the Lease Agreement to make all scheduled Base Rental Payments, to include all such payments as a separate line item in its annual budgets, and to make all the necessary annual appropriations for such Base Rental Payments. The City s obligation to make Base Rental Payments is subject to abatement during any period in which, by reason of material damage to, or destruction or condemnation of, the Property, or any defects in title to the Property, there is substantial interference with the City s right to use and occupy any portion of the Property. See RISK FACTORS Abatement. The Series 2017 Bonds are being issued in fully registered book-entry only form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). Interest on the Series 2017 Bonds is payable semiannually on April 1 and October 1 of each year, commencing April 1, Purchasers will not receive certificates representing their interest in the Series 2017 Bonds. Individual purchases will be in principal amounts of $5,000 or integral multiples thereof. Principal of and interest and premium, if any, on the Series 2017 Bonds will be paid by the Trustee to DTC for subsequent disbursement to DTC Participants who are obligated to remit such payments to the beneficial owners of the Series 2017 Bonds. See THE SERIES 2017 BONDS Book-Entry Only System. The Authority may issue additional bonds ( Additional Bonds ) payable from Base Rental Payments. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Additional Bonds. The Series 2017 Bonds and any Additional Bonds are collectively referred to as the Bonds. The Series 2017 Bonds are subject to optional, mandatory sinking fund and extraordinary redemption prior to maturity as described in this Official Statement. See THE SERIES 2017 BONDS Redemption. No reserve fund has been created or will be funded with respect to the Series 2017 Bonds. The Series 2017 Bonds are special obligations of the Authority, payable solely from Base Rental Payments and the other assets pledged therefor under the Indenture. Neither the faith and credit nor the taxing power of the Authority, the City or the State of California, or any political subdivision thereof, is pledged to the payment of the Series 2017 Bonds. The Authority has no taxing power. The obligation of the City to make the Base Rental Payments does not constitute a debt of the City or the State of California or of any political subdivision thereof within the meaning of any constitutional or statutory debt limit or restriction, and does not constitute an obligation for which the City or the State of California is obligated to levy or pledge any form of taxation or for which the City or the State of California has levied or pledged any form of taxation. THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT A SUMMARY OF THIS ISSUE. INVESTORS MUST READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION. The Series 2017 Bonds will be offered when, as and if issued and received by the Underwriter, subject to the approval as to their validity by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel. Certain legal matters will be passed upon for the City and the Authority by the City Attorney. Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California is acting as disclosure counsel. Certain legal matters will be passed upon for the Underwriter by Jones Hall, a Professional Law Corporation, San Francisco, California, and for the Trustee by its counsel. It is anticipated that the Series 2017 Bonds in definitive form will be available for delivery to DTC on or about October 18, Dated: October 4, 2017

2 Principal Payment Date (October 1) $29,735,000 COSTA MESA FINANCING AUTHORITY 2017 LEASE REVENUE BONDS MATURITY SCHEDULE BASE CUSIP : Interest Rate Yield Price CUSIP Principal 2018 $1,600, % 0.890% AA ,610, AB ,675, AC ,740, AD ,830, AE ,920, AF ,015, AG ,115, AH ,220, AJ , AK , C AL , C AM , C AN , C AP , C AQ , C AR , C AS , AT , AU , AV0 $4,935, % Term Bonds due October 1, 2042; Yield 3.440%; Price: ; CUSIP : AW8 C Priced to first optional redemption date of October 1, 2027, at par. CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services (CGS) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright 2017 CUSIP Global Services. All rights reserved. CUSIP data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve in any way as a substitute for the CGS database. CUSIP numbers are provided for convenience of reference only. None of the Authority, the City, or the Underwriter takes any responsibility for the accuracy of such numbers.

3 No dealer, broker, salesperson or other person has been authorized by the City or the Authority to give any information or to make any representations in connection with the offer or sale of the Series 2017 Bonds other than those contained in this Official Statement and, if given or made, such other information or representations must not be relied upon as having been authorized by the City or the Authority. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor will there be any sale of the Series 2017 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers or owners of the Series 2017 Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described in this Official Statement, are intended solely as such and are not to be construed as representations of fact. 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 a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. This Official Statement and the information contained in this Official Statement are subject to completion or amendment without notice and neither delivery of this Official Statement nor any sale made hereunder will, under any circumstances, create any implication that there has been no change in the affairs of the City or the Authority or any other parties described in this Official Statement since the date hereof. These securities may not be sold, nor may an offer to buy be accepted, prior to the time the Official Statement is delivered in final form. This Official Statement is being submitted in connection with the sale of the Series 2017 Bonds referred to in this Official Statement and may not be reproduced or used, in whole or in part, for any other purpose, unless authorized in writing by the City. All summaries of documents and laws are made subject to the provisions thereof and do not purport to be complete statements of any or all such provisions. Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, project, budget, intend or similar words. Such forward-looking statements include, but are not limited to, certain statements contained under the caption THE PROJECT, the information in APPENDIX A GENERAL AND FINANCIAL INFORMATION ABOUT THE CITY OF COSTA MESA and under the caption RISK FACTORS. 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. THE CITY DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THE FORWARD-LOOKING STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT. IN EVALUATING SUCH STATEMENTS, POTENTIAL INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS THAT COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. IN CONNECTION WITH THE OFFERING OF THE SERIES 2017 BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2017 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 SERIES 2017 BONDS TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AND OTHERS 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 SERIES 2017 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED IN SUCH ACT AND HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. The City maintains a website; however, information presented there is not a part of this Official Statement and should not be relied upon in making an investment decision with respect to the Series 2017 Bonds.

4 CITY OF COSTA MESA, CALIFORNIA

5 CITY OF COSTA MESA, CALIFORNIA CITY COUNCIL Katrina Foley, Mayor Sandra Genis, Mayor Pro Tem John Stephens, Member James Righeimer, Member Allan Mansoor, Member COSTA MESA FINANCING AUTHORITY Katrina Foley, Chair Sandra Genis, Vice Chair John Stephens, Boardmember James Righeimer, Boardmember Allan Mansoor, Boardmember CITY/AUTHORITY STAFF Thomas R. Hatch, City Manager/Executive Director Tamara Letourneau, Assistant City Manager/Administrative Services Director/Assistant Executive Director Brenda Green, City Clerk/Secretary Stephen Dunivent, Interim Finance Director/Treasurer Colleen O Donoghue, Assistant Finance Director Thomas P. Duarte, Esq., City Attorney SPECIAL SERVICES Bond and Disclosure Counsel Stradling Yocca Carlson & Rauth, a Professional Corporation Newport Beach, California Municipal Advisor Fieldman, Rolapp & Associates, Inc. Irvine, California Verification Agent Grant Thornton LLP Minneapolis, Minnesota Trustee U.S. Bank National Association Los Angeles, California

6 [THIS PAGE INTENTIONALLY LEFT BLANK]

7 TABLE OF CONTENTS INTRODUCTION... 1 ESTIMATED SOURCES AND USES OF FUNDS... 3 REFUNDING PLAN... 4 THE PROJECT... 4 BASE RENTAL PAYMENT SCHEDULE... 5 THE SERIES 2017 BONDS... 6 General... 6 Registration, Transfers and Exchanges... 6 Redemption... 6 Book-Entry Only System... 8 SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS... 9 Pledge of Revenues... 9 Additional Bonds... 9 Base Rental Payments Additional Rental Payments Abatement Substitution and Release of Property Termination of Lease Agreement Action on Default No Reserve Fund Insurance THE PROPERTY THE CITY OF COSTA MESA THE AUTHORITY RISK FACTORS General Considerations Security for the Series 2017 Bonds Abatement No Reserve Fund Substitution and Release of Property; Additional Bonds Limited Recourse on Default; No Acceleration of Base Rental Possible Insufficiency of Insurance Proceeds Natural Disasters Hazardous Substances Other Financial Matters Limitations on Remedies No Liability of Authority to the Owners Secondary Market STATE OF CALIFORNIA BUDGET INFORMATION State Budget Potential Impact of State Financial Condition on the City Redevelopment Dissolution Future State Budgets CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS Article XIIIA of the State Constitution i

8 Article XIIIB of the State Constitution Proposition Proposition Unitary Property Proposition Proposition 1A Proposition Future Initiatives TAX MATTERS CERTAIN LEGAL MATTERS MUNICIPAL ADVISOR LITIGATION VERIFICATION OF MATHEMATICAL ACCURACY UNDERWRITING RATING CONTINUING DISCLOSURE FINANCIAL STATEMENTS OF THE CITY MISCELLANEOUS APPENDIX A GENERAL AND FINANCIAL INFORMATION ABOUT THE CITY OF COSTA MESA... A-1 APPENDIX B SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS... B-1 APPENDIX C COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY OF COSTA MESA FOR THE YEAR ENDED JUNE 30, C-1 APPENDIX D PROPOSED FORM OF BOND COUNSEL OPINION... D-1 APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE... E-1 APPENDIX F BOOK-ENTRY ONLY SYSTEM... F-1 ii

9 OFFICIAL STATEMENT $29,735,000 COSTA MESA FINANCING AUTHORITY 2017 LEASE REVENUE BONDS INTRODUCTION Series 2017 Bonds. This Official Statement, which includes the cover page and Appendices (the Official Statement ), provides certain information concerning the captioned bonds (the Series 2017 Bonds ) issued by the Costa Mesa Financing Authority (the Authority ). The Series 2017 Bonds will be issued pursuant to the Marks-Roos Local Bond Pooling Act of 1985, commencing with Section 6584 of the California Government Code (the Act ), and an Indenture, dated as of October 1, 2017 (the Indenture ), among the Authority, the City of Costa Mesa (the City ) and U.S. Bank National Association, as trustee (the Trustee ). The Series 2017 Bonds are being issued in fully registered book-entry only form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). Interest on the Series 2017 Bonds is payable semiannually on April 1 and October 1 of each year, commencing April 1, Purchasers will not receive certificates representing their interest in the Series 2017 Bonds. Individual purchases will be in principal amounts of $5,000 or integral multiples thereof. Principal of and interest on the Series 2017 Bonds will be paid by the Trustee to DTC for subsequent disbursement to DTC Participants who are obligated to remit such payments to the beneficial owners of the Series 2017 Bonds. See THE SERIES 2017 BONDS Book-Entry Only System. Redemption Prior to Maturity. The Series 2017 Bonds are subject to redemption prior to maturity as described in this Official Statement. See THE SERIES 2017 BONDS Redemption. Financing Purpose. The Series 2017 Bonds are being issued to provide funds to: (i) finance certain capital improvements in the City, as described herein (the Project ); (ii) refund all of the outstanding City of Costa Mesa 2007 Certificates of Participation (Police Facility Expansion Project) (the 2007 Certificates ); and (iii) pay certain costs of issuing the Series 2017 Bonds. See THE PROJECT and REFUNDING PLAN. Security for the Series 2017 Bonds; Base Rental Payments. The Series 2017 Bonds are equally and ratably payable from base rental payments (the Base Rental Payments ) to be made by the City for the right to use certain real property and improvements (the Property ) pursuant to a Lease Agreement, dated as of October 1, 2017 (the Lease Agreement ), between the City, as lessee, and the Authority, as lessor. Pursuant to a Ground Lease, dated as of October 1, 2017 (the Ground Lease ), the City has leased the Property to the Authority. The Authority has subleased the Property to the City under the Lease Agreement. The Lease Agreement obligates the City to make Base Rental Payments to the Authority. 1

10 The Trustee and the Authority have entered into an Assignment Agreement, dated as of October 1, 2017, (the Assignment Agreement ), pursuant to which the Authority has assigned to the Trustee for the benefit of the Series 2017 Bond Owners substantially all of the Authority s right, title and interest in and to the Ground Lease and the Lease Agreement, including its right to receive the Base Rental Payments due under the Lease Agreement and to enforce any remedies in the event of a default by the City. The City covenants under the Lease Agreement to take such action as may be necessary to include all Rental Payments, which are comprised of Base Rental Payments and Additional Rental Payments (which include taxes and assessments affecting the Property, administrative costs of the Authority relating to the Property, fees and expenses of the Trustee and other amounts payable under the Lease Agreement), due under the Lease Agreement as a separate line item in its annual budgets and to make the necessary annual appropriations therefor, subject to abatement as described in this Official Statement. Base Rental Payments are subject to complete or partial abatement in the event and to the extent that there is substantial interference with the City s right to use and occupy the Property or any portion thereof. See RISK FACTORS Abatement. Abatement of Base Rental Payments under the Lease Agreement, to the extent payment is not made from alternative sources as set forth in the following sentence, would result in all Series 2017 Bond Owners receiving less than the full amount of principal of and interest on the Series 2017 Bonds. To the extent moneys in any of the funds and accounts established under the Indenture or proceeds of insurance are available, Base Rental Payments (or a portion thereof) may be made during periods of abatement. The Property subject to the Lease Agreement consists of two components, referred to herein as the City Hall Property and the 2026 Termination Property, as described under the caption THE PROPERTY. In the absence of default, prior release, prior substitution or abatement, the term of the Lease Agreement ends with respect to the 2026 Termination Property on October 1, 2026 and with respect to the City Hall Property on October 1, As of October 1, 2026, the 2026 Termination Property will no longer be part of the Property subject to the leasehold encumbrance of the Lease Agreement and the Base Rental Payments securing the Series 2017 Bonds will be secured only by the use and operation of the City Hall Property. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Termination of Lease Agreement. Limited Obligation. THE SERIES 2017 BONDS ARE SPECIAL OBLIGATIONS OF THE AUTHORITY, PAYABLE SOLELY FROM BASE RENTAL PAYMENTS AND THE OTHER ASSETS PLEDGED THEREFOR UNDER THE INDENTURE. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE AUTHORITY, THE CITY OR THE STATE OF CALIFORNIA (THE STATE ), OR ANY POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE SERIES 2017 BONDS. THE AUTHORITY HAS NO TAXING POWER. THE OBLIGATION OF THE CITY TO MAKE THE BASE RENTAL PAYMENTS DOES NOT CONSTITUTE A DEBT OF THE CITY OR THE STATE OR OF ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION, AND DOES NOT CONSTITUTE AN OBLIGATION FOR WHICH THE CITY OR THE STATE IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY OR THE STATE HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. Bonds. No Reserve Fund. No reserve fund has been created or will be funded with respect to the Series 2017 Additional Bonds. The Authority may issue additional bonds (the Additional Bonds ) payable from the Base Rental Payments on a parity basis with the Series 2017 Bonds. The Series 2017 Bonds and any Additional Bonds are collectively referred to in this Official Statement as the Bonds. 2

11 Financial Statements. The City s comprehensive annual financial report for the fiscal year ended June 30, 2016 is included as Appendix C and has been audited by White Nelson Diehl Evans LLP, Irvine, California (the Auditor ), certified public accountants. See APPENDIX C COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY OF COSTA MESA FOR THE YEAR ENDED JUNE 30, Continuing Disclosure. The City has agreed to provide, or cause to be provided, to the Municipal Securities Rulemaking Board for purposes of Securities and Exchange Commission Rule 15c2-12 (the Rule ) certain annual financial information and operating data and, in a timely manner, notice of certain listed events. See CONTINUING DISCLOSURE. Certain Risk Factors. Certain events could affect the ability of the City to make the Base Rental Payments when due. See RISK FACTORS for a discussion of certain factors that should be considered, in addition to other matters set forth in this Official Statement, in evaluating an investment in the Series 2017 Bonds. Forward-Looking Statements. The presentation of information, including tables of receipt of revenues, is intended to show recent historical information and, except for the budget discussion for fiscal year , is not intended to indicate future or continuing trends in the financial position or other affairs of the City. No representation is made that past experience, as it might be shown by such financial and other information, will necessarily continue or be repeated in the future. Official Statement is a Summary. The summaries or references to the Indenture, the Lease Agreement, the Ground Lease, the Assignment Agreement and other documents, agreements and statutes referred to in this Official Statement, and the description of the Series 2017 Bonds included in this Official Statement, do not purport to be comprehensive or definitive, and such summaries, references and descriptions are qualified in their entireties by reference to each such document or statute. All capitalized terms used in this Official Statement (unless otherwise defined in this Official Statement) are defined in the Indenture or the Lease Agreement and have the meanings set forth therein. See APPENDIX B SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS. ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds with respect to the Series 2017 Bonds and amounts related to the 2007 Certificates are shown below. Sources (1) Principal Amount of Series 2017 Bonds $ 29,735,000 Plus Net Original Issue Premium 3,694,172 Amounts related to 2007 Certificates (2) 2,302,225 Total Sources $ 35,731,397 Uses (1) Deposit into Escrow Fund (3) $ 16,832,745 Construction Fund 18,506,603 Underwriter s Discount 124,639 Cost of Issuance Fund (4) 267,410 Total Uses $ 35,731,397 (1) Rounded to the nearest dollar. (2) Reflects moneys held in funds and accounts established in connection with the 2007 Certificates. (3) To be used to prepay the 2007 Certificates on the prepayment date. See REFUNDING PLAN. (4) Includes legal fees, municipal advisor fees, printing costs, rating agency fees and other miscellaneous expenses. 3

12 REFUNDING PLAN The 2007 Certificates, which as of October 1, 2017 will be outstanding in the aggregate principal amount of $16,765,000, were delivered by the City pursuant to an Amended and Restated Trust Agreement, dated as of January 1, 2007 (the 2007 Trust Agreement ), by and among the City, the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee to The Bank of New York Trust Company, N.A. (the Prior Trustee ). The 2007 Certificates are payable from lease payments made by the City under the Lease/Purchase Agreement, dated as of October 1, 2003, as amended by a First Amendment to Lease/Purchase Agreement, dated as of January 1, 2007 (the 2007 Lease Agreement ), by and between the Authority, as lessor, and the City, as lessee. Proceeds of the 2007 Certificates were used by the City to pay for the construction and equipping of certain improvements to the Civic Center Complex of the City, including the expansion and seismic retrofitting of the City s Police Department facility. Under an Escrow Agreement (2007 Certificates), dated as of October 1, 2017 (the 2007 Escrow Agreement ), by and between the City and The Bank of New York Mellon Trust Company, N.A., as escrow agent (the 2007 Escrow Agent ), the City will deliver a portion of the proceeds of the 2017 Bonds to the 2007 Escrow Agent for deposit in the escrow fund (the 2007 Escrow Fund ) established under the 2007 Escrow Agreement on or about the date of issuance of the Series 2017 Bonds. In addition, the Prior Trustee will transfer certain moneys held in connection with the 2007 Certificates to the 2007 Escrow Agent for deposit in the 2007 Escrow Fund on or about the date of issuance of the Series 2017 Bonds. The 2007 Escrow Agent will hold such amounts uninvested in cash, and apply such moneys to prepay on November 6, 2017 the principal of the 2007 Certificates together with interest accrued with respect thereto, without premium. See VERIFICATION OF MATHEMATICAL ACCURACY. The amounts held by the 2007 Escrow Agent in the 2007 Escrow Fund are pledged solely to the payment of the 2007 Certificates. Neither the funds deposited in the 2007 Escrow Fund nor any interest thereon will be available for the payment of the principal of or interest on the Series 2017 Bonds. THE PROJECT A portion of the proceeds of the Series 2017 Bonds will be deposited in the Construction Fund and used to finance the construction and equipping of improvements collectively known as the Lions Park project (the Project ). These improvements include a two-story, 22,860 square foot library to be constructed in place of the existing community center and the repurposing of the existing Donald Dungan library, which will become the 20,000 square foot Neighborhood Community Center. The new library will include large meeting rooms and a children s area, and will be operated by Orange County (the County ). The Neighborhood Community Center will include a 40-seat meeting room, raised stage, new restrooms, a lobby entrance, catering kitchen and loading dock. Additional recreational areas will also be added as part of the Project. Pursuant to the California Environmental Quality Act, California Public Resources Code Section 21000, et seq., and the implementing regulations thereto, Title 14 California Code of Regulations Section 15000, et seq., the City prepared a mitigated negative declaration to identify any environmental impacts from the Project, held a public hearing and the Planning Commission adopted a resolution approving the Project in March No further governmental approvals are necessary to commence construction of the Project. The total budget for the Project is approximately $36 million, of which approximately $18.6 million will be funded using proceeds of the Series 2017 Bonds. The City plans to use moneys held in the City s Capital Improvement Fund, Park Improvement Fund and Gas Tax Fund (for street-related Project improvements only) to pay the remaining costs of the Project. Any costs in excess of the budgeted amount will be funded from the annual amounts allocated towards the City s capital improvement expenditures. The City awarded the bid for the construction of the Project on July 18, 2017 to Tovey/Shultz Construction Inc. (the Contractor ) and the City and the Contractor executed a contract with respect to the Project. The Contractor is a California S corporation, based in Lake Elsinore, California. The Contractor has 4

13 been in business since 1988 and has significant experience in new construction and modernization of public buildings. Construction on the Project began in August 2017 and is expected to be completed in the spring of The Series 2017 Bonds are secured by and payable from Base Rental Payments and certain amounts on deposit in the funds and accounts established under the Indenture and there is no special or direct pledge of revenues generated by the Project to pay debt service on the Series 2017 Bonds. BASE RENTAL PAYMENT SCHEDULE Set forth below is the annual schedule of Base Rental Payments, which corresponds with the schedule of debt service payments on the Series 2017 Bonds (except that (i) the Interest Payment Dates for the Series 2017 Bonds are April 1 and October 1 and (ii) payments of principal on the Series 2017 Bonds are made according to the maturity schedule contained on the inside cover page of this Official Statement): Base Rental Payment Date (1) Series 2017 Principal Series 2017 Interest Total Payments 10/1/2018 $ 1,600,000 $ 1,209, $ 2,809, /1/2019 1,610,000 1,237, ,847, /1/2020 1,675,000 1,173, ,848, /1/2021 1,740,000 1,106, ,846, /1/2022 1,830,000 1,019, ,849, /1/2023 1,920, , ,847, /1/2024 2,015, , ,846, /1/2025 2,115, , ,845, /1/2026 2,220, , ,845, /1/ , , ,084, /1/ , , ,085, /1/ , , ,085, /1/ , , ,089, /1/ , , ,085, /1/ , , ,086, /1/ , , ,084, /1/ , , ,086, /1/ , , ,086, /1/ , , ,085, /1/ , , ,088, /1/ , , ,085, /1/ , , ,085, /1/ ,000 99, ,084, /1/2041 1,020,000 67, ,087, /1/2042 1,050,000 34, ,084, Total: $ 29,735,000 $ 13,223, $ 42,958, (1) The Base Rental Payment Date is the second day prior to the corresponding Interest Payment Date for the Series 2017 Bonds. 5

14 THE SERIES 2017 BONDS General The Series 2017 Bonds will be issued in fully registered form without coupons in denominations of $5,000 or any integral multiple thereof. The Series 2017 Bonds will be dated as of and bear interest (calculated on the basis of a 360-day year comprised of twelve 30-day months) from the dated date thereof at the rates set forth on the inside cover page. Interest on the Series 2017 Bonds will be paid semiannually on April 1 and October 1 (each, an Interest Payment Date ) of each year, commencing April 1, Interest on the Series 2017 Bonds will be payable from the Interest Payment Date next preceding the date of authentication thereof unless (i) a Series 2017 Bond is authenticated on or before an Interest Payment Date and after the close of business on the preceding Record Date, in which event it will bear interest from such Interest Payment Date, (ii) a Series 2017 Bond is authenticated on or before the first Record Date, in which event interest thereon will be payable from the dated date thereof, or (iii) interest on any Series 2017 Bond is in default as of the date of authentication thereof, in which event interest thereon will be payable from the date to which interest has been paid in full, payable on each Interest Payment Date. Interest will be paid in lawful money of the United States on each Interest Payment Date to the Persons in whose names the ownership of the Series 2017 Bonds is registered on the Registration Books at the close of business on the immediately preceding Record Date, except as provided below. Interest will be paid by check of the Trustee mailed by first class mail, postage prepaid, on each Interest Payment Date to the Series 2017 Bond Owners at their respective addresses shown on the Registration Books as of the close of business on the preceding Record Date. The principal and premium, if any, of the Series 2017 Bonds will be payable in lawful money of the United States upon presentation and surrender thereof upon maturity or earlier redemption at the Office of the Trustee. The Series 2017 Bonds will be subject to optional, mandatory sinking fund and extraordinary redemption as set forth in this Official Statement. Registration, Transfers and Exchanges The Series 2017 Bonds will be issued as fully registered bonds, registered in the name of Cede & Co. as nominee of DTC, and will be available to actual purchasers of the Series 2017 Bonds (the Beneficial Owners ) in the denominations set forth above, under the book-entry system maintained by DTC, only through brokers and dealers who are or act through DTC Participants (as defined in Appendix F) as described in this Official Statement. Beneficial Owners will not be entitled to receive physical delivery of the Series 2017 Bonds. See THE SERIES 2017 BONDS Book-Entry Only System. Redemption Optional Redemption. The Series 2017 Bonds maturing on or after October 1, 2028, are subject to optional redemption, in whole or in part, on October 1, 2027 or any date thereafter, as directed by the City in a Written Request of the City provided to the Trustee not less than 30 days (or such lesser number of days acceptable to the Trustee, in the sole discretion of the Trustee) prior to such date, in Authorized Denominations, from and to the extent of prepaid Base Rental Payments paid pursuant to the Lease Agreement, at a Redemption Price equal to the principal amount of the Series 2017 Bonds to be redeemed, plus accrued interest thereon to the date of redemption, without premium. 6

15 Mandatory Sinking Fund Redemption. The Series 2017 Bonds with stated maturities on October 1, 2042, are subject to mandatory sinking fund redemption in part (by lot) on October 1, 2038 and each October 1 thereafter, in integral multiples of $5,000 at a Redemption Price of the principal amount thereof plus accrued interest to the date fixed for redemption, without premium, in accordance with the following schedule: * Final Maturity. Redemption Date (October 1) 7 Principal Amount 2038 $ 925, , , ,020, * 1,050,000 Purchase in Lieu of Redemption. If, during the Fiscal Year immediately preceding one of the redemption dates specified above under the heading Mandatory Sinking Fund Redemption, the Authority purchases Series 2017 Bonds, at least 45 days prior to the redemption date, the Authority will notify the Trustee as to the principal amount purchased and the amount of Series 2017 Bonds so purchased shall be credited at the time of purchase, to the extent of the full principal amount thereof, to reduce such upcoming mandatory sinking fund redemption payment for the Series 2017 Bonds so purchased. All Series 2017 Bonds purchased as described in this paragraph will be cancelled pursuant to the Indenture. Extraordinary Redemption from Condemnation Award or Insurance Proceeds. The Series 2017 Bonds are subject to redemption, in whole or in part, on any date as directed by the City in a Written Request of the City provided to the Trustee not less than 30 days (or such lesser number of days acceptable to the Trustee, in the sole discretion of the Trustee) prior to such date, in Authorized Denominations, from and to the extent of any Net Insurance Proceeds received with respect to all or a portion of the Property, deposited by the Trustee in the Redemption Fund pursuant to the Indenture, at a Redemption Price equal to the principal amount of the Series 2017 Bonds to be redeemed, plus accrued interest thereon to the date of redemption, without premium. Selection of Bonds for Redemption. Whenever provision is made in the Indenture for the redemption of less than all of the Series 2017 Bonds, the Trustee will select the Series 2017 Bonds to be redeemed from all Bonds not previously called for redemption (a) with respect to any optional redemption of Bonds, among maturities of Bonds as directed in a Written Request of the Authority, (b) with respect to any redemption from and to the extent of any insurance proceeds or condemnation award received with respect to all or a portion of the Property and the corresponding provision of any Supplemental Indenture pursuant to which Additional Bonds are issued, among maturities of all Series of Bonds on a pro rata basis as nearly as practicable, and (c) with respect to any other redemption of Additional Bonds, among maturities as provided in the Supplemental Indenture pursuant to which such Additional Bonds are issued, and by lot among Bonds of the same Series with the same maturity in any manner which the Trustee in its sole discretion will deem appropriate and fair. For purposes of such selection, all Bonds will be deemed to be comprised of separate $5,000 denominations, and such separate denominations will be treated as separate Bonds that may be separately redeemed. Notice of Redemption. So long as the Series 2017 Bonds are held in book-entry form, notices of redemption will be mailed by the Trustee only to DTC and not to any Beneficial Owners. The Trustee on behalf and at the expense of the Authority will mail (by first class mail) notice of any redemption to the respective Owners of any Bonds designated for redemption at their respective addresses appearing on the Registration Books, to the Securities Depositories and to one or more Information Services, at least 20 but not more than 60 days prior to the date fixed for redemption. Such notice will state the date of the notice, the redemption date, the redemption place and the Redemption Price and will designate the CUSIP numbers, the

16 Bond numbers and the maturity or maturities (except in the event of redemption of all of the Series 2017 Bonds of such maturity or maturities in whole) of the Series 2017 Bonds to be redeemed, and will require that such Bonds be then surrendered at the principal corporate trust office of the Trustee for redemption at the Redemption Price, giving notice also that further interest on such Bonds will not accrue from and after the date fixed for redemption. A redemption notice may state that optional redemption is conditioned upon sufficient funds being on deposit on the redemption date to redeem the Series 2017 Bonds so called for redemption. Neither the failure to receive any notice so mailed, nor any defect in such notice, will affect the validity of the proceedings for the redemption of the Series 2017 Bonds or the cessation of accrual of interest thereon from and after the date fixed for redemption. Partial Redemption of Bonds. Upon surrender of any Bonds redeemed in part only, the Authority will execute and the Trustee will authenticate and deliver to the Owner thereof, at the expense of the Authority, a new Bond or Bonds of the same Series in Authorized Denominations equal in aggregate principal amount representing the unredeemed portion of the Series 2017 Bonds surrendered. Effect of Notice of Redemption. If a redemption notice has been mailed, and moneys for the Redemption Price, and the interest to the applicable date fixed for redemption, have been set aside in the Redemption Fund, the Series 2017 Bonds will become due and payable on the redemption date, and, upon presentation and surrender of a Bond at the principal corporate trust office of the Trustee, the Authority will pay the Redemption Price of the Bond, together with interest accrued and unpaid to said date. If, on the redemption date, moneys for the Redemption Price of all the Series 2017 Bonds to be redeemed, together with interest to said date, will be held by the Trustee so as to be available therefor on such date, and, if a notice of redemption has been mailed and not canceled, then, from and after said date, interest on the Series 2017 Bonds to be redeemed will cease to accrue and become payable. All moneys held by or on behalf of the Trustee for the redemption of Bonds will be held in trust for the account of the Owners of the Series 2017 Bonds so to be redeemed without liability to such Owners for interest thereon. Book-Entry Only System General. DTC will act as securities depository for the Series 2017 Bonds. The Series 2017 Bonds will be issued as fully-registered bonds registered in the name of Cede & Co. (DTC s partnership nominee). One fully-registered Series 2017 Bond will be issued for each maturity of the Series 2017 Bonds, each in the initial aggregate principal amount of such maturity, and will be deposited with DTC. See APPENDIX F BOOK-ENTRY ONLY SYSTEM. Transfer and Exchange of Bonds. The following provisions regarding the exchange and transfer of the Series 2017 Bonds apply only during any period in which the Series 2017 Bonds are not subject to DTC s book-entry system. While the Series 2017 Bonds are subject to DTC s book-entry system, their exchange and transfer will be made through DTC and the Participants and will be subject to the procedures, rules and requirements established by DTC. Any Bond may, in accordance with its terms, be transferred upon the books required to be kept by the Trustee pursuant to the provisions of the Indenture by the Person in whose name it is registered, in person or by his or her duly authorized attorney, upon surrender of such Bond for cancellation, accompanied by delivery of a written instrument of transfer, duly executed in a form acceptable to the Trustee. Whenever any Bond or Bonds are surrendered for transfer, the Authority will execute and the Trustee will authenticate and will deliver a new Bond or Bonds of the same Series in a like aggregate principal amount, in any Authorized Denomination. The Trustee will require the Bond Owner requesting such transfer to pay any tax or other governmental charge required to be paid with respect to such transfer. 8

17 The Series 2017 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 of other Authorized Denominations. The Trustee will require the payment by the Bond Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. The Trustee will not be obligated to make any transfer or exchange of Bonds of a Series during the period established by the Trustee for the selection of Bonds of such Series for redemption, or with respect to any Bonds of such Series selected for redemption. Pledge of Revenues SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS The Series 2017 Bonds are equally and ratably payable from and secured by Base Rental Payments and certain amounts on deposit in the funds and accounts established under the Indenture. Base Rental Payments will be paid by the City from any and all legally available funds. See RISK FACTORS and see APPENDIX A GENERAL AND FINANCIAL INFORMATION ABOUT THE CITY OF COSTA MESA for certain financial and demographic information about the City, including its General Fund. The City has covenanted in the Lease Agreement to take such action as may be necessary to include all Base Rental Payments and Additional Rental Payments due under the Lease Agreement as a separate line item in its annual budgets and to make the necessary annual appropriations therefor. The Authority, pursuant to the Assignment Agreement, will assign to the Trustee for the benefit of the Series 2017 Bond Owners all of the Authority s right, title and interest in and to the Ground Lease and the Lease Agreement, including, without limitation, its right to receive Base Rental Payments to be paid by the City under and pursuant to the Lease Agreement; provided that the Authority will retain the rights to indemnification and to payment of reimbursement of its reasonable costs and expenses under the Lease Agreement. The City will pay Base Rental Payments directly to the Trustee, as assignee of the Authority. See Base Rental Payments below. Pursuant to the Indenture, the Authority may issue Additional Bonds payable from the Base Rental Payments on parity with the Series 2017 Bonds. See APPENDIX B SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS. Subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture, all of the Base Rental Payments and any other amounts (including proceeds of the sale of the Series 2017 Bonds) held in the Base Rental Payment Fund, the Interest Fund, the Principal Fund and the Redemption Fund are pledged by the Authority pursuant to the Indenture to secure the payment of the principal of, premium, if any, and interest on the Series 2017 Bonds in accordance with their terms, the provisions of the Indenture and the Act. Said pledge constitutes a first lien on such assets. THE SERIES 2017 BONDS ARE SPECIAL OBLIGATIONS OF THE AUTHORITY, PAYABLE SOLELY FROM BASE RENTAL PAYMENTS AND THE OTHER ASSETS PLEDGED THEREFOR UNDER THE INDENTURE. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE AUTHORITY, THE CITY OR THE STATE, OR ANY POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE SERIES 2017 BONDS. THE AUTHORITY HAS NO TAXING POWER. Additional Bonds The Authority may at any time issue one or more Series of Additional Bonds (in addition to the Series 2017 Bonds) payable from Base Rental Payments as provided in the Indenture on a parity with all other Bonds theretofore issued under the Indenture, but only subject to the following conditions, which are conditions precedent to the issuance of such Additional Bonds: 9

18 (a) The issuance of such Additional Bonds has been authorized under and pursuant to the Indenture and has been provided for by a Supplemental Indenture which specifies the following: (1) the application of the proceeds of the sale of such Additional Bonds; (2) the principal amount and designation of such Series of Additional Bonds and the denomination or denominations of the Additional Bonds; (3) the date, the maturity date or dates, the interest payment dates and the dates on which mandatory sinking fund redemptions, if any, are to be made for such Additional Bonds; provided, however, that: (i) the serial Bonds of such Series of Additional Bonds will be payable as to principal annually on October 1 of each year in which principal falls due, and the term Bonds of such Series of Additional Bonds will have annual mandatory sinking fund redemptions on October 1; (ii) the Additional Bonds will be payable as to interest semiannually on April 1 and October 1 of each year, except that the first installment of interest may be payable on either April 1 or October 1 and shall be for a period of not longer than twelve months and the interest will be payable thereafter semiannually on April 1 and October 1; (iii) all Additional Bonds of a Series of like maturity will be identical in all respects, except as to number or denomination; and (iv) serial maturities of serial Bonds or mandatory sinking fund redemptions for term Bonds, or any combination thereof, will be established to provide for the redemption or payment of such Additional Bonds on or before their respective maturity dates; (4) the redemption premiums and terms, if any, for such Additional Bonds; (5) the form of such Additional Bonds; and (6) such other provisions that are appropriate or necessary and are not inconsistent with the provisions of the Indenture; (b) the Authority is in compliance with all agreements, conditions, covenants and terms contained in the Indenture, in the Lease Agreement and in the Ground Lease required to be observed or performed by it; (c) the City is in compliance with all agreements, conditions, covenants and terms contained in the Indenture, in the Lease Agreement and in the Ground Lease required to be observed or performed by it; and (d) the Ground Lease has been amended, to the extent necessary, and the Lease Agreement has been amended so as to increase the Base Rental Payments payable by the City thereunder by an aggregate amount equal to the principal of and interest on such Additional Bonds, payable at such times and in such manner as may be necessary to provide for the payment of the principal of and interest on such Additional Bonds; provided, however, that no such amendment will be made such that the sum of Base Rental Payments, including any increase in the Base Rental Payments as a result of such amendment, plus Additional Rental Payments, in any Rental Period will be in excess of the annual fair rental value of the Property after taking into account the use of the proceeds of any Additional Bonds issued in connection therewith (evidence of the satisfaction of such condition will be made by a Written Certificate of the City). Nothing contained in the Indenture limits the issuance of any bonds or other obligations payable from Base Rental Payments if, after the issuance and delivery of such bonds or other obligations, none of the Bonds theretofore issued under the Indenture will be Outstanding. Notwithstanding satisfaction of the other conditions to the issuance of Additional Bonds set forth in the Indenture, Additional Bonds may not be issued if an Event of Default (or any event which, once all notice or grace periods have passed, would constitute an Event of Default) exists, unless such default will be cured upon such issuance. Base Rental Payments General. Rental Payments, including Base Rental Payments, will be paid by the City to the Authority for and in consideration of the right to use and occupy the Property and in consideration of the continued right to the quiet use and enjoyment thereof during each Rental Period for which such Rental Payments are to be paid. Each Base Rental Payment will be deposited with the Trustee no later than second day next preceding each Interest Payment Date (the Base Rental Deposit Date ). All Base Rental Payments will be paid directly by the City to the Trustee, and if received by the Authority at any time will be transferred by the Authority to 10

19 the Trustee within one Business Day after the receipt thereof. All Base Rental Payments received by the Trustee will be deposited by the Trustee in the Base Rental Payment Fund. Pursuant to the Indenture, on the Business Day immediately preceding each Interest Payment Date, the Trustee will transfer amounts in the Base Rental Payment Fund as are necessary to the Interest Fund and the Principal Fund to provide for the payment of the interest on and principal of the Series 2017 Bonds. Base Rental Payment Schedule. Scheduled Base Rental Payments relating to the Series 2017 Bonds are set forth above under the heading BASE RENTAL PAYMENT SCHEDULE. Covenant to Budget and Appropriate. The City covenants in the Lease Agreement to take such action as may be necessary to include all Rental Payments due under the Lease Agreement as a separate line item in its annual budgets and to make necessary annual appropriations for all such Rental Payments. The City covenants to deliver to the Authority and the Trustee a Written Certificate of the City stating that its final annual budget includes all Base Rental Payments due in such fiscal year within 10 days after the filing or adoption of the final annual budget. The Lease Agreement declares that these covenants are and will be construed to be duties imposed by law and that it is the duty of each and every public official of the City to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the City s covenants and agreements under the Lease Agreement. See, however, Abatement below. Limited Obligation. THE OBLIGATION OF THE CITY TO MAKE THE BASE RENTAL PAYMENTS DOES NOT CONSTITUTE A DEBT OF THE CITY OR THE STATE OR OF ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION, AND DOES NOT CONSTITUTE AN OBLIGATION FOR WHICH THE CITY OR THE STATE IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY OR THE STATE HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. Additional Rental Payments For the right to use and occupy the Property, the Lease Agreement requires the City to pay, as Additional Rental Payments, such amounts as will be required for the payment of the following: (i) All taxes and assessments of any type or nature charged to the Authority or the City or affecting the Property or the respective interests or estates of the Authority or the City therein. (ii) All reasonable administrative costs of the Authority relating to the Property including, but without limiting the generality of the foregoing, salaries, wages, fees and expenses, compensation and indemnification of the Trustee payable by the Authority under the Indenture, fees of auditors, accountants, attorneys or engineers, and all other necessary and reasonable administrative costs of the Authority or charges required to be paid by it in order to maintain its existence or to comply with the terms of the Indenture or the Lease Agreement or to defend the Authority and its members, officers, agents and employees. (iii) Insurance premiums for all insurance required pursuant to the Lease Agreement. (iv) Any amounts with respect to the Lease Agreement or the Series 2017 Bonds required to be rebated to the federal government in accordance with section 148(f) of the Internal Revenue Code of 1986, as amended. (v) All other payments required to be paid by the City under the provisions of the Lease Agreement or the Indenture. 11

20 Amounts constituting Additional Rental Payments payable under the Lease Agreement will be paid by the City directly to the person or persons to whom such amounts will be payable. The City will pay all such amounts when due or at such later time as such amounts may be paid without penalty or, in any other case, within 60 days after notice in writing from the Trustee to the City stating the amount of Additional Rental Payments then due and payable and the purpose thereof. Abatement Base Rental Payments and Additional Rental Payments are paid by the City in each Rental Period for and in consideration of the right to use and occupy the Property. Except as otherwise specifically provided in the Lease Agreement, during any period in which, by reason of material damage to, or destruction or condemnation of, the Property, or any defect in title to the Property, there is substantial interference with the City s right to use and occupy any portion of the Property, Rental Payments will be subject to abatement proportionately, and the City waives the benefits of Civil Code Sections 1932(1), 1932(2) and 1933(4) and any and all other rights to terminate the Lease Agreement by virtue of any such interference, and the Lease Agreement will continue in full force and effect. The amount of such abatement will be agreed upon by the City and the Authority; provided, however, that the Rental Payments due for any Rental Period will not exceed the annual fair rental value of that portion of the Property available for use and occupancy by the City during such Rental Period. Any such abatement will continue for the period commencing with the date of interference resulting from such damage, destruction, condemnation or title defect and, with respect to damage to or destruction of the Property, ending with the substantial completion of the work of repair or replacement of the Property, or the portion thereof so damaged or destroyed; and the term of the Lease Agreement will be extended as provided in the Lease Agreement, except that the term will in no event be extended ten years beyond the stated termination date of the Lease Agreement. The Trustee cannot terminate the Lease Agreement in the event of such substantial interference. Abatement of Base Rental Payments and Additional Rental Payments is not an event of default under the Lease Agreement and does not permit the Trustee to take any action or avail itself of any remedy against the City. See APPENDIX B SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS. Notwithstanding the foregoing, to the extent that moneys are available for the payment of Rental Payments due under the Lease Agreement in any of the funds and accounts established under the Indenture (including as a result of the availability of insurance proceeds), such Rental Payments will not be abated as provided above but, rather, will be payable by the City as a special obligation payable solely from said funds and accounts. The City is permitted to apply Net Insurance Proceeds: (a) together with other legally available funds that the City elects to appropriate, to the repair, reconstruction or replacement of the damaged or destroyed portions of the Property; (b) to redeem Series 2017 Bonds; and/or (c) if the annual fair rental value of the Property is at least equal to 100% of the Base Rental Payments, to any other lawful purpose, including Base Rental Payments. See the captions THE SERIES 2017 BONDS Redemption Extraordinary Redemption from Condemnation Award or Insurance Proceeds, SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS No Reserve Fund, RISK FACTORS Abatement and No Reserve Fund and Appendix A under the caption INDENTURE SECURITY FOR BONDS; FLOW OF FUNDS; INVESTMENTS Application of Net Insurance Proceeds. Substitution and Release of Property The Authority and the City may amend the Lease Agreement to substitute alternate real property for any portion of the Property or to release a portion of the Property from the Lease Agreement, upon compliance with all of the conditions set forth in the Lease Agreement and described below. After a substitution or release, the portion of the Property for which the substitution or release has been effected will be released from the leasehold encumbrance of the Lease Agreement. 12

21 The Lease Agreement provides that there will be no reduction in or abatement of the Base Rental Payments due from the City as a result of such substitution or release. Any such substitution or release will be subject to the following specific conditions precedent: (a) The City will have delivered a Written Certificate to the Trustee setting forth its findings that the Property, as constituted after such substitution or release: (i) has an annual fair rental value at least equal to the maximum Base Rental Payments payable by the City in any Rental Period; and (ii) has a useful life in excess of the final maturity of any Outstanding Bonds. (b) The City will have obtained or caused to be obtained a CLTA or ALTA title insurance policy or policies with respect to any substituted property in an amount at least equal to the aggregate principal amount of any Outstanding Bonds, of the type and with the endorsements described in the Lease Agreement. (c) The City will have provided the Trustee with an opinion of counsel to the effect that such substitution or release will not, in and of itself, cause the interest on the Series 2017 Bonds to be included in gross income for federal income tax purposes. (d) The City, the Authority and the Trustee will have executed, and the City will have caused to be recorded with the Orange County Recorder, any document necessary to reconvey to the City the portion of the Property being released and to include any substituted real property in the description of the Property contained in the Lease Agreement and in the Ground Lease. (e) The City will have provided notice of such substitution to each rating agency then rating the Series 2017 Bonds. Termination of Lease Agreement The Property subject to the Lease Agreement consists of two components, referred to herein as the City Hall Property and the 2026 Termination Property, as described under the caption THE PROPERTY. In the absence of default, prior release, prior substitution or abatement, the term of the Lease Agreement ends with respect to the 2026 Termination Property on October 1, 2026 and with respect to the City Hall Property on October 1, As of October 1, 2026, the 2026 Termination Property will no longer be part of the Property subject to the leasehold encumbrance of the Lease Agreement and the Base Rental Payments securing the Series 2017 Bonds will be secured only by the use and operation of the City Hall Property. The Lease Agreement will terminate in its entirety on October 1, 2042, provided that the Lease Agreement is not terminated earlier or extended pursuant to the terms thereof. See RISK FACTORS Abatement, RISK FACTORS Substitution and Release of Property and RISK FACTORS Limited Recourse on Default; No Acceleration of Base Rental Payments. Action on Default Should the City default under the Lease Agreement, the Trustee, as assignee of the Authority under the Lease Agreement, may terminate the Lease Agreement and recover certain damages from the City, or may retain the Lease Agreement and hold the City liable for all Base Rental Payments thereunder on an annual basis, and will have the right to re-enter and re-let the Property. Base Rental Payments may not be accelerated upon a default under the Lease Agreement. See RISK FACTORS Limited Recourse on Default; No Acceleration of Base Rental. For purposes of certain actions of Series 2017 Bond Owners under the Indenture and the Lease, such as certain consents and amendments and the direction of remedies following default, Series 2017 Bond Owners do not act alone and may not control such matters to the extent such matters are not supported by the requisite number of the Owners of all Bonds and Additional Bonds, if any. 13

22 For a description of the events of default and permitted remedies of the Trustee (as assignee of the Authority) contained in the Lease Agreement and the Indenture, see APPENDIX B SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS. No Reserve Fund Neither the City nor the Authority has established a reserve fund in connection with the issuance of the Series 2017 Bonds. In the event of abatement of Base Rental Payments, only proceeds of rental interruption insurance or net proceeds of insurance may be available to pay Base Rental Payments. See the captions RISK FACTORS Abatement and No Reserve Fund. Insurance The Lease Agreement requires the City to maintain or cause to be maintained fire, lightning and special extended coverage insurance (which will include coverage for vandalism and malicious mischief, but need not include coverage for earthquake damage) on all improvements constituting any part of the Property in an amount equal to the greater of 100% of the replacement cost of such improvements or 100% of the outstanding principal amount of the Series 2017 Bonds. The City has an insurance policy that provides replacement cost coverage. All insurance required to be maintained pursuant to the Lease Agreement may be subject to a deductible in an amount not to exceed $500,000. The City s obligation to maintain the insurance described in this Official Statement (except for rental interruption insurance) may be satisfied by selfinsurance, provided that such self-insurance and any self-insured retentions maintained by the City comply with the requirements of the Lease Agreement. See APPENDIX B SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS. Although not required under the Lease Agreement, the City maintains earthquake insurance on the Property. The Lease Agreement requires the City to maintain rental interruption insurance to cover the Authority s loss, total or partial, of Base Rental Payments resulting from the loss, total or partial, of the use of any part of the Property as a result of any of the hazards covered by the casualty insurance described in the preceding paragraph, in an amount sufficient at all times to pay an amount not less than the product of two times the maximum amount of Base Rental Payments scheduled to be paid during any Rental Period. The City is not permitted to self-insure its obligation to maintain rental interruption insurance. The City is also required to maintain or cause to be maintained, throughout the term of the Lease Agreement, a standard commercial general liability insurance policy or policies in protection of the City, the Authority and their respective members, officers, agents and employees, and worker s compensation insurance as described in APPENDIX B SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS. The City is required under the Lease Agreement to provide, at its own expense, one or more CLTA or ALTA title insurance policies for the Property, in the aggregate amount of not less than the initial aggregate principal amount of the Series 2017 Bonds. Such policies will insure the fee interest of the City in the Property, the Authority s leasehold estate in the Property under the Ground Lease, and the City s subleasehold estate in the Property under the Lease Agreement, subject only to Permitted Encumbrances, and will provide that all proceeds thereunder are payable to the Trustee for the benefit of the Owners. THE PROPERTY The Property leased under the Lease Agreement consists of the City s Civic Center Complex, which includes the City Hall and City Council Chambers, Police Facility, Communications Building and Fire Station No. 5. All of the facilities of the Civic Center Complex are located on a 9.4 acre site. The Property also includes Fire Station No. 2, which is located at 800 Baker Street in the City. The Authority and the City may, under the terms of the Lease Agreement, substitute alternate real property for any portion of the Property in 14

23 accordance therewith. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Substitution and Removal of Property. The City Hall was built in 1965 and consists of six floor levels (including the basement) with 65,000 square feet housing all of the administrative offices of the City and City Council Chambers (referred to herein as the City Hall Property ). The City Hall Property was seismically retrofitted in The Police Facility was also built in 1965 and houses the City s main police station, offices and jail cells. The Police Facility has two stories and a basement level, and totals 60,342 square feet. In 1984, a 7,000 square foot elevated helipad with parking was added to the Police Facility. In 2007, an 11,342 square foot single story addition was added to the Police Facility, additional parking and security fencing was added and the Police Facility underwent seismic retrofitting. The Communications Building was built in 1983 and is comprised of two floors (including the mezzanine) with 8,000 square feet of space used as the City s dispatch center, additional offices and includes a garage. Fire Station No. 5 is a 7,000 square foot, two story facility built in Fire Station No. 2 is a 4,875 square foot fire station, built in 1966 and located on a three-quarter acre site. The City estimates the current value of the Property at over $42 million. The insured values of the various buildings located at the Property are set forth in the following table. Source: The City. Property Component Insured Value City Hall Property $ 22,111,531 Police Facility 14,425,140 Fire Station No. 5 2,329,593 Communications Building 2,169,182 Fire Station No. 2 1,144,786 TOTAL $ 42,180,232 The buildings included in the Property sit on approximately 10.2 acres; the land value is not included in the valuation above. The Property will include improvements constructed on the Property which are financed with the proceeds of any Additional Bonds. See THE BONDS Additional Bonds. As described under the heading SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Termination of Lease Agreement, the Lease Agreement will terminate with respect to the Police Facility, Communications Building, Fire Station No. 5 and Fire Station No. 2 (collectively referred to herein as the 2026 Termination Property ) on October 1, 2026, unless the Lease Agreement is extended in accordance with its terms. Thereafter, the Lease Agreement will relate only to the approximately 5.3 acre lot which includes the City Hall Property described above and the surrounding parking lot. THE CITY OF COSTA MESA See APPENDIX A GENERAL AND FINANCIAL INFORMATION ABOUT THE CITY OF COSTA MESA for certain financial and demographic information about the City, including its General Fund. THE AUTHORITY The Costa Mesa Financing Authority was organized pursuant to the provisions of Article I of Chapter 5 of Division 7 of Title 1 of the State Government Code and a Joint Exercise of Powers Agreement, dated as of August 1, 2017, by and between the City and the Costa Mesa Housing Authority, a public body corporate and politic, formed under the California Housing Authorities Law, Division 24, Part 2, Section 34200, et seq. The Authority has no financial liability to the Owners of the Series 2017 Bonds with respect to the payment of Base Rental Payments by the City or with respect to the performance by the City of the other agreements and covenants that the City is required to perform. 15

24 RISK FACTORS The following factors, along with the other information in this Official Statement, should be considered by potential investors in evaluating the purchase of the Series 2017 Bonds. However, the following does not purport to be an exhaustive listing of risks and other considerations which may be relevant to an investment in the Series 2017 Bonds. In addition, the order in which the following factors are presented is not intended to reflect the relative importance of any such risks. General Considerations Security for the Series 2017 Bonds The Series 2017 Bonds are special obligations of the Authority, payable solely from Base Rental Payments on a parity with the other assets pledged under the Indenture. Neither the faith and credit nor the taxing power of the Authority, the City, the State, or any political subdivision thereof, is pledged to the payment of the Series 2017 Bonds. The Authority has no taxing power. The obligation of the City to make the Base Rental Payments does not constitute a debt of the City, the County or the State or any political subdivision thereof within the meaning of any constitutional or statutory debt limit or restriction, and does not constitute an obligation for which the City or the State is obligated to levy or pledge any form of taxation or for which the City, the County or the State has levied or pledged any form of taxation. Although the Lease Agreement does not create a pledge, lien or encumbrance upon the funds of the City, the City is obligated under the Lease Agreement to pay the Base Rental Payments and Additional Rental Payments from any source of legally available funds, and the City has covenanted in the Lease Agreement to take such action as may be necessary to include all such Base Rental Payments and Additional Rental Payments due thereunder in its annual budgets, and to make necessary annual appropriations for all such Base Rental Payments and Additional Rental Payments, subject to abatement. The City is currently liable and may become liable on other obligations payable from general revenues. See Appendix A under the caption CITY FINANCIAL INFORMATION Other Indebtedness General Fund-Supported Debt. The City has the capacity to enter into other obligations which may constitute additional charges against its revenues, including pension obligations and essential services. To the extent that additional obligations are incurred by the City, the funds available to make Base Rental Payments may be decreased. In the event that the City s revenue sources are less than its total obligations, the City could choose to fund other activities before making Base Rental Payments. The same result could occur if, because of State Constitutional limits on expenditures, the City is not permitted to appropriate and spend all of its available revenues. However, the City s appropriations have never exceeded the limitation on appropriations under Article XIIIB of the State Constitution. See the caption CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS Article XIIIB of the State Constitution. Abatement In the event of substantial interference with the City s right to use and occupy any portion of the Property by reason of damage to or destruction or condemnation of the Property, or any defects in title to the Property, Base Rental Payments will be subject to abatement. See the caption SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Abatement and No Reserve Fund. In the event that such portion of the Property, if damaged or destroyed by an insured casualty, could not be replaced during the period of time in which proceeds of the City s rental interruption insurance will be available in lieu of Base Rental Payments, plus the period in which funds are available from the funds and accounts established under the Indenture, or in the event that casualty insurance proceeds are insufficient to provide for complete repair or replacement of such portion of the Property or redemption of the Series 2017 Bonds, there could be insufficient funds to make payments to Owners in full. 16

25 It is not always possible to predict the circumstances under which abatement of rental may occur. In addition, there is no statute, case or other law specifying how such an abatement of rental should be measured. For example, it is not clear whether fair rental value is established as of commencement of the lease or at the time of the abatement. If the latter, the value of the Property could be substantially higher or lower than its value at the time of the issuance of the Series 2017 Bonds. Abatement, therefore, could have an uncertain and material adverse effect on the security for and payment of the Series 2017 Bonds. If damage, destruction, title defect or eminent domain proceedings with respect to the Property results in abatement of the Base Rental Payments related to such Property and if such abated Base Rental Payments, if any, together with moneys from rental interruption or use and occupancy insurance (in the event of any insured loss due to damage or destruction), and eminent domain proceeds, if any, are insufficient to make all payments of principal and interest with respect to the Series 2017 Bonds during the period that the Property is being replaced, repaired or reconstructed, then all or a portion of such payments of principal and interest may not be made. Under the Lease Agreement and the Indenture, no remedy is available to the Series 2017 Bond Owners for nonpayment under such circumstances. No Reserve Fund Neither the City nor the Authority has established a reserve fund in connection with the issuance of the Series 2017 Bonds. In the event of abatement, funds available to pay debt service on the Series 2017 Bonds will be limited to proceeds of insurance (including rental interruption insurance). In addition, if annual appropriations to pay Base Rental Payments are not made (for example, due to delay in adoption of an annual budget), no funds would be available to pay debt service on the Series 2017 Bonds until such appropriations were available. Substitution and Release of Property; Additional Bonds The Authority and the City may amend the Lease Agreement: (a) to substitute alternate real property for all or a portion of the Property; or (b) to release all or a portion of the Property from the Lease Agreement, upon compliance with all of the conditions set forth in the Lease Agreement. After a substitution or release, the portion of the Property for which the substitution or release has been effected will be released from the leasehold encumbrance of the Lease Agreement. Moreover, the Authority may issue Additional Bonds secured by Base Rental Payments which are increased from current levels. See the captions SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Substitution and Removal of Property, SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Termination of Lease Agreement and SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Additional Bonds. Although the Lease Agreement requires, among other things, that the Property, as constituted after such substitution or release, have an annual fair rental value at least equal to the maximum Base Rental Payments becoming due in the then current Fiscal Year or in any subsequent Fiscal Year, it does not require that such Property have an annual fair rental value equal to the annual fair rental value of the Property at the time of substitution or release. Thus, a portion of the Property could be replaced with less valuable real property, or could be released altogether. Such a replacement or release could have an adverse impact on the security for the Series 2017 Bonds, particularly if an event requiring abatement of Base Rental Payments were to occur subsequent to such substitution or release. See Appendix B. The Indenture requires, among other things, that upon the issuance of Additional Bonds, the Ground Lease and the Lease Agreement will be amended, to the extent necessary, so as to increase the Base Rental Payments payable by the City thereunder by an aggregate amount equal to the principal of and interest on such Additional Bonds; provided, however, that no such amendment will be made such that the sum of Base Rental Payments, including any increase in the Base Rental Payments as a result of such amendment, plus Additional Rental Payments, in any Fiscal Year is in excess of the annual fair rental value of the Property after taking into 17

26 account the use of the proceeds of any Additional Bonds issued in connection therewith. See the caption SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Additional Bonds for a full description of the requirements that must be met in order for the Authority to issue Additional Bonds. Limited Recourse on Default; No Acceleration of Base Rental Failure by the City to make Base Rental Payments or other payments required to be made under the Lease Agreement, or failure to observe and perform any other terms, covenants or conditions contained in the Lease Agreement or in the Indenture for a period of 30 days after written notice of such failure and request that it be remedied has been given to the City by the Authority or the Trustee, constitute events of default under the Lease Agreement and permit the Trustee or the Authority to pursue any and all remedies available. In the event of a default, notwithstanding anything in the Lease Agreement or in the Indenture to the contrary, there is no right under any circumstances to accelerate the Base Rental Payments or otherwise declare any Base Rental Payments not then in default to be immediately due and payable, nor do the Authority or the Trustee have any right to re-enter or re-let the Property except as described in the Lease Agreement. The enforcement of any remedies provided in the Lease Agreement and the Indenture could prove both expensive and time consuming. If the City defaults on its obligation to make Base Rental Payments with respect to the Property, the Trustee, as assignee of the Authority, may retain the Lease Agreement and hold the City liable for all Base Rental Payments thereunder on an annual basis and enforce any other terms or provisions of the Lease Agreement to be kept or performed by the City. Alternatively, the Authority or the Trustee may terminate the Lease Agreement, retake possession of the Property and proceed against the City to recover damages pursuant to the Lease Agreement. There is no assurance that that the Trustee would be able to re-let the Property so as to provide rental income sufficient to make all payments of principal of, interest and premium, if any, on the Series 2017 Bonds when due. Similar limitations and constraints would apply to any property substituted for the Property pursuant to the Lease Agreement. Moreover, the Trustee is not empowered to sell the Property for the benefit of the Owners of the Series 2017 Bonds. Any suit for money damages would be subject to limitations on legal remedies against cities in the State, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. See the captions SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS, THE PROPERTY and APPENDIX A GENERAL AND FINANCIAL INFORMATION ABOUT THE CITY OF COSTA MESA. Possible Insufficiency of Insurance Proceeds The Lease Agreement obligates the City to keep in force various forms of insurance, subject to deductibles, for repair or replacement of the Property in the event of damage, destruction or title defects, subject to certain exceptions. The Authority and the City make no representation as to the ability of any insurer to fulfill its obligations under any insurance policy obtained pursuant to the Lease Agreement and no assurance can be given as to the adequacy of any such insurance to fund necessary repair or replacement or to pay principal of and interest on the Series 2017 Bonds when due. In addition, certain risks, such as earthquakes and floods, are not required to be covered under the Lease Agreement. See the captions SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Insurance, No Reserve Fund and THE CITY Risk Management. Natural Disasters The occurrence of any natural disaster in the City, including, without limitation, fire, windstorm, drought, earthquake or flood, could have an adverse material impact on the economy within the City, its General Fund and the revenues available for the payment of the Base Rental Payments. The City currently maintains earthquake insurance on the Property; however, the Lease Agreement does not require the City to maintain this coverage. 18

27 Earthquakes are considered a threat to the City due to the highly active seismic region and the proximity of fault zones, which could influence the entire southern coastal portion of the State. However, no major earthquake has caused substantial damage to the City. An earthquake along one of the faults in the vicinity of the City, either known or unknown, could cause a number of casualties and extensive property damage. The effects of such a quake could be aggravated by aftershocks and secondary effects such as fires, landslides, dam failure, liquefaction and other threats to public health, safety and welfare. The potential direct and indirect consequences of a major earthquake could easily exceed the resources of the City and would require a high level of self-help, coordination and cooperation. The occurrence of natural disasters in the City could result in substantial damage to the City which, in turn, could substantially reduce General Fund revenues and affect the ability of the City to make the Base Rental Payments. Reduced ability to make the Base Rental Payments could affect the payment of the principal of and interest on the Series 2017 Bonds. The City maintains liability insurance and property casualty insurance for the Property. See Appendix A under the caption THE CITY Risk Management. However, there can be no assurance that specific losses will be covered by insurance or, if covered, that claims will be paid in full by the applicable insurers. Hazardous Substances An additional environmental condition that may result in the reduction in the assessed value of property, and therefore property tax revenue available to make Base Rental Payments, would be the discovery of a hazardous substance that would limit the beneficial use of taxable property within the City. In general, the owners and operators of a property may be required by law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERCLA or the Superfund Act, is the most well-known and widely applicable of these laws, but State laws with regard to hazardous substances are also stringent and similar in effect. Under many of these laws, the owner or operator may be required to remedy a hazardous substance condition of property whether or not the owner or operator has anything to do with creating or handling the hazardous substance. The effect, therefore, should any of the property within the City be affected by a hazardous substance, could be to reduce the marketability and value of such property by the costs of remedying the condition, because the purchaser, upon becoming owner, will become obligated to remedy the condition just as is the seller. The City is aware that asbestos is located within the City Hall building and other buildings located at the Property. While much of this asbestos has been remediated, some asbestos remains, in non-friable form, in locations within the buildings that are not accessible to the public or City employees. The location of this asbestos is not considered a risk to public health or safety. Except as described above, the City is not aware of the presence of any hazardous substances on the Property. Hazardous substance liabilities may arise in the future with respect to any of the property in the City resulting from the existence, currently, of a substance presently classified as hazardous but which has not been released or the release of which is not presently threatened, or may arise in the future resulting from the existence, currently, on the parcel of a substance not presently classified as hazardous but which may in the future be so classified. Additionally, such liabilities may arise from the method of handling such substance. These possibilities could significantly affect the value of a parcel and could result in substantial delays in completing planned development on parcels that are currently undeveloped. 19

28 Other Financial Matters Weakness in the economy of the State and the United States or other factors could cause the general revenues of the City to decline. Such financial matters may have a detrimental impact on the City s General Fund, and, accordingly, may reduce the City s ability to make Base Rental Payments. See Appendix A under the caption CITY FINANCIAL INFORMATION. In addition, City expenses could also rise as a result of unforeseen events, including but not limited to increases in pension obligations. See Appendix A under the caption Retirement Contributions. Limitations on Remedies The rights of the Owners of the Series 2017 Bonds are subject to the limitations on legal remedies against cities in the State, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. Furthermore, the remedies available to the Owners of the Series 2017 Bonds upon the occurrence of an event of default under the Indenture or the Lease Agreement are in many respects dependent upon judicial actions which are often subject to discretion and delay and could prove both expensive and time consuming to obtain. Additionally, enforceability of the rights and remedies of the Owners of the Series 2017 Bonds, and the obligations incurred by the City, may become subject to the provisions of Title 11 of the United States Code (the Bankruptcy Code ) and applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors rights generally, now or later in effect, equity principles which may limit the specific enforcement under State law of certain remedies, the exercise by the United States of America of the powers delegated to it by the federal Constitution, the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate public purpose and the limitations on remedies against cities in the State. Bankruptcy proceedings, or the exercise of powers by the federal or State government, if initiated, could subject the Owners of the Series 2017 Bonds to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently may entail risks of delay, limitation or modification of their rights. Under Chapter 9 of the Bankruptcy Code, which governs the bankruptcy proceedings for public agencies such as the City, involuntary petitions are not permitted. If the City were to file a petition under Chapter 9 of the Bankruptcy Code, the Owners of the Series 2017 Bonds, the Trustee and the Authority could be prohibited from taking any steps to enforce their rights under the Lease Agreement, and from taking any steps to collect amounts due from the City under the Lease Agreement. In particular, if the City were to become a debtor under the Bankruptcy Code, the City would be entitled to all of the protective provisions of the Bankruptcy Code as applicable in a Chapter 9 case. Among the adverse effects of such a bankruptcy might be: (i) the application of the automatic stay provisions of the Bankruptcy Code, which, until relief is granted, would prevent collection of payments from the City or the commencement of any judicial or other action for the purpose of recovering or collecting a claim against the City, and which could prevent the Trustee from making payments from funds in its possession; (ii) the avoidance of preferential transfers occurring during the relevant period prior to the filing of a bankruptcy petition; (iii) the existence of unsecured or secured debt which may have a priority of payment that is superior to that of Owners of the Series 2017 Bonds; and (iv) the possibility of the adoption of a plan (an Adjustment Plan ) for the adjustment of the City s various obligations over the objections of the Trustee or all of the Owners of the Series 2017 Bonds and without their consent, which Adjustment Plan may restructure, delay, compromise or reduce the amount of any claim of the Owners if the Bankruptcy Court finds that such Adjustment Plan is fair and equitable and in the best interests of creditors. The Adjustment Plans approved by the Bankruptcy Courts in connection with the bankruptcies of the cities of Vallejo and Stockton resulted in significant reductions in the amounts payable by the cities under lease revenue obligations that were substantially identical or similar to the Series 2017 Bonds. The City can provide no assurances about the 20

29 outcome of the bankruptcy cases of other California municipalities or the nature of any Adjustment Plan if it were to file for bankruptcy. In addition, the City could either reject the Lease Agreement or the Ground Lease or assume the Lease Agreement or the Ground Lease despite any provision of the Lease Agreement or the Ground Lease that makes the bankruptcy or insolvency of the City an event of default thereunder. If the City rejects the Lease Agreement, the Trustee, on behalf of the Owners of the Series 2017 Bonds, would have a pre-petition unsecured claim that may be substantially limited in amount, and this claim would be treated in a manner under an Adjustment Plan over the objections of the Trustee or Owners of the Series 2017 Bonds. Moreover, such rejection would terminate the Lease Agreement and the City s obligations to make payments thereunder. The City may also be permitted to assign the Lease Agreement or the Ground Lease to a third party, regardless of the terms of the transaction documents. If the City rejects the Ground Lease, the Trustee, on behalf of the Owners of the Series 2017 Bonds, would have a pre-petition unsecured claim and this claim would be treated in a manner under an Adjustment Plan over the objections of the Trustee or Owners of the Series 2017 Bonds. Moreover, such rejection may terminate both the Lease Agreement and the Ground Lease and the obligations of the City to make payments thereunder. The opinion to be delivered by Bond Counsel concurrently with the execution and delivery of the Series 2017 Bonds will be subject to such limitations and the various other legal opinions to be delivered concurrently with the issuance of the Series 2017 Bonds will be similarly qualified. See Appendix D. In the event that the City fails to comply with its covenants under the Lease Agreement or fails to pay Base Rental Payments, there can be no assurance of the availability of remedies adequate to protect the interest of the Owners of the Series 2017 Bonds. No Liability of Authority to the Owners Except as expressly provided in the Indenture, the Authority has no obligation or liability to the Owners of the Series 2017 Bonds with respect to: (a) the payment when due of the Base Rental Payments by the City; (b) the performance by the City of other agreements and covenants required to be performed by it contained in the Lease Agreement or the Indenture; or (c) the performance by the Trustee of any right or obligation required to be performed by it contained in the Indenture. Secondary Market There can be no guarantee that there will be a secondary market for the Series 2017 Bonds or, if a secondary market exists, that the Series 2017 Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon then prevailing circumstances. Such prices could be substantially different from the original purchase price. State Budget STATE OF CALIFORNIA BUDGET INFORMATION The following information concerning the State s budgets for fiscal year and fiscal year has been obtained from publicly available information that the City believes to be reliable; however, the City, the Authority and the Underwriter take no responsibility as to the accuracy or completeness thereof and have not independently verified such information. Information about the State budget is regularly available at various State-maintained websites. Text of proposed and adopted budgets may be found at the website of the State Department of Finance (the DOF ), under the heading California Budget. An impartial analysis of the budget is posted by the Legislative Analyst s Office (the LAO ) at In addition, various State official statements, many of which contain a summary of the 21

30 current and past State budgets and the impact of those budgets on cities in the State, may be found at the website of the State Treasurer, The information referred to is prepared by the respective State agency maintaining each website and not by the City, the Authority or the Underwriter, and the City, the Authority and the Underwriter take no responsibility for the continued accuracy of these Internet addresses or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by these references State Budget. On June 27, 2016, the Governor signed into law the State budget for fiscal year (the Budget ). The following information is drawn from the Department of Finance s summary of the Budget and the LAO s review of the Budget. The Budget projected, for fiscal year , total general fund revenues and transfers of $117.0 billion and total expenditures of $115.6 billion. The State was projected to end fiscal year with total available reserves of $7.3 billion, including $3.9 billion in the traditional general fund reserve and $3.4 billion in the Budget Stabilization Account (the BSA ), the State s basic reserve account. For fiscal year , the Budget projected a growth in State general fund revenues driven primarily by total general fund revenues of $120.3 billion and authorized expenditures of $122.5 billion. The State was projected to end the fiscal year with total available reserves of $8.5 billion, including $1.8 billion in the traditional general fund reserve and $6.7 billion in the BSA. As a result of higher general fund revenue estimates for fiscal years and , and after accounting for expenditures that are controlled by State Constitutional funding requirements such as Proposition 2 and Proposition 98, the Budget allocated over $6 billion in discretionary funding for various purposes. These included: (i) additional deposits of $2 billion to the BSA and $600 million to the State s discretionary budget reserve fund; (ii) approximately $2.9 billion in one-time funding for infrastructure, affordable housing, public safety and other purposes; and (iii) $700 million in on-going funding commitments for higher education (the California State University and the University of California systems), corrections and rehabilitation and State courts. As required by Proposition 2, the Budget applied $1.3 billion towards the repayment of existing State liabilities, including loans from special funds, State and University of California pension and retiree health benefits and settle-up payments to K-14 school districts resulting from an underfunding of the Proposition 98 minimum funding guarantee in a prior fiscal year. With respect to education funding, the Budget set the Proposition 98 minimum funding guarantee at $71.9 billion, an increase of $2.8 billion over the revised level from the prior fiscal year. For additional information regarding the Budget, see the DOF website at and the LAO s website at The information presented on such websites is not incorporated herein by reference State Budget. On June 27, 2017, the Governor signed into law the State budget for fiscal year (the Budget ). The following information is drawn from the Department of Finance s summary of the Budget. The Budget projects, for fiscal year , total general fund revenues and transfers of approximately $118.5 billion and total expenditures of approximately $121.4 billion, such revenues and expenditures being approximately $1.8 billion and $1.1 billion lower than what was included in the Budget, respectively. The State is projected to end fiscal year with total available reserves of approximately $7.4 billion, including $642 million in the traditional general fund reserve and $6.7 billion in the BSA. For fiscal year , the Budget projects a growth in State general fund revenues driven primarily by total general fund revenues of approximately $125.9 billion and authorizes expenditures of approximately $125.1 billion. The State is projected to end the fiscal year with total available 22

31 reserves of approximately $9.9 billion, including $1.4 billion in the traditional general fund reserve and $8.5 billion in the BSA. After accounting for expenditures that are controlled by State Constitutional funding requirements such as Proposition 2 and Proposition 98, the Budget allocates discretionary funding for various purposes, including additional deposits of approximately $1.8 billion to the BSA and $800 million to the State s discretionary budget reserve fund. Further, the Budget includes a $6 billion supplemental payment to CalPERS through a loan from the Surplus Money Investment Fund, which is projected to save $11 billion in pension costs over the next two decades. The General Fund share of repaying such loan will come from Proposition 2 revenues dedicated to reducing debts and long-term liabilities. Other discretionary allocations include one-time funding for infrastructure, affordable housing, public safety and other purposes. As required by Proposition 2, the Budget applies $1.8 billion towards the repayment of existing State liabilities, including loans from special funds, State and University of California pension and retiree health benefits and settle-up payments to K-14 school districts resulting from an underfunding of the Proposition 98 minimum funding guarantee in a prior fiscal year. With respect to education funding, the Budget sets the Proposition 98 minimum funding guarantee at $74.5 billion, an increase of $3.1 billion over the revised level from the prior fiscal year. For additional information regarding the Budget, see the State Department of Finance website at and the LAO s website at However, the information presented on such websites is not incorporated herein by reference. Potential Impact of State Financial Condition on the City The State experienced significant financial stress during the last economic recession, with budget shortfalls in the several billions of dollars. There can be no assurance that, in the case of similar financial stress in the future, the State will not significantly reduce revenues to local governments (including the City) or shift financial responsibility for programs to local governments as part of its efforts to address the State financial difficulties. Although the State is not a significant source of City revenues, no prediction can be made by the City as to what measures the State would adopt to respond to potential future financial difficulties. There can be no assurance that State actions to respond to State financial difficulties will not adversely affect the financial condition of the City. Redevelopment Dissolution General. On December 29, 2011, the State Supreme Court upheld Assembly Bill 1x26 ( AB 1x26 ), which dissolved redevelopment agencies in the State. The effect of AB 1x26 upon the City is the termination of the redevelopment functions of the Costa Mesa Redevelopment Agency (the Former Agency ) and the transfer of such functions to the Successor Agency to the Costa Mesa Redevelopment Agency, ( a separate public entity from the public agency that provides for its governance [the City] and the two entities shall not merge as provided in California Health and Safety Code Section 34171(g)), which entity is referred to in this context as the Successor Agency that is tasked with winding down the Former Agency s redevelopment activities. Under AB 1x26, the Successor Agency cannot enter into new redevelopment projects or obligations and its assets can be used only to pay enforceable obligations, which enforceable obligations are generally limited to obligations in existence in mid-2011, when AB 1x26 was signed by the Governor. In addition, the Successor Agency will receive tax increment revenues in amounts that are sufficient to pay 100% (but no greater amount) of such enforceable obligations until such obligations (including accrued interest, as applicable) are paid in full, at which time the Successor Agency will be dissolved. Certain tax revenues formerly allocable to the Former Agency will continue to be available to the Successor Agency to pay certain obligations, and a portion of such revenues may be redirected to other taxing agencies, such as the County, school districts and the City. The Successor Agency s activities are subject to review by an oversight board established under AB 1x26. Under AB 1x26, liabilities of the Successor Agency are not liabilities of the City. 23

32 On June 27, 2012, the Governor signed Assembly Bill 1484 ( AB 1484 ), which made certain amendments to AB 1x26. Under AB 1484, the County Auditor-Controller, the DOF and the State Controller may require the return of funds improperly spent or transferred to a public entity in conflict with the provisions of the Community Redevelopment Law, as amended by AB 1x26 and AB 1484, and if such funds are not returned within 60 days, they may be recovered through an offset of sales and use tax or property tax allocations to the local agency, which, in the case of the Successor Agency, is the City. On September 22, 2015, the following amendments to the dissolution legislation discussed under the caption General were enacted as Senate Bill 107 ( SB 107 ): (1) redevelopment successor agencies that enter into a written agreement with the DOF to remit unencumbered cash to the county auditor-controller will receive a finding of completion, which provides successor agencies with additional fiscal tools and reduced State oversight; (2) successor agencies that that have a Last and Final ROPS (as discussed below) may expend a portion of proceeds of bonds issued in 2011, which proceeds are currently frozen; (3) pension or State Water Project override revenues that are not pledged to or not needed for redevelopment bond debt service will be returned to the entity that levies the override; (4) agreements relating to State highway improvements and money loaned to successor agencies to pay costs associated with redevelopment dissolution litigation will be considered enforceable obligations; and (5) reentered agreements entered into after the passage of AB 1484 are unenforceable unless entered into for the purpose of providing administrative support. SB 107 also: (a) requires the preparation of a Recognized Obligation Payment Schedule with respect to enforceable obligations (a ROPS ), which are required to be submitted to the oversight board and the DOF in accordance with AB 1x26, once a year beginning with the ROPS period that commences on July 1, 2016 (rather than twice a year under current law); (b) establishes an optional Last and Final ROPS process beginning in September 2015; under this process, a successor agency that elected to submit a Last and Final ROPS would no longer submit a periodic ROPS and the enforceable obligations set forth in the Last and Final ROPS would be binding on all parties; and (c) clarifies that former tax increment caps and plan limits do not apply for the purposes of paying approved enforceable obligations. Impact on the City. Significant provisions of AB 1x26, AB 1484, SB 107 and implementing actions of affected parties, including the Successor Agency, the oversight board, the County and the DOF, may be subject to legal challenge, statutory or administrative changes and other clarifications which could affect the impact of the dissolution of redevelopment on the City and its General Fund. The DOF has periodically proposed additional legislation which would modify statutes affecting redevelopment dissolution; it is not known whether additional legislation will be enacted. The full extent of the impact of the implementation of AB 1x26, AB 1484 and SB 107 or potential future legislation on the City s General Fund is unknown at this time. While certain administrative costs previously charged to the Former Agency by the General Fund will no longer be supported by the Successor Agency, certain property tax revenues formerly allocated to the Former Agency will now be received by the City s General Fund. Prior to its dissolution, the City provided loans of money to the Former Agency. The Dissolution Act, Health and Safety Code Section 34171(d)(2) invalidated these loans, but Health and Safety Code Section (b) authorized the Successor Agency to reinstate such loans, subject to Oversight Board and DOF approval. The Successor Agency took the actions required to reinstate its loan obligations to the City and received Oversight Board and DOF approval of that certain Amended and Restated Agreement to Re-Establish Loan pursuant to Section , dated as of April 17, 2014 (the Reinstated Loan Agreement ). The City estimates that the balance of this Reinstated Loan as of June 30, 2017 is approximately $9,112, Beginning in Fiscal Year 2015, the City has received between $287,740 and $649,100 per year in repayment of the Reinstated Loan. The City cannot provide assurance that the Agency will continue to make annual payments to the City under the Reinstated Loan Agreement. See Note 22 in the City s audited financial statements attached hereto as Appendix C for more information regarding the Successor Agency s outstanding obligations. 24

33 Future State Budgets No prediction can be made by the City as to whether the State will continue to encounter budgetary problems in future years, and if it were to do so, it is not clear what measures would be taken by the State to balance its budget, as required by law. In addition, the City cannot predict the final outcome of future State budget negotiations, the impact that such budgets will have on City finances and operations or what actions will be taken in the future by the State Legislature and the Governor to deal with changing State revenues and expenditures. There can be no assurance that actions taken by the State to address its financial condition will not materially adversely affect the financial condition of the City. Current and future State budgets will be affected by national and State economic conditions and other factors. CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS There are a number of provisions in the State Constitution that limit the ability of the City to raise and expend tax revenues. Article XIIIA of the State Constitution On June 6, 1978, State voters approved an amendment (commonly known as both Proposition 13 and the Jarvis-Gann Initiative) to the State Constitution. The amendment, which added Article XIIIA to the State Constitution, among other things affects the valuation of real property for the purpose of taxation in that it defines the full cash property value to mean the county assessor s valuation of real property as shown on the 1975/76 tax bill under full cash value, or thereafter, the appraised value of real property newly constructed, or when a change in ownership has occurred after the 1975 assessment. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or a reduction in the consumer price index or comparable local data at a rate not to exceed 2% per year, or reduced in the event of declining property value caused by damage, destruction or other factors including a general economic downturn. The amendment further limits the amount of any ad valorem tax on real property to 1% of the full cash value, except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to December 1, 1978, and bonded indebtedness for the acquisition or improvement of real property approved on or after December 1, 1978 by two-thirds of the votes cast by the voters voting on the proposition (55% in the case of certain school facilities). Property taxes subject to Proposition 13 are a significant source of the City s General Fund revenues. See APPENDIX A GENERAL AND FINANCIAL INFORMATION ABOUT THE CITY OF COSTA MESA. Legislation enacted by the State Legislature to implement Article XIIIA provides that all taxable property is shown at full assessed value as described above. Tax rates for voter approved bonded indebtedness are also applied to 100% of assessed value. Future assessed valuation growth allowed under Article XIIIA (new construction, change of ownership, 2% annual value growth) is allocated on the basis of situs among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies and school districts share the growth of base revenue from the tax rate area. Each year s growth allocation becomes part of each agency s allocation the following year. Article XIIIA effectively prohibits the levying of any other ad valorem property tax above the 1% limit except for taxes to support indebtedness approved by the voters as described above. Article XIIIA has subsequently been amended to permit reduction of the full cash value base in the event of declining property values caused by damage, destruction or other factors, and to provide that there would be no increase in the full cash value base in the event of reconstruction of property damaged or destroyed in a disaster and in certain other limited circumstances. 25

34 Article XIIIB of the State Constitution At the Statewide special election on November 6, 1979, the voters approved an initiative entitled Limitation on Government Appropriations, which added Article XIIIB to the State Constitution. Under Article XIIIB, State and local government entities have an annual appropriations limit which limits the ability to spend certain moneys which are called appropriations subject to limitation (consisting of tax revenues and investment proceeds thereof, certain State subventions and regulatory license fees, user charges and user fees to the extent that the proceeds thereof exceed the costs of providing such services, together called proceeds of taxes, and certain other funds) in an amount higher than the appropriations limit. Article XIIIB does not affect the appropriation of moneys which are excluded from the definition of appropriations limit, including debt service on indebtedness existing or authorized as of October 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terms, the appropriations limit is to be based on certain expenditures and is to be adjusted annually to reflect changes in the consumer price index, population and services provided by these entities. Among other provisions of Article XIIIB, if those entities revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. The City s appropriations have never exceeded the limitation on appropriations under Article XIIIB of the State Constitution. Proposition 62 A statutory initiative ( Proposition 62 ) was adopted by the voters of the State at the November 4, 1986 general election which: (a) requires that any tax for general governmental purposes imposed by local governmental entities be approved by resolution or ordinance adopted by two-thirds vote of the governmental agency s legislative body and by a majority of the electorate of the governmental entity; (b) requires that any special tax (defined as taxes levied for other than general governmental purposes) imposed by a local governmental entity be approved by a two-thirds vote of the voters within the jurisdiction; (c) restricts the use of revenues from a special tax to the purposes or for the service for which the special tax is imposed; (d) prohibits the imposition of ad valorem taxes on real property by local governmental entities except as permitted by Article XIIIA; (e) prohibits the imposition of transaction taxes and sales taxes on the sale of real property by local governmental entities; and (f) requires that any tax imposed by a local governmental entity on or after August 1, 1985 be ratified by a majority vote of the electorate within two years of the adoption of the initiative or be terminated by November 15, The requirements imposed by Proposition 62 were upheld by the State Supreme Court in Santa Clara County Local Transportation Authority v. Guardino, 11 Cal.4th 220 (1995). Proposition 62 applies to the imposition of any taxes or the implementation of any tax increases after its enactment in 1986, but the requirements of Proposition 62 are largely subsumed by the requirements of Proposition 218 for the imposition of any taxes or the effecting of any tax increases after November 5, See the caption Proposition 218 below. Proposition 218 On November 5, 1996, State voters approved Proposition 218, an initiative measure entitled the Right to Vote on Taxes Act. Proposition 218 added Articles XIIIC and XIIID to the State Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. Proposition 218 states that all taxes imposed by local governments are deemed to be either general taxes or special taxes. Special purpose districts, including school districts, have no power to levy general taxes. No local government may impose, extend or increase any general tax unless and until such tax is submitted to the electorate and approved by a majority vote. No local government may impose, extend or increase any special tax unless and until such tax is submitted to the electorate and approved by a two-thirds vote. 26

35 Proposition 218 also provides that no tax, assessment, fee or charge may be assessed by any agency upon any parcel of property or upon any person as an incident of property ownership except: (a) the ad valorem property tax imposed pursuant to Articles XIII and XIIIA of the State Constitution; (b) any special tax receiving a two-thirds vote pursuant to the State Constitution; and (c) assessments, fees and charges for property related services as provided in Proposition 218. Proposition 218 then goes on to add voter requirements for assessments and fees and charges imposed as an incident of property ownership, other than fees and charges for sewer, water, and refuse collection services. In addition, all assessments and fees and charges imposed as an incident of property ownership, including sewer, water, and refuse collection services, are subjected to various additional procedures, such as hearings and stricter and more individualized benefit requirements and findings. The effect of such new provisions will presumably be to increase the difficulty a local agency will have in imposing, increasing or extending such assessments, fees and charges. Proposition 218 also extended the initiative power to reducing or repealing any local taxes, assessments, fees and charges. This extension of the initiative power is not limited to taxes imposed on or after November 6, 1996, the effective date of Proposition 218, and could result in retroactive repeal or reduction in any existing taxes, assessments, fees and charges, subject to overriding federal constitutional principles relating to the impairments of contracts. Legislation implementing Proposition 218 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. However, no assurance can be given that the voters of the City will not, in the future, approve an initiative which reduces or repeals local taxes, assessments, fees or charges that currently are deposited into the City s General Fund. Although a portion of the City s General Fund revenues are derived from general taxes purported to be governed by Proposition 218 as discussed under the caption CITY FINANCIAL INFORMATION Other Taxes, all of such taxes were imposed in accordance with the requirements of Proposition 218. No assurance can be given that the voters of the City will not, in the future, approve an initiative or initiatives which reduce or repeal local taxes, assessments, fees or charges which support the City s General Fund. Unitary Property Some amount of property tax revenue of the City is derived from utility property which is considered part of a utility system with components located in many taxing jurisdictions ( unitary property ). Under the State Constitution, such property is assessed by the State Board of Equalization (the SBE ) as part of a going concern rather than as individual pieces of real or personal property. State-assessed unitary and certain other property is allocated to the counties by the SBE, taxed at special county-wide rates, and the tax revenues distributed to taxing jurisdictions (including the City) according to statutory formula generally based on the distribution of taxes in the prior year. Proposition 22 On November 2, 2010, voters in the State approved Proposition 22, which eliminates the State s ability to borrow or shift local revenues and certain State revenues that fund transportation programs. It restricts the State s authority over a broad range of tax revenues, including property taxes allocated to cities (including the City), counties and special districts, the Vehicle License Fee, State excise taxes on gasoline and diesel fuel, the State sales tax on diesel fuel, and the former State sales tax on gasoline. It also makes a number of significant other changes, including restricting the State s ability to use motor vehicle fuel tax revenues to pay debt service on voter-approved transportation bonds. 27

36 Proposition 1A As part of former Governor Schwarzenegger s agreement with local jurisdictions, Senate Constitutional Amendment No. 4 was enacted by the State Legislature and subsequently approved by the voters as Proposition 1A ( Proposition 1A ) at the November 2, 2004 general election. Proposition 1A amended the State Constitution to, among other things, reduce the State Legislature s authority over local government revenue sources by placing restrictions on the State s access to local governments property, sales, and vehicle license fee revenues as of November 3, Beginning with Fiscal Year 2009, the State may borrow up to 8% of local property tax revenues, but only if the Governor proclaims that such action is necessary due to a severe State fiscal hardship and two-thirds of both houses of the State Legislature approve the borrowing. The amount borrowed is required to be paid back within three years. The State also will not be able to borrow from local property tax revenues for more than two Fiscal Years within a period of ten Fiscal Years. In addition, the State cannot reduce the local sales tax rate or restrict the authority of local governments to impose or change the distribution of the Statewide local sales tax. The Fiscal Year 2010 State budget included a Proposition 1A diversion of $1.935 billion in local property tax revenues from cities, counties, and special districts to the State to offset State general fund spending. Such diverted revenues were required to be repaid, with interest, by no later than June 30, The amount of the Proposition 1A diversion from the City was $3,270,152. The City participated in the State of California Proposition 1A Receivables Program to securitize its receivable from the State, and, as a result, received the shifted funds in the amount of $3,270,152, without interest, in two installments in 2010 from the California Statewide Communities Development Authority. See APPENDIX A GENERAL AND FINANCIAL INFORMATION ABOUT THE CITY OF COSTA MESA. Proposition 26 On November 2, 2010, voters in the State approved Proposition 26. Proposition 26 amends Article XIIIC of the State Constitution to expand the definition of tax to include any levy, charge, or exaction of any kind imposed by a local government except the following: (a) 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; (b) 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; (c) a charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof; (d) a charge imposed for entrance to or use of local government property, or the purchase, rental or lease of local government property; (e) a fine, penalty or other monetary charge imposed by the judicial branch of government or a local government as a result of a violation of law; (f) a charge imposed as a condition of property development; and (g) assessments and property-related fees imposed in accordance with the provisions of Article XIIID. Proposition 26 provides 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. The City does not believe that Proposition 26 will adversely affect its General Fund revenues. Future Initiatives Articles XIIIA and XIIIB and Propositions 62, 218, 22, 1A and 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, further affecting the City s current revenues or its ability to raise and expend revenues. 28

37 TAX MATTERS In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest (and original issue discount) on the Series 2017 Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, interest (and original issue discount) on the Series 2017 Bonds is exempt from State of California personal income tax. Bond Counsel notes that, with respect to corporations, interest on the Series 2017 Bonds may be included as an adjustment in the calculation of alternative minimum taxable income, which may affect the alternative minimum tax liability of such corporations. The difference between the issue price of a Series 2017 Bond (the first price at which a substantial amount of the Series 2017 Bonds of a maturity is to be sold to the public) and the stated redemption price at maturity with respect to such Series 2017 Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to the Owner of the Series 2017 Bond before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by the Owner of a Series 2017 Bond will increase the Owner s basis in the Series 2017 Bond. In the opinion of Bond Counsel, original issue discount that accrues to the Owner of a Series 2017 Bond is excluded from the gross income of such Owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. The amount by which a Series 2017 Bond Owner s original basis for determining loss on sale or exchange in the applicable Series 2017 Bond (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable bond premium, which must be amortized under Section 171 of the Internal Revenue Code of 1986, as amended (the Code ); such amortizable bond premium reduces the Series 2017 Bond Owner s basis in the applicable Series 2017 Bond (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of bond premium may result in a Series 2017 Bond Owner realizing a taxable gain when a Series 2017 Bond is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Series 2017 Bond to the Owner. Purchasers of the Series 2017 Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium. Bond Counsel s opinion as to the exclusion from gross income for federal income tax purposes of the interest (and original issue discount) on the Series 2017 Bonds is based upon certain representations of fact and certifications made by the City and others and is subject to the condition that the City and the Authority comply with all requirements of the Code that must be satisfied subsequent to issuance of the Series 2017 Bonds to assure that the interest (and original issue discount) on the Series 2017 Bonds will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue discount) on the Series 2017 Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Series 2017 Bonds. The City and the Authority have covenanted to comply with all such requirements applicable to each, respectively. The Internal Revenue Service (the IRS ) has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Series 2017 Bonds will be selected for audit by the IRS. It is also possible that the market value of the Series 2017 Bonds might be affected as a result of such an audit of the Series 2017 Bonds (or by an audit of similar municipal obligations). No assurance can be given that in the course of an audit, as a result of an audit, or otherwise, Congress or the IRS might not change the Code (or interpretation thereof) subsequent to the issuance of the 29

38 Series 2017 Bonds to the extent that it adversely affects the exclusion from gross income of interest on the Series 2017 Bonds or their market value. SUBSEQUENT TO THE ISSUANCE OF THE SERIES 2017 BONDS THERE MIGHT BE FEDERAL, STATE, OR LOCAL STATUTORY CHANGES (OR JUDICIAL OR REGULATORY INTERPRETATIONS OF FEDERAL, STATE, OR LOCAL LAW) THAT AFFECT THE FEDERAL, STATE, OR LOCAL TAX TREATMENT OF THE SERIES 2017 BONDS OR THE MARKET VALUE OF THE SERIES 2017 BONDS. TAX REFORM PROPOSALS ARE BEING CONSIDERED BY CONGRESS. IT IS POSSIBLE THAT LEGISLATIVE CHANGES MIGHT BE INTRODUCED IN CONGRESS, WHICH, IF ENACTED, WOULD RESULT IN ADDITIONAL FEDERAL INCOME OR STATE TAX BEING IMPOSED ON OWNERS OF TAX-EXEMPT STATE OR LOCAL OBLIGATIONS, SUCH AS THE SERIES 2017 BONDS. THE INTRODUCTION OR ENACTMENT OF ANY OF SUCH CHANGES COULD ADVERSELY AFFECT THE MARKET VALUE OR LIQUIDITY OF THE SERIES 2017 BONDS. NO ASSURANCE CAN BE GIVEN THAT SUBSEQUENT TO THE ISSUANCE OF THE SERIES 2017 BONDS SUCH CHANGES (OR OTHER CHANGES) WILL NOT BE INTRODUCED OR ENACTED OR INTERPRETATIONS WILL NOT OCCUR. BEFORE PURCHASING ANY OF THE SERIES 2017 BONDS, ALL POTENTIAL PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING POSSIBLE STATUTORY CHANGES OR JUDICIAL OR REGULATORY CHANGES OR INTERPRETATIONS, AND THEIR COLLATERAL TAX CONSEQUENCES RELATING TO THE SERIES 2017 BONDS. Bond Counsel s opinions may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. Bond Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. Bond Counsel s engagement with respect to the Series 2017 Bonds terminates upon their issuance and Bond Counsel disclaims any obligation to update the matters set forth in its opinion. The Indenture, the Lease Agreement and the Tax Certificate relating to the Series 2017 Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is provided with respect thereto. Bond Counsel expresses no opinion as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) due with respect to any Series 2017 Bond if any such action is taken or omitted based upon the advice of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation. Although Bond Counsel has rendered an opinion that the interest (and original issue discount) on the Series 2017 Bonds is excluded from gross income for federal income tax purposes provided that the City and the Authority continue to comply with certain requirements of the Code, the ownership of the Series 2017 Bonds and the accrual or receipt of interest (and original issue discount) with respect to the Series 2017 Bonds may otherwise affect the tax liability of certain persons. Bond Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Series 2017 Bonds, all potential purchasers should consult their tax advisors with respect to collateral tax consequences with respect to the Series 2017 Bonds. The form of Bond Counsel s proposed opinion with respect to the Series 2017 Bonds is attached hereto as Appendix D. CERTAIN LEGAL MATTERS The validity of the Series 2017 Bonds and certain other legal matters are subject to the approving opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Bond Counsel and Disclosure Counsel. A complete copy of the proposed form of Bond Counsel opinion is contained in Appendix D hereto. Bond Counsel and Disclosure Counsel will receive compensation from the City contingent upon the sale and delivery of the Series 2017 Bonds. 30

39 Certain legal matters will be passed upon for the City and the Authority by the City Attorney, for the Underwriter by Jones Hall, a Professional Law Corporation, San Francisco, California, and for the Trustee by its counsel. MUNICIPAL ADVISOR The City has retained Fieldman, Rolapp & Associates, Inc., Irvine, California, as municipal advisor (the Municipal Advisor ) for the sale of the Series 2017 Bonds. The Municipal Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume any responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. The Municipal Advisor will receive compensation contingent upon the issuance of the Series 2017 Bonds. LITIGATION To the best knowledge of the City, the Authority and the City Attorney, there is no action, suit or proceeding pending or threatened either restraining or enjoining the execution or delivery of the Series 2017 Bonds, the Lease Agreement or the Indenture, or in any way contesting or affecting the validity of the foregoing or any proceedings of the Authority or the City taken with respect to any of the foregoing. There are a number of lawsuits and claims pending against the City. The following outstanding litigation matters may result in significant financial obligations of the City: The Kennedy Commission, et al. v. City of Costa Mesa, et al. The petitioners in this case (the Kennedy Commission case) seek (1) a writ of mandate to invalidate various land use approvals (the project approvals ) relating to a new 224-unit apartment development located in the City (the proposed project ) and (2) declaratory and injunctive relief to compel the City to comply with the California Relocation Assistance Act, Government Code Section 7260, et seq. (the Relocation Law ). The City s potential exposure in the Kennedy Commission case relates to the petitioners claim that the former long-term occupants ( LTOs ) of a 236-unit commercial motel, which was owned and operated and then closed by the owner of the property (the Developer ), are entitled to monetary benefits under the Relocation Law. If a court were to rule that the Relocation Law applies to Developer s proposed project, then the court would order the City to carry out the relocation planning and procedures required under the Relocation Law to (a) determine which, if any, of the former LTOs are eligible for relocation advisory assistance and monetary benefits and (b) to pay such benefits to eligible LTOs. Further, if the City is unsuccessful in this litigation, the City could be liable for the petitioners attorneys fees. The City s total potential exposure if this litigation is resolved in a manner adverse to the City could exceed $4.5 million, including attorneys fees and relocation payments to eligible LTOs; however, in the project approval conditions, the Developer agreed to indemnify the City, which indemnity obligation is affirmed in a Joint Defense Agreement entered into between the City and Developer, relating to defense of the Kennedy Commission litigation. No trial date has been set by the court with respect to the Relocation Law cause of action. Timothy Dadey, et al. v. City of Costa Mesa. The plaintiffs in this case (the Dadey case) challenge the City s adoption of Ordinance 14-11, which prohibits long-term occupancy at motels in the City in the absence of the motel operator obtaining a conditional use permit. The Ordinance grandfathered existing LTOs. Plaintiffs allege discrimination based on mental/physical disability, source of income, and/or familial status under state and federal housing discrimination statutes, as well as related state and federal civil rights violations and violations of the Relocation Law. Certain of the plaintiffs allegations in the Dadey case relating to Relocation Law violations overlap with certain of the allegations in the Kennedy Commission case, in that one of the motels alleged to be affected by Ordinance is the motel closed by the Developer in the Kennedy Commission case. If the City is unsuccessful in this litigation, the City could be liable for money damages, benefits under the Relocation Law and plaintiffs attorneys fees. Trial in the Dadey case is currently scheduled for September 18, The City estimates that its total exposure as a result of an unfavorable judgment in this case could exceed $5 million; however, the City cannot predict the outcome of the case and it is possible that the ultimate financial impact to the City could be higher. 31

40 Yellowstone Women s First Step House, Inc. et al. v. City of Costa Mesa. The plaintiffs in this case (the Yellowstone case) challenge the City s adoption of an ordinance that creates the regulatory framework to provide a balance between group homes and single housekeeping units in single-family residential neighborhoods throughout the City. Plaintiffs allege that the ordinance impermissibly regulates sober living homes, a subset of group homes, in violation of state law, federal law, and both the state and federal constitutions. Plaintiffs also allege the City s adoption and enforcement of certain land use regulations discriminates on the basis of disability in violation of the Fair Housing Act, the Americans with Disabilities Act, the Civil Rights Act of 1871 and other related state laws. Trial in the Yellowstone case is set for February 6, Although the City cannot predict the outcome of this litigation, should it proceed to trial and be decided adversely to the City, the City s potential exposure could exceed $5 million in damages and plaintiffs attorneys fees. The City maintains a self-insurance reserve of $2 million in the General Fund for potential liabilities such as the litigation matters described above and would draw on this reserve, available cash in the City s selfinsurance fund and other available General Fund reserves to cover potential exposure from these matters. Notwithstanding the litigation matters described above, in the opinion of the City and the City Attorney, and taking into account likely insurance coverage and moneys held in reserves, there are no lawsuits or claims pending against the City which will materially affect the City s finances so as to impair its ability to pay Base Rental Payments when due. VERIFICATION OF MATHEMATICAL ACCURACY The Verification Agent, upon delivery of the Series 2017 Bonds, will deliver a report on the mathematical accuracy of certain computations contained in schedules provided to them, which were prepared by the Underwriter (as defined below), relating to the sufficiency of the anticipated receipts from the moneys deposited in the 2007 Escrow Fund to prepay the 2007 Certificates on November 6, UNDERWRITING Stifel, Nicolaus & Company, Incorporated (the Underwriter ), will purchase the Series 2017 Bonds from the Authority at an aggregate purchase price of $33,304, (representing the principal amount of the Series 2017 Bonds ($29,735,000), plus a net original issue premium of $3,694,171.50, and less an underwriter s discount of $124,638.75). The Series 2017 Bonds are offered for sale at the initial prices stated on the inside cover page of this Official Statement, which may be changed from time to time by the Underwriter. The Series 2017 Bonds may be offered and sold to certain dealers at prices lower than the public offering prices. RATING S&P Global Ratings, a business unit of Standard & Poor s Financial Services LLC ( S&P ), has assigned its municipal bond rating of AA+ to the Series 2017 Bonds. No application has been made to any other rating agency for the purpose of obtaining any additional ratings on the Series 2017 Bonds. Any desired explanation of such rating should be obtained from S&P. Generally, rating agencies base their ratings on information and materials furnished to them and on investigations, studies and assumptions by the rating agencies. A securities rating is not a recommendation to buy, sell or hold securities and there is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by S&P if, in the judgment of S&P, circumstances so warrant. Any such change in or withdrawal of such rating may have an adverse effect on the market price of the Series 2017 Bonds. The City has covenanted in a Continuing Disclosure Certificate to file notices of any rating changes on the Series 2017 Bonds with the Municipal Securities Rulemaking Board s Electronic Municipal Market Access system. See the caption CONTINUING DISCLOSURE and Appendix E. Notwithstanding such 32

41 covenant, information relating to rating changes on the Series 2017 Bonds may be publicly available from the S&P prior to such information being provided to the City or the Authority and prior to the date by which the City is obligated to file a notice of rating change. Purchasers of the Series 2017 Bonds are directed to the S&P s website and official media outlets for the most current rating with respect to the Series 2017 Bonds after the initial issuance of the Series 2017 Bonds. In providing a rating on the Series 2017 Bonds, S&P may have performed independent calculations of coverage ratios using its own internal formulas and methodology which may not reflect the provisions of the Indenture. The City and the Authority make no representations as to any such calculations, and such calculations should not be construed as a representation by the City or the Authority as to past or future compliance with any financial covenants, the availability of particular revenues for the payment of debt service or for any other purpose. CONTINUING DISCLOSURE The City has covenanted for the benefit of the Owners of the Series 2017 Bonds to provide annually certain financial information and operating data relating to the Series 2017 Bonds and the City (the Annual Report ), and to provide notices of the occurrence of certain enumerated events. For a complete listing of items of information that will be provided in each Annual Report and further description of the City s undertaking with respect to the Annual Report and certain enumerated events, see APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE. The Annual Report and notices of enumerated events will be filed with the Municipal Securities Rulemaking Board. The Annual Report is to be provided by the City not later than March 15 of each year following the end of the City s fiscal year, commencing with the report for fiscal year These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5) (the Rule ). The City and its related governmental entities specifically those entities for which City staff is responsible for undertaking compliance with continuing disclosure undertakings have previously entered into numerous disclosure undertakings under the Rule in connection with the issuance of long-term obligations. The City and its affiliated entities have failed on one occasion during the past five years to comply, in all material respects, with these undertakings. More specifically, the City filed a notice of a rating upgrade on certain of the City s obligations which incorrectly stated that the City s obligations were downgraded. This incorrect filing was corrected prior to the date of this Official Statement. In order to ensure ongoing compliance with its continuing disclosure undertakings, the City has designated a single staff member within the City Finance Department with the responsibility of ensuring timely and complete filings. In addition, the City has retained an outside consultant to conduct periodic reviews of City compliance. FINANCIAL STATEMENTS OF THE CITY A copy of the most recent audited financial statements of the City audited by White Nelson Diehl Evans LLP, Irvine, California, certified public accountants (the Auditor ) is included as Appendix C to this Official Statement (the Financial Statements ). The Auditor s letter concludes that the Financial Statements present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the City as of June 30, 2016, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. The Auditor has not reviewed the information contained in this Official Statement, nor has the Auditor consented to the inclusion of the Financial Statements, which are public documents, herein. 33

42 The City accounts for moneys received and expenses paid in accordance with generally accepted accounting principles applicable to governmental agencies such as the Department ( GAAP ), and the City applies all relevant Governmental Accounting Standards Board pronouncements. In certain cases, GAAP requires or permits moneys collected in one Fiscal Year to be recognized as revenue in a subsequent Fiscal Year and requires or permits expenses paid or incurred in one Fiscal Year to be recognized in a subsequent Fiscal Year. The underlying account system of the City is organized and operated on the basis of separate funds. A fund is defined as an independent fiscal and accounting entity with a self-balancing set of accounts, recording resources, related liabilities, obligations, reserves, and equities segregated for the purpose of carrying out specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations. Fund financial statements for the primary government s governmental, proprietary, and fiduciary funds are presented after the government-wide financial statements. These statements display information about major funds individually and nonmajor funds in the aggregate for governmental funds. Proprietary statements include financial information for internal service funds. Fiduciary statements include financial information for Agency and Private Purpose Trust funds. Fiduciary funds of the City represent assets held by the City in a custodial capacity for other individuals or organizations. In the fund financial statements, governmental funds are presented using the modified accrual basis of accounting. Revenues are recognized when they become measurable and available as net current assets. Measurable means that the amounts can be estimated or otherwise determined. Available means that the amounts were collected during the reporting period or soon enough thereafter to be available to finance the expenditures accrued for the reporting period. The City uses an availability period of 60 days. Sales taxes, property taxes, franchise taxes, motor vehicle in lieu, transient occupancy taxes, grants, and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized in the Financial Statements as revenues of the current fiscal period to the extent normally collected within the availability period. Other revenue items are considered to be measurable and available where cash is received by the government. Amounts paid to acquire capital assets are capitalized as assets in the government-wide financial statements, rather than reported as expenditures. Proceeds of long-term debt are recorded as a liability in the government-wide financial statements, rather than as other financing sources. Amounts paid to reduce longterm indebtedness of the reporting government are reported as a reduction of the related liability, rather than as expenditures. In the fund financial statements, governmental funds are presented using the current financial resources measurement focus. This means that generally only current assets, current liabilities and deferred inflows of resources are included on their balance sheets. The reported fund balance is considered to be a measure of available spendable resources. Governmental fund operating statements present increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in fund balance. Accordingly, they are said to present a summary of sources and uses of available spendable resources during a period. Noncurrent portions of long-term receivables due to governmental funds are reported on the balance sheet in spite of their spending measurement focus. Special reporting treatments are used to indicate, however, that they should not be considered available spendable resources, since they do not represent fund balance. See Appendix C for a discussion of the City s accounting practices. Except as otherwise expressly noted herein, all financial information derived from the Financial Statements reflects the application of GAAP. In providing a rating on the Series 2017 Bonds, S&P may have performed independent calculations of coverage ratios using its own internal formulas and methodology, which may not reflect the provisions of the 34

43 Indenture. See the caption RATING. The City makes no representations as to any such calculations, and such calculations should not be construed as a representation by the Department as to past or future compliance with any financial covenants, the availability of particular revenues for the payment of debt service or for any other purpose. 35

44 MISCELLANEOUS References are made in this Official Statement to certain documents and reports that are brief summaries thereof which do not purport to be complete or definitive and reference is made to such documents and reports for full and complete statements of the contents thereof. Copies of the Indenture, the Lease Agreement, the Ground Lease and other documents are available, upon request, and upon payment to the City of a charge for copying, mailing and handling, from the City Clerk at the City, 77 Fair Drive, Costa Mesa, California Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Authority or the City and the purchasers or Owners of any of the Series 2017 Bonds. The execution and delivery of this Official Statement have been duly authorized by the Authority and the City. COSTA MESA FINANCING AUTHORITY By: /s/ Thomas R. Hatch Executive Director CITY OF COSTA MESA By: /s/ Thomas R. Hatch City Manager 36

45 APPENDIX A GENERAL AND FINANCIAL INFORMATION ABOUT THE CITY OF COSTA MESA General The City is located in southern Orange County (the County ), approximately 35 miles southeast of Los Angeles and 85 miles northwest of San Diego, California. The City covers approximately 16.8 square miles. The California Department of Finance estimates that City has a population of approximately 114,044 as of January 1, The City s population has remained stable for the past ten years, growing 6.1% since The City was incorporated on June 29, 1953 and is a general law city operating under a council/manager form of government. The City provides or contracts for many municipal services for its residents, including libraries, parks maintenance, street sweeping, jail operations and electric utility services. Water service is provided by Mesa Water District and sewer service is provided by the Costa Mesa Sanitary District. The City had approximately 605 full and part-time employees as of June 30, In the past six years, the City has reduced the number of authorized full-time positions from approximately 611 to approximately 477 of which 407 are currently filled. The City now relies on a greater number of part-time and contract workers. This enables the City to limit exposure to pension costs and to allow for greater flexibility in the City s ability to respond to future economic downturns that may affect the City. City employees are represented by six labor associations: (i) the Costa Mesa City Employees Association (the CMCEA ), which represented approximately 236 employees as of June 30, 2017; (ii) the Costa Mesa Police Association (the CMPA ), which represented approximately 127 employees as of June 30, 2017; (iii) the Costa Mesa Firefighters Association (the CMFA ), which represented approximately 79 employees as of June 30, 2017; (iv) the Costa Mesa Division Managers Association (the CMDMA ), which represented approximately 14 employees as of June 30, 2017; (v) the Costa Mesa Police Management Association (the CMPMA ), which represented approximately 8 employees as of June 30, 2017; and (vi) the Costa Mesa Fire Management Association (the CMFMA ), which represented approximately 4 employees as of June 30, There are memoranda of understanding (each, an MOU ) in place between the City and CMCEA (which MOU expires June 30, 2020), between the City and CMFMA (which MOU expires June 30, 2022), and between the City and CMPA (which MOU expires June 20, 2018). Salaries and benefits for executives, CMDMA and confidential employees are governed by resolutions adopted by the City Council. The City has negotiated a new MOU with the CMFA, which is required to be heard at two separate public hearings prior to approval by the City Council. While the City Council has not yet taken action with respect to the new MOU, the City expects the hearing and approval process to be completed in October or November of The CMFA s members have already approved the MOU. If approved, the new MOU will expire on June 30, See the caption Budget Procedure, Current Budget and Historical Budget Information for a discussion of the impact of the new MOU with the CMFA, if approved. The City currently expects to commence negotiations with the CMPMA with respect to a new MOU in late September or October The previous MOU with the CMPMA expired in August Largest Employers The largest employer located in the City is EPL Intermediate, Inc. (El Pollo Loco), which currently employs approximately 3,998 employees, representing approximately 6.5% of the total City employment. EPL Intermediate, Inc., through its subsidiary, El Pollo Loco, Inc., owns, develops, operates and licenses quick-service restaurants under the name El Pollo Loco. A-1

46 Other large employers in the City include Experian Information Solutions, Inc., which currently employs approximately 3,700 employees, and the Coast Community College District Foundation, which currently employs approximately 2,900 employees. The table below sets forth the largest employers within the City as of June 30, 2016, the latest date for which such information is available. CITY OF COSTA MESA LARGEST EMPLOYERS AS OF JUNE 30, 2016 Rank Name of Business Employees Percentage of Total City Employment 1. EPL Intermediate, Inc. (El Pollo Loco) 3, % 2. Experian Information Solutions, Inc. 3, Coast Community College District Foundation 2, Automobile Club of Southern California 2, Orange Coast Community College 1, California State Hospital-Fairview Develop. Center (1) 1, Westar Capital Associates II, LLC 1, Deloitte Consulting LLP Dynamic Cooking Systems, Inc FileNet Corporation (1) The City is informed that the Fairview Developmental Center may close in the near future and currently serves a reduced number of clients. Source: City. Government and Administration The City operates under a council-manager form of government. Currently, the City Council consists of five members, each elected by a City-wide vote. Beginning in November 2018, the City Council will consist of seven members, with six elected by their respective districts and the Mayor elected by a City-wide vote. The City Manager, appointed by the City Council, serves as the City s chief administrative officer and is responsible for overseeing the daily operations of City departments and efficient management of all City business. Functions of the City Manager s Office include coordination of the implementation of City Council policies and programs; providing overall direction to the departments that administer City programs and services; coordinating intergovernmental relations and legislative advocacy; and administration of the City s communications, media relations, and public information programs. Thomas R. Hatch is the City Manager. Mr. Hatch was appointed City Manager in March Mr. Hatch is responsible for the administration of all municipal affairs, including implementation of City Council policy, State laws and City ordinances. Mr. Hatch has 30 years of local government experience. He has worked at the City for over 15 years in a variety of leadership positions, including Assistant City Manager. Mr. Hatch obtained his master s degree in public administration and bachelor s degree from California State University, Fullerton. Other key personnel responsible for management of the City include the Assistant City Manager/Administrative Services Director Tamara Letourneau and the Interim Finance Director Stephen Dunivent. In addition, City Attorney Thomas P. Duarte, of the law firm Jones & Mayer, provides legal services to the City and the Authority. A-2

47 Assistant City Manager/Administrative Services Director Tamara Letourneau was appointed Assistant City Manager/Administrative Services Director in March Ms. Letourneau oversees the City s human resources, labor relations, Parks and Community Services Department, County-run libraries in the City and employee development and communications, among other duties. Ms. Letourneau has over 27 years of local government experience. She has worked at the City for over 6 years, and previously served as city manager for the cities of Yorba Linda and Sierra Madre. Ms. Letourneau obtained her master s degree in public administration from California State University, Long Beach and bachelor s degree from California State Polytechnic University, Pomona. Stephen Dunivent is the Interim Finance Director of the City. Mr. Dunivent began his employment with the City in September 2013 as the City s Interim Finance Director. During his professional tenure, Mr. Dunivent served the County in various finance-related capacities for 35 years, including as deputy county executive officer from 2007 to Mr. Dunivent holds a bachelor s degree in accounting from the University of Illinois. In July, 2017, Mr. Dunivent announced his intention to retire at the end of the year. The City is actively recruiting for the Finance Director position that will be vacated by Mr. Dunivent. City Attorney Thomas P. Duarte has been an attorney for more than 20 years and has been in private practice specializing in municipal law since He is a partner of the law firm Jones & Mayer with main offices in Fullerton, California. Previously, he served as legal counsel for the Whittier Planning Commission and Westminster Planning Commission. Mr. Duarte graduated with a juris doctorate from the Thomas Jefferson School of Law. Risk Management The City is exposed to various risks of loss related to torts, theft of, damage to, and destruction of assets, errors and omissions, injuries to employees and natural disasters. The City is self-insured for the first $2,000,000 of each claim arising for workers compensation and has purchased outside insurance coverage in excess of the $2,000,000 up to an unlimited maximum. The City is self-insured for the first $2,000,000 of each claim arising for general liability. The City has purchased outside insurance coverage in excess of the $2,000,000 up to a maximum of $20,000,000 per occurrence. See the caption SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS Insurance. Accounting and Financial Reporting CITY FINANCIAL INFORMATION The City maintains its accounting records in accordance with Generally Accepted Accounting Principles and the standards established by the Governmental Accounting Standards Board ( GASB ). The City s Finance Department staff review City revenues and expenses on a monthly basis. On a semi-annual basis, a report is prepared for the City Council and City staff which reviews fiscal performance to date against the budget. Combined financial statements of the City and its component units are produced following the close of each Fiscal Year. The City Council employs an independent certified public accountant who examines at least annually the financial statements of the City in accordance with generally accepted auditing standards, including tests of the accounting records and other auditing procedures as such accountant considers necessary. As soon as practicable, after the end of the Fiscal Year, a final audit and report is submitted by the independent accountant to the City Council. The accounts of the City are organized on the basis of funds and account groups, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures, or A-3

48 expenses, as appropriate. Government resources are allocated to and accounted for in individual funds based upon the purposes for which they are to be spent and the means by which spending activities are controlled. The General Fund is the general operating fund of the City. It is used to account for all financial resources except those required to be accounted for in another fund. It is expected that the Base Rental Payments will be paid for from amounts in the General Fund. Tables 1 through 3 below set forth certain historical and current Fiscal Year information for the General Fund. Information on the remaining governmental funds of the City as of June 30, 2016 is set forth in Appendix C. General Economic Condition and Outlook of the City Based on unaudited actual Fiscal Year 2017 results, the City reports that the General Fund is on track to exceed budgeted revenues and come in under budgeted expenditures (as amended). However, the City transferred out a portion of its Fiscal Year 2016 General Fund surplus: (i) in the amount of approximately $5.9 million to its Information Technology Replacement Fund to fund planned information technology system replacements; (ii) in the amount of approximately $1 million to its City s Self-Insurance Fund. Including such transfers out, Fiscal Year 2017 General Fund expenditures are expected to exceed Fiscal Year 2017 General Fund revenues by approximately $1.2 million, based on unaudited actual results. See the caption General Fund Reserves, below. For Fiscal Year 2018, the adopted General Fund operating budget projects revenues of $125,674,573, which is approximately $4.06 million (3.3%) above Fiscal Year 2017 unaudited actual revenues. The City projects that sales taxes will increase in Fiscal Year 2018 by approximately 0.6% over the Fiscal Year 2017 unaudited actual amount. See the caption Budget Procedure, Current Budget and Historical Budget Information for additional information relating to the adopted budget for Fiscal Year Seven-Year Capital Improvement Plan. In addition to the City s annual budgets, described below under the heading Budget Procedures, Current Budget and Historical Budget Information, the City maintains a rolling seven-year Capital Improvement Plan, which is updated by City staff and approved by the City Council annually. The City selects and evaluates capital improvement projects to be undertaken based on several criteria including City Council objectives, protection of infrastructure, assisting economically disadvantaged areas, health and public safety, availability of grant funding and community needs. Five-Year City Financial Plan. To ensure prudent financial management, the City also prepares the City Financial Plan, which is a five-year financial plan updated by City staff and approved by the City Council at least every two years. The current City Financial Plan was approved by the City Council in February The current City Financial Plan projects that in the absence of adjustments to projected revenues and/or expenditures, the General Fund will experience deficits for Fiscal Year 2018 through Fiscal Year 2022 as a result of projected revenues increasing at a slower rate than projected expenses. Such projected deficits range from approximately $45,000 in Fiscal Year 2018 to approximately $8.3 million in Fiscal Year 2022, with the largest single-year deficit increase projected to occur in Fiscal Year 2019, coinciding with the first Fiscal Year in which the lowered CalPERS (as defined below) discount rates will impact the City s pension funding obligations. The projected annual deficit increase culminating in an $8.3 million projected deficit for Fiscal Year 2022 ranges from approximately $1 million to $3 million (approximately 1-2% of annual revenues), allowing the City to address deficit growth incrementally through relatively modest annual measures considered during the budgeting process, as described below. Factors that impact the projected deficit include the City s conservative projections of modest growth in sales tax and property tax, as well as assumed increases in labor costs as a result of inflation, decreased CalPERS investment returns and decreased CalPERS discount rate assumptions. CalPERS 2017 actuarial valuation reports for the City s pension plans set forth the actual impact of the discount rate reduction on the City s pension obligations in Fiscal Year 2019, and project the impact of further reductions in Fiscal Years 2020 and The information set forth in the 2017 CalPERS actuarial reports is generally consistent with the discount rate assumptions used by the City in A-4

49 making the projections set forth in the Financial Plan. See the captions Retirement Contributions and GENERAL AND FINANCIAL INFORMATION ABOUT THE CITY OF COSTA MESA General. To address the projected deficit described in the City Financial Plan, the City expects to consider a variety of strategies as part of the City s annual budgeting process, including: (i) cost reductions to lower priority items, (ii) re-shaping service delivery, (iii) revisiting the City s capital asset needs ordinance, (iv) revisiting the annual budgeted contingency amount, (v) updating fees for full cost recovery, (vi) implementing new fees and (vii) exploring other revenue enhancements. With the adoption of the Fiscal Year 2018 budget, the City approved a total of $450,000 in updated and new fees in the Parks Department and the Fire Department. The City Council also directed staff to prepare a proposal for full cost recovery in the special event rates. Other fees throughout the City will also be reviewed and updated with full cost recovery recommendations with the Fiscal Year 2019 budget. The City Financial Plan does not contemplate using City reserves to address projected operating deficits. See the caption Budget Procedure, Current Budget and Historical Budget Information for more information regarding the City s budgets and budgeting process. General Fund Reserves. On March 3, 2015, the City Council reviewed a Reserves Study which recommended funding for reserves based on an analysis of risks including economic volatility, major infrastructure failure, natural disasters and other potential emergencies. Accordingly, the City Council approved a reserves goal of $55,000,000 (increasing annually by the rate of increase in the consumer price index) and a plan to reach this target by annual increases to existing reserves of up to $1,500,000 funded by any actual operating surplus. The City has since surpassed the $55,000,000 reserves target and has reallocated the amount in excess of such target to debt reduction and one-time capital improvement items. As of June 30, 2017, the City continues to maintain a $ million emergency general operating reserve, and has an estimated $63,291,560 in total General Fund reserves. See Table 2 under the caption Change in Fund Balance of the City General Fund below. Amounts in excess of the reserves target not used to satisfy debt service reserve requirements for City obligations are transferred to separate City funds which include the Self-Insurance Fund, Equipment Replacement Fund and Information Technology Fund. The Self-Insurance Fund provides a reserve for payments of workers compensation, general liability and unemployment claims against the City. See the caption Risk Management. The Equipment Replacement Fund is a reserve maintained to provide funds for all motorized equipment used by City departments, while the Information Technology Replacement fund provides funds for the replacement and upgrading of City computer equipment, systems and supporting infrastructure. Finance and Pension Advisory Committee. The City maintains an 11-member Finance and Pension Advisory Committee (the Advisory Committee ) to assist in the management of the City s finances and pension obligations. Of the 11 members, 4 have specialized pension knowledge and 7 have financial expertise in other areas such as securities and accounting. The Advisory Committee provides guidance and information to the City Council, serves as the review panel for the selection of the City s independent auditor and makes recommendations regarding proposed financial legislation and policy amendments. In addition, the Advisory Committee meets annually to review the City s investment policy, and meets quarterly to review the City s investment portfolio. See the caption City Investment Policy. In performing these roles, the Advisory Committee reviews the City s financial documents and plans, monitors and evaluates changes in pension contribution rates and actuarial schedules, reviews labor contracts to analyze pension and compensation packages, and examines alternative retirement benefit plans and financing methods to address the City s unfunded pension liability. See the caption Retirement Contributions. Budget Procedure, Current Budget and Historical Budget Information The Fiscal Year 2018 budget was approved on June 20, 2017 and governs the period beginning on July 1, 2017 to June 30, The budget includes all funding sources of the City, including the General Fund. At such time as the City Manager determines, each department head must furnish to the City Manager A-5

50 an estimate of revenues and expenditures for the applicable department for the ensuing Fiscal Year, detailed in such manner as may be prescribed by the City Manager. In preparing the proposed budget, the City Manager reviews the estimates, holds conferences regarding the estimates with the respective department heads, and revises the estimates as the City Manager deems advisable. Prior to June 30, the City Manager submits to the City Council a proposed budget for the Fiscal Year commencing the following July 1. The budget includes proposed expenditures and the means of financing them. Prior to June 30, public hearings are conducted to obtain public comments and the budget is legally enacted through the passage of a resolution. The budget is subject to amendment to reflect actual financial performance. Finance Department staff present a mid-year report regarding the budget to the City Council. From the effective date of the budget, the amounts stated as proposed expenditures become appropriated to the several departments, offices and agencies for the objects and purposes named. The City Manager is authorized to transfer budgeted amounts between line items within a department or activity, and between departments and programs within the same fund, provided that the total appropriation does not exceed the budgeted amount. All other transfers or amendments require City Council approval. The City Manager and affected department heads are mutually responsible for controlling expenditures within budgeted appropriations. All appropriations lapse at the end of the Fiscal Year to the extent that they have not been expended or lawfully encumbered. At a public meeting after the adoption of the budget the City Council may amend or supplement the budget by motion adopted by the City Council. The City is currently working with an outside information technology company to develop an online, user-friendly budget information system. Called the Open Budget, it will provide users with the ability to see City General Fund revenues and expenses in total, by program or department, and compare current actual to budget amounts. In addition, there will be a capital project section where the user can obtain information regarding current capital projects, including cost, location and project description. The Open Budget system is scheduled to be available to the public in the fall of The City Council adopted a balanced budget for Fiscal Year 2017 on June 21, The budget for all funds totaled $129,189,648 (excluding internal service funds) and the General Fund operating budget totaled $109,596,111 (including debt service due to the Costa Mesa Public Financing Authority with respect to the 2007 Certificates). The Fiscal Year 2017 General Fund operating budget projected an increase in appropriations of approximately $3.4 million (3.2%) over the Fiscal Year 2016 adopted General Fund operating budget. Such increases were derived principally from an assumption of modest economic growth, an improving real estate market and increasing development activity within the City. The City Council adopted a balanced budget for Fiscal Year 2018 on June 20, The budget for all funds totals $140,694,811 (excluding internal service funds), and the General Fund operating budget totals $116,517,143 (including debt service due to the Costa Mesa Public Financing Authority with respect to the 2007 Certificates and to the Costa Mesa Financing Authority with respect to the Series 2017 Bonds). The Fiscal Year 2018 General Fund operating budget projects an increase in appropriations of approximately $6.9 million (6.3%) over the Fiscal Year 2017 adopted General Fund operating budget. Such increases were derived principally from an assumption of modest economic growth, an improving real estate market, expected increases in Fire and Parks Fees, revenues from new business and conditional use permits issued to medical marijuana operations, and six months of new Fire-Paramedic ambulance transportation revenue. The Fiscal Year 2018 budget allocates approximately $20,934,170 for capital improvements, an increase of 30.4% over the Fiscal Year 2017 allocation. The capital improvement budget and projects undertaken can vary significantly from year to year because most projects are funded by grants or restricted revenue sources. The General Fund provides approximately $8,283,644 of the capital improvement budget for Fiscal Year 2018, reflecting a 6.9% increase over the Fiscal Year 2017 allocation. Pursuant to the City s Municipal Code, the City is required to allocate a minimum of 5% of annual General Fund revenues to its capital expenditures and 1.5% to capital facilities accounts. Projects to be funded under the Fiscal Year 2018 A-6

51 budget include capital facilities, park development and maintenance, street improvements and maintenance and traffic planning and operations. As a result of a reduction in the County pool allocation of sales taxes (which affected all cities in the County), the City currently expects to receive approximately $55.9 million in sales taxes in Fiscal Year 2018, which is approximately $1 million below the budgeted amount. The City Council has directed staff to monitor sales tax receipts and may make a mid-year budget adjustment if required to address this matter. As discussed under the caption General, the City expects to enter into a new MOU with one of its labor associations, the CMFA, in or about late As a result of the provisions of the new MOU, the City expects personnel costs related to CMFA members to exceed the City s Fiscal Year 2018 budget expectations by approximately $1.1 million. If the MOU is entered into as currently expected, staff intends to recommend that the City Council approve the transfer $1.1 million from other discretionary budget items to cover such costs as part of the mid-year budget report to the City Council. The combined potential impact of the items that are described in the preceding two paragraphs is a net change in the General Fund balance that will be approximately $2.1 million less than the adopted Fiscal Year 2018 Budget. The City expects to address these adjustments by monitoring its General Fund revenues, managing overtime expenses, managing the timing of filling vacant regular and part-time positions, allocating budgeted contingency funds, and if necessary, reducing a budgeted discretionary transfer of $3 million to the City s Self-Insurance Fund. The City s intent is to keep Fiscal Year 2018 actual expenses at or below actual Fiscal Year 2018 revenue as it has done in the past years. Set forth in Table 1 are the General Fund budgets for Fiscal Years 2015 through 2018, the audited General Fund results for Fiscal Years 2015 and 2016 and the unaudited General Fund results for Fiscal Year During the course of each Fiscal Year, the budget is amended and revised as necessary by the City Council. A-7

52 Final Fiscal Year 2015 Budget TABLE 1 CITY OF COSTA MESA GENERAL FUND BUDGETS AND RESULTS Fiscal Year 2015 Results Final Fiscal Year 2016 Budget Fiscal Year 2016 Results Adopted Fiscal Year 2017 Budget Unaudited Fiscal Year 2017 Results (1) Adopted Fiscal Year 2018 Budget Revenues Sales Taxes (2) $ 50,169,000 $ 51,115,064 $ 52,862,000 $ 57,593,561 $ 54,600,000 $ 56,556,867 $ 56,906,000 Property Taxes 24,027,000 24,058,820 24,673,600 25,998,070 25,925,102 27,286,121 28,111,738 Transient Occupancy Taxes 8,040,000 7,995,154 8,107,500 8,622,505 8,531,000 8,924,854 9,250,000 Franchise Taxes 4,867,000 4,885,926 5,039,600 5,060,402 4,961,156 4,593,632 4,798,473 Business License Taxes 954, , , , , , ,805 Licenses & Permits 2,287,500 2,313,296 2,889,500 2,983,081 2,173,933 2,930,920 2,636,508 Fines & Forfeitures 1,485,000 1,204,868 1,190,000 1,530,046 1,475,000 1,467,693 1,535,000 Intergovernmental (3) 10,295,157 11,229,135 10,696,705 10,448,829 10,695,418 11,078,463 11,167,025 Charges for Services 3,449,150 3,574,264 3,562,300 3,634,255 3,848,308 3,776,534 5,635,426 Rental 2,896,000 2,932,280 2,963,900 2,890,731 2,983,221 2,791,744 2,859,749 Investment Income 296,427 1,463, ,800 1,199, ,000 (161,368) 250,000 Miscellaneous (4) 901,960 1,260, ,500 1,067,367 1,074,107 1,440,621 1,563,849 Total Revenues $ 109,668,194 $ 112,986,795 $ 113,832,505 $ 122,002,181 $ 117,392,897 $ 121,605,009 $ 125,674,573 Expenditures General Government (5) $ 24,405,684 $ 24,699,226 $ 23,428,896 $ 25,102,067 $ 23,553,568 $ 26,543,133 $ 25,536,049 Protection of Persons & 65,938,890 58,538,083 65,698,544 61,698,933 67,435,134 63,615,323 69,746,567 Property (6) Community Programs (7) 7,089,323 6,315,015 7,985,646 6,955,472 8,503,832 8,185,152 9,229,628 Public Services (8) 6,164,543 5,565,303 6,695,737 5,537,269 6,368,084 6,111,689 7,284,034 Total Expenditures $ 103,598,440 $ 95,117,627 $ 103,808,823 $ 99,293,741 $ 105,860,618 $ 104,455,297 $ 112,796,278 Excess (Deficiency) of Revenues Over (Under) Expenditures $ 6,069,754 $ 17,869,168 $ 10,023,682 $ 22,708,440 $ 11,532,279 $ 17,149,712 $ 12,878,295 (1) Reflects unaudited actual Fiscal Year 2017 results. Such amounts are subject to change. (2) Currently projected to be approximately $1 million lower than budgeted amount due to reduction in County pool allocation as described herein. (3) Includes motor vehicle in-lieu fees and grants and reimbursements. (4) Includes State payment on the Reinstated Loan Agreement (as described in the Official Statement under the caption STATE OF CALIFORNIA BUDGET INFORMATION Redevelopment Dissolution Impact on the City ), reimbursement for police services to a local school district, donations and other miscellaneous revenues. (5) Includes costs related to City Council, personnel, information technology, financial services, development services, facilities and equipment maintenance, and non-departmental operations. (6) Includes police protection, fire protection and building and safety costs. The decrease in costs in Fiscal Year 2015 from the budgeted amount reflects the recategorization of certain safety positions. Does not reflect the $1.1 million cost increase expected to result from the approval of the City s new MOU with the CMFA. See the discussion herein and under the caption GENERAL AND FINANCIAL INFORMATION ABOUT THE CITY OF COSTA MESA General. (7) Includes community recreation and planning costs. (8) Includes administration, engineering and transportation costs. Sources: Adopted budgets of the City for Fiscal Years 2015, 2016, 2017 and 2018; City audited financial statements for Fiscal Years 2015 and 2016; unaudited actual results for Fiscal Year A-8

53 Change in Fund Balance of the City General Fund Set forth in Table 2 are the City s audited General Fund statements of revenues, expenditures and changes in fund balance for Fiscal Years 2013 through 2016 and the unaudited General Fund statement of revenues, expenditures and changes in fund balance for Fiscal Year TABLE 2 CITY OF COSTA MESA GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE Fiscal Year Ending June 30, (1) Revenues Taxes Sales Taxes (2) $ 45,830,107 $ 49,264,633 $ 51,115,064 $ 57,593,561 $ 56,556,867 Property Taxes 23,172,595 22,821,008 24,058,820 25,998,070 27,286,121 Transient Occupancy Taxes 7,257,695 7,696,090 7,995,154 8,622,505 8,924,854 Franchise Taxes (3) 4,818,972 4,891,465 4,885,926 5,060,402 4,593,632 Business License Taxes 917, , , , ,928 Licenses & Permits 1,997,057 2,085,348 2,313,296 2,983,081 2,930,920 Fines & Forfeitures 1,506,940 1,216,018 1,204,868 1,530,046 1,467,693 Intergovernmental (4) 9,623,130 10,148,835 11,229,135 10,448,829 11,078,463 Charges for Services 3,509,616 3,404,276 3,574,264 3,634,255 3,776,534 Rental 2,786,330 2,825,148 2,932,280 2,890,731 2,791,744 Investment Income (5) 109,930 1,407,935 1,463,378 1,199,813 (161,368) Return on Equity 2,551, Settlements 1,452, , Miscellaneous (6) 517, ,926 1,260,202 1,067,367 1,440,621 Total Revenues $ 106,052,363 $ 107,395,938 $112,986,795 $122,002,181 $ 121,605,009 Expenditures Current General government (7) $ 21,982,783 $ 23,893,450 $ 24,699,226 $ 25,102,067 $ 26,543,133 Protection of Persons & 58,150,275 59,239,947 58,538,083 61,698,933 63,615,323 Property (8) Community Programs (9) 4,500,656 4,980,001 6,315,015 6,955,472 8,185,152 Public Services (10) 5,177,151 5,634,647 5,565,303 5,537,269 6,111,689 Debt Service (11) 304, Total Expenditures $ 90,115,525 $ 93,748,045 $ 95,117,627 $ 99,293,741 $ 104,455,297 Excess (Deficiency) of Revenues Over (Under) Expenditures $ 15,936,838 $ 13,647,893 $ 17,869,168 $ 22,708,440 $ 17,149,712 Other Financing Sources (Uses) Transfers In $ 148 $ 126 $ 201 $ 400,505 $ 471 Transfers Out (12) (6,212,312) (9,094,134) (14,253,744) (12,452,435) (18,331,084) Total Other Financing Sources (Uses) $ (6,212,164) $ (9,094,008) $ (14,253,543) $ (12,051,930) $ (18,330,613) Net Change in Fund Balance Before Extraordinary Items $ 9,724,674 $ 4,553,885 $ 3,615,625 $ 10,656,510 $ (1,180,901) Extraordinary Items (13) (11,888,159) Net Change in Fund Balance $ (2,163,485) $ 4,553,885 $ 3,615,625 $ 10,656,510 $ (1,180,901) Fund Balance, Beginning of Year 47,809,926 45,646,441 50,200,326 53,815,951 64,472,461 Fund Balance, End of Year $ 45,646,441 $ 50,200,326 $ 53,815,951 $ 64,472,461 $ 63,291,560 (1) Reflects unaudited actual Fiscal Year 2017 results. Such amounts are subject to change. (2) Increase in Fiscal Year 2016 reflects in-lieu receipts related to the end of payments to the City under the triple-flip program. (3) Decrease in Fiscal Year 2017 relates to electric utility and cable television franchise revenues. (4) Includes motor vehicle in-lieu fees and grants and reimbursements. (5) Reflects reduced value of assets as a result of GASB market adjustments. (6) Includes contributions, sponsorships, donations, Successor Agency loan payments (see the Official Statement under the caption STATE OF CALIFORNIA BUDGET INFORMATION Redevelopment Dissolution ) and other miscellaneous revenues. (7) Includes costs related to City Council, personnel, information technology, financial services, development services, facilities and equipment maintenance, and non-departmental operations. (8) Includes police protection, fire protection and building and safety costs. Decrease in Fiscal Year 2015 reflects deletion of 12 positions. Increase in Fiscal Year 2016 reflects two new positions in the fire department, an increase in equipment and an increase in fire and police pension costs. (9) Includes community recreation and planning costs. Increases in Fiscal Year 2015 and 2017 reflect the addition of part-time positions in the Parks and Recreation Department and the Development Services Department. (10) Includes administration, engineering and transportation costs. (11) Reflects debt service on a fire truck loan. [FOOTNOTES CONTINUED ON THE FOLLOWING PAGE] A-9

54 (12) Includes transfers for capital improvement projects, public safety expenditures and debt service payments on Costa Mesa Public Financing Authority obligations. Fiscal Year 2013 also includes reimbursement to Homeless Prevention Fund for negative fund balance. (13) Extraordinary item for Fiscal Year 2013 reflects loss on advance to Successor Agency for demand payment to County Auditor-Controller and write-off of General Fund loan declared an unenforceable obligation by the Department of Finance. See Note 22 to City s audited financial statements for Fiscal Year 2016 for more information. Sources: City audited financial statements for Fiscal Years 2013 through 2016; City for Fiscal Year A-10

55 General Fund Balance Sheets of the City Set forth in Table 3 are the City s audited General Fund balance sheets for Fiscal Years 2013 through 2016 and the unaudited General Fund balance sheet for Fiscal Year TABLE 3 CITY OF COSTA MESA GENERAL FUND BALANCE SHEETS Fiscal Year Ending June 30, (1) Assets Cash and Investments (2) $ 37,286,126 $ 41,558,123 $ 44,593,386 $ 47,748,867 $ 51,292,862 Cash and Investments with Fiscal Agent Due from Other Governments (3) 7,787,361 8,327,109 8,160,488 18,062,091 12,063,066 Accounts Receivable (net) 520, , , , ,137 Interest Receivable 55,402 65,392 80,147 99, ,966 Loans Receivable - 311, Rent Receivable 232, , , , ,816 Due from Other Funds 113,477 53,054 40, ,539 - Advances to Other Funds (4) 4,285,268 4,285,268 4,081,005 2,375,720 2,161,909 Inventories 41,036 47,095 36,066 45,480 52,447 Prepaid Items 37,251 66,671 48,724 64,885 47,978 Total Assets $ 50,358,786 $ 55,397,623 $ 57,676,866 $ 69,444,213 $ 66,769,181 Liabilities, Deferred Inflows of Resources and Fund Balances Liabilities Accounts Payable $ 1,545,563 $ 1,581,772 $ 1,544,599 $ 2,313,712 $ 2,160,331 Accrued Liabilities 1,208,888 1,315,305 1,330,898 1,350,605 66,862 Retentions Payable Deposits Payable 732, , , , ,204 Due to Other Funds Advances from Other Funds Total Liabilities $ 3,486,584 $ 3,666,921 $ 3,602,867 $ 4,405,294 $ 2,967,397 Deferred Inflows of Resources Unavailable Revenues $ 1,225,761 $ 1,530,376 $ 258,048 $ 566,458 $ 510,224 Total Deferred Inflows of Resources $ 1,225,761 $ 1,530,376 $ 258,048 $ 566,458 $ 510,224 Fund Balances Nonspendable Prepaid Costs $ 37,251 $ 66,671 $ 48,724 $ 64,885 $ 47,978 Inventories 41,036 47,095 36,066 45,480 52,447 Advances to Other Funds 3,059,507 3,316,338 4,081,005 2,375,720 2,161,909 Restricted for Protection of Persons & Property Community Programs Public Services Debt Service Committed 16,125,000 16,125,000 16,125,000 16,125,000 16,125,000 Assigned 10,131,615 10,016,092 11,325,819 13,820,663 13,579,974 Unassigned (5) 16,252,032 20,629,130 22,199,337 32,040,713 31,324,252 Total Fund Balances $ 45,646,441 $ 50,200,326 $ 53,815,951 $ 64,472,461 $ 63,291,560 Total Liabilities, Deferred Inflows of Resources and Fund Balances $ 50,358,786 $ 55,397,623 $ 57,676,866 $ 69,444,213 $ 66,769,181 (1) Reflects unaudited actual Fiscal Year 2017 results. Such amounts are subject to change. (2) Increases reflect the buildup of reserves resulting from prior year General Fund surpluses. (3) Increase in Fiscal Year 2016 reflects increased sales tax receipts of approximately $2.5 million over Fiscal Year 2015 and sales tax in lieu receipts of approximately $6.8 million related to the end of the triple-flip payments to the City. (4) Decrease in Fiscal Year 2016 reflects repayment of a General Fund loan to the City s Park Development Fund for park improvements. (5) Increase in Fiscal Year 2016 reflects increased sales tax revenues related to the end of payments to the City under the triple-flip program; in accordance with the City s adopted policies, a portion of this surplus was transferred to the City s General Fund reserve in 2017 to reduce General Fund obligations (including unfunded pension liabilities) and to fund capital projects. Sources: City audited financial statements for Fiscal Years 2013 through 2016; City for Fiscal Year A-11

56 Sales Taxes Estimated sales tax receipts of $56,556,867 provided the largest tax revenue source for the City in Fiscal Year 2017, contributing approximately 58% of General Fund tax revenues and approximately 47% of total General Fund revenues during Fiscal Year Fiscal Year 2016 sales tax receipts equaled $57,556,867, 42% of which was attributable to sales at car dealerships on Harbor Boulevard and retail sales at the South Coast Plaza Shopping Center. A sales tax is imposed on retail sales or consumption of personal property and collected and distributed by the State Board of Equalization. The basic sales tax rate is established by the State Legislature, and local overrides may be approved by voters. The current sales tax rate in the City is 7.75%. The following table shows taxable sales by category for calendar years 2007 through TABLE 4 CITY OF COSTA MESA TAXABLE SALES BY CATEGORY (in thousands of dollars) Fiscal Years Apparel stores $ 482,249 $ 432,965 $ 383,716 $ 436,980 $ 484,036 $ 604,936 $ 681,348 $ 715,097 $ 727,073 $ 754,197 General merchandise 639, , , , , , , , , ,500 Food stores 101, ,519 96,251 92,575 93,721 94,377 87,225 88, ,225 90,941 Eating and drinking establishments 379, , , , , , , , , ,041 Building materials 222, , , , , , , , , ,225 Auto dealers and supplies 659, , , , , , , , , ,641 Service stations 183, , , , , , , , , ,969 Other retail stores 1,030, , , , , , ,383 1,025,424 1,047,009 1,050,063 All other outlets 928, , , , , , ,501 1,015,134 1,112,851 1,206,829 $ 4,627,752 $ 4,171,472 $ 3,623,757 $ 3,898,506 $ 4,182,103 $ 4,512,645 $ 4,790,976 $ 5,096,097 $ 5,357,562 $ 5,520,407 City direct sales tax rate 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Source: City audited financial statements for Fiscal Year 2016 for calendar years 2007 through State of California Board of Equalization and The HdL Companies for calendar year A-12

57 The City is home to South Coast Plaza International Shopping Destination, one of the largest retail centers in the United States. At almost 3 million square feet of enclosed space, and covering some 128 acres, it contains over 300 shops and nine anchor department stores including Nordstrom, Macy s, Bloomingdale s and Saks Fifth Avenue. South Coast Plaza is regarded as a shopping, dining and entertainment complex, featuring two separate enclosed malls joined by a Bridge of Gardens and several distinctive outdoor areas. The surrounding property includes luxury hotels, dozens of restaurants, banks, fountains, art gardens and theaters. Sears, one of the anchor department stores at South Coast Plaza, is not among the Sears stores currently planned for closure by the company, although the City is aware that the South Coast Plaza Sears may be included in a future round of store closures. Sears owns (i.e., does not lease) the South Coast Plaza retail location. In addition to the sales tax generated by brick and mortar retail locations, the City receives 8.6% of the sales tax generated by online purchases originating in Orange County, the third largest share among cities in Orange County. Property Taxes Estimated property tax receipts of $27,286,121 provided the second largest tax revenue source of the City in Fiscal Year 2017, contributing approximately 28% of General Fund tax revenues and approximately 22% of total General Fund revenues during Fiscal Year Property in the State which is subject to ad valorem taxes is classified as secured or unsecured. The secured classification includes property on which any property tax levied by a county becomes a lien on that property. A tax levied on unsecured property does not become a lien against the taxed unsecured property, but may become a lien on certain other property owned by the taxpayer. Every tax which becomes a lien on secured property has priority over all other liens, arising pursuant to State law, on the secured property, regardless of the time of the creation of other liens. The valuation of property is determined as of January 1 each year, and installments of taxes levied upon secured property become delinquent on the following December 10th and April 10th of the subsequent calendar year. Taxes on unsecured property are due July 1 and become delinquent August 31. Secured and unsecured properties are entered separately on the assessment roll maintained by the county assessor. The method of collecting delinquent taxes is substantially different for the two classifications of property. The exclusive means of forcing the payment of delinquent taxes with respect to property on the secured roll is the sale of the property securing the taxes of the State for the amount of taxes that are delinquent. The taxing authority has four methods of collecting unsecured personal property taxes: (1) filing a civil action against the taxpayer; (2) filing a certificate in the office of the county clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for recording in the county recorder s office in order to obtain a lien on certain property of the taxpayer; and (4) seizing and selling personal property, improvements or possessory interests belonging or taxable to the assessee. A 10% penalty is added to delinquent taxes which have been levied with respect to property on the secured roll. In addition, beginning on the July 1 following a delinquency, interest begins accruing at the rate of 1.5% per month on the amount delinquent. Such property may thereafter be redeemed by the payment of the delinquent taxes and the 10% penalty, plus interest at the rate of 1.5% per month to the time of redemption. If taxes are unpaid for a period of five years or more, the property is deeded to the State and then is subject to sale by the county tax collector. A 10% penalty also applies to the delinquent taxes or property on the unsecured roll, and further, an additional penalty of 1.5% per month accrues with respect to such taxes beginning on the varying dates related to the tax billing date. Legislation enacted in 1984 (Section 25 et seq. of the California Revenue and Taxation Code), provides for the supplemental assignment and taxation of property as of the occurrence of a change in A-13

58 ownership or completion of new construction. Previously, statutes enabled the assessment of such changes only as of the next tax lien date following the change and thus delayed the realization of increased property taxes from the new assessment for up to 14 months. Collection of taxes based on supplemental assessments occurs throughout the year. Taxes due are prorated according to the amount of time remaining in the tax year, with the exception of tax bills dated January 1 through May 31, which are calculated on the basis of the remainder of the current Fiscal Year and the full 12 months of the next Fiscal Year. For a number of years, the State Legislature has shifted property taxes from cities, counties and special districts to the Educational Revenue Augmentation Fund ( ERAF ). In Fiscal Years 1993 and 1994, in response to serious budgetary shortfalls, the State Legislature and administration permanently redirected over $3 billion of property taxes from cities, counties, and special districts to schools and community college districts pursuant to ERAF shifts. The Fiscal Year 2005 State Budget included an additional $1.3 billion shift of property taxes from certain local agencies, including the City, in Fiscal Years 2005 and On November 2, 2004, State voters approved Proposition 1A, which amended the State Constitution to significantly reduce the State s authority over major local government revenue sources. Under Proposition 1A, the State may not: (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes; (ii) shift property taxes from local governments to schools or community colleges; (iii) change how property tax revenues are shared among local governments without two-thirds approval of both houses of the State Legislature; or (iv) decrease Vehicle License Fee revenues without providing local governments with equal replacement funding. Beginning in Fiscal Year 2009, the State may shift to schools and community colleges a limited amount of local government property tax revenue if certain conditions are met, including: (a) a proclamation by the Governor that the shift is needed due to a severe financial hardship of the State; and (b) approval of the shift by the State Legislature with a two-thirds vote of both houses. Under such a shift, the State must repay local governments for their property tax losses, with interest, within three years. Proposition 1A does allow the State to approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. On July 27, 2009, the Governor signed a revised Fiscal Year 2010 State budget that included an ERAF shift of approximately 8% of 1% ad valorem property tax revenues from certain local agencies, including the City. The City participated in the State of California Proposition 1A Receivables Program to securitize its receivable from the State, and, as a result, received the shifted funds in the amount of $3,270,152, without interest, in two installments in 2010 from the California Statewide Communities Development Authority. A-14

59 Set forth in Table 5 are the assessed valuations for property in the City for the Fiscal Years 2009 through Fiscal Year Residential Property TABLE 5 CITY OF COSTA MESA ASSESSED VALUATION HISTORY Commercial Property Industrial Property Miscellaneous Property Taxable Assessed Value 2009 $ 8,164,306,671 $ 2,553,080,097 $ 1,129,832,358 $ 2,518,888,713 $ 14,366,107, ,171,208,423 3,383,235,481 1,196,215,357 1,682,015,788 14,432,675, ,347,650,226 3,466,364,532 1,138,864,468 1,163,583,656 14,116,462, ,557,101,277 3,394,223,104 1,100,996,492 1,065,596,839 14,117,917, ,704,306,093 3,479,681,880 1,122,815,201 1,070,250,329 14,377,053, ,101,889,466 3,566,114,710 1,117,794,289 1,140,508,581 14,926,307, ,745,389,688 3,633,678,888 1,126,437,386 1,206,217,946 15,711,723, ,456,976,124 3,766,616,981 1,190,970,066 1,118,171,362 16,532,734, ,033,602,522 3,918,807,590 1,336,961,702 1,180,683,099 17,470,054, ,440,879,306 (1) (1) Preliminary amount provided by County Assessor s Office. Sources: City audited financial statements for Fiscal Year 2016; County Assessor s Office for Fiscal Year 2017 and 2018 information. Set forth in Table 6 are property tax collections in the City as of June 30 for Fiscal Years 2009 through Certain counties in the State of California operate under a statutory program entitled Alternate Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the Teeter Plan ). Under the Teeter Plan local taxing entities receive 100% of their tax levies net of delinquencies, but do not receive interest or penalties on delinquent taxes collected by the county. The County has adopted the Teeter Plan, and consequently the City s receipt of property taxes is not subject to delinquencies. No assurances can be provided that the County will not discontinue the Teeter Plan, the result of which would be to subject the City s receipt of property taxes to delinquencies in the payment thereof. Fiscal Year Total Tax Levy TABLE 6 CITY OF COSTA MESA PROPERTY TAX LEVIES AND COLLECTIONS Collections within the Fiscal Year of Levy (1) Percent of Levy Collected within the Fiscal Year of Levy Collections in Subsequent Years Percent of Levy Collected to Date 2009 $ 21,276,710 $ 20,363, % $ 920, % ,092,684 17,122, , ,670,091 20,059, , ,574,309 19,958, , ,112,082 20,599, , ,178,464 21,732, , ,405,838 22,897, , ,960,369 24,222, , ,330,538 25,640, , (1) The amounts shown in this column reflect all property tax collections of the City. See Table 2 under the caption Change in Fund Balance of the City General Fund for historic General Fund property tax revenues alone. Source: City audited financial statements for Fiscal Years , County Assessor s Office for Fiscal Year A-15

60 The ten largest taxpayers in the City as shown on the Fiscal Year 2017 tax roll, number of parcels held by each taxpayer, net assessed valuation of the property held by such taxpayers, primary use of the taxpayer property and the percentage of the City s total net assessed valuation attributable to each taxpayer are set forth in Table 7. Rank Property Owner Parcels Fiscal Year 2017 Net Assessed Valuation of Secured Property TABLE 7 CITY OF COSTA MESA TEN LARGEST TAXPAYERS % of Total City Net Assessed Valuation of Secured Property Parcels Fiscal Year 2017 Net Assessed Valuation of Unsecured Property % of Total City Net Assessed Valuation of Unsecured Property Combined Net Assessed Valuation % of Total City Combined Net Assessed Valuation Primary Use 1. South Coast Plaza 19 $ 279,792, % 1 $ 4, % $ 279,796, % Commercial 2. The Irvine Company LLC (1) 2 236,578, ,578, Commercial 3. PR II of MCC South Coast Property Owner LLC 6 233,000, ,000, Commercial 4. United Dominion Realty LP 2 194,669, ,669, Residential 5. BRE LLC (1) 7 178,051, , ,060, Commercial 6. Marjack LLC Irvine Company 1 153,657, ,657, Residential 7. Automobile Club of Southern California (1) 4 130,400, ,163, ,564, Commercial 8. Casden Lakes LP ,946, , ,419, Residential 9. Soco Retail Fee Owner LLC ,000, ,000, Industrial 10. JKS-CMFV LLC (1) 5 113,427, ,427, Commercial TOP 10 TOTAL 73 $ 1,768,525, % 6 $ 5,648, % $ 1,774,174, % CITY TOTAL $ 16,503,360, % $ 966,694, % $ 17,470,054, % (1) Assessment appeals pending. Source: County Assessor s Office. A-16

61 Transient Occupancy Taxes Estimated transient occupancy taxes of $8,924,854 provided the third largest tax revenue source for the City in Fiscal Year 2017, contributing approximately 9% of General Fund tax revenues and approximately 7% of total General Fund revenues during Fiscal Year The transient occupancy tax is imposed upon persons staying 30 days or less in a hotel, inn, motel or other lodging facility at the rate of 8%. The Business Improvement Area, comprised of 10 hotels within the City, imposes an additional 3% which is used by the Costa Mesa Conference and Visitor s Bureau to promote travel and tourism in the City. The City is evaluating a potential increase in its transient occupancy tax rate from 8% to 11%. If the City determines to proceed with this increase, the City may place this measure on the November 2018 ballot. Franchise Taxes Estimated franchise taxes of $4,593,632 provided the fourth largest tax revenue source for the City in Fiscal Year 2017, contributing approximately 5% of General Fund tax revenues and approximately 4% of total General Fund revenues during Fiscal Year The franchise tax is imposed on utility companies for use of City streets and rights-of-way. Currently, the City collects electric franchise taxes from Southern California Edison and gas franchise taxes from Southern California Gas Company at the rate of 2% of gross receipts arising from use, operation or possession of the franchise; and, cable franchise fees from Time Warner at the rate of 5% of receipts, net of bad debt. The electric and gas franchise fees are paid annually while the cable franchise fees are paid on a quarterly basis. The Public Utility Commission limits the franchise tax for electric and gas to 2% of gross receipts and cable franchise taxes to 5% of gross receipts. The City also collects a quarterly franchise fee of 16% of gross receipts from 25 waste haulers in the City. Other Taxes, Fees and Services In Fiscal Year 2017 the City collected an estimated $13,326,440 in other fees, taxes and charges for the issuance of business licenses or building permits, certain police services, public works projects, parks and recreation programs, and other miscellaneous services, activities or permits. Such fees provided approximately 11% of General Fund revenues during Fiscal Year Such amounts reflect the sum of the Business License Tax, Licenses & Permits, Rental, Charges for Services, Fines & Forfeitures and Miscellaneous line items shown in Tables 1 and 2 above. State of California Motor Vehicle In-Lieu Payments The State imposes a Vehicle License Fee (the VLF ), which is the portion of the fees paid in lieu of personal property taxes on a vehicle. The VLF is based on vehicle value and declines as the vehicle ages. Prior to the adoption of the Fiscal Year 2005 State Budget, the VLF was 2% of the value of a vehicle. Through legislation in prior Fiscal Years, the State enacted VLF reductions under which the State was required to backfill local governments for their revenue losses resulting from the lowered fee. The Fiscal Year 2005 State Budget permanently reduced the VLF from 2% to 0.65% of the value of a vehicle and deleted the requirement for backfill payments, providing instead that the amount of the backfill requirement will be met by an increase in the property tax allocation to cities and counties. See the caption STATE OF CALIFORNIA BUDGET INFORMATION. A-17

62 As set forth in Table 8 below, for Fiscal Year 2017, the City received $10,541,298 (unaudited) in total VLF revenues. TABLE 8 CITY OF COSTA MESA STATE OF CALIFORNIA MOTOR VEHICLE IN-LIEU PAYMENTS Fiscal Year Source (1) Motor Vehicle In-Lieu Payments $8,814,644 $9,229,059 $9,481,340 $9,982,948 $10,541,298 (1) Reflects unaudited actual Fiscal Year 2017 results. Such amounts are subject to change. Source: City. Other Indebtedness General Fund-Supported Debt Certificates. As described in the Official Statement under the caption REFUNDING PLAN, the City will refund the City s 2007 Certificates of Participation (Police Facility Expansion Project), currently outstanding in the aggregate principal amount of $18,295,000, at the time of issuance of the Series 2017 Bonds. Employee Leave. As of June 30, 2016, the City owes $4,107,428 in compensated absences which is expected to be paid primarily by the General Fund in future years. See Note 1 in the City s audited financial statements for Fiscal Year 2016, attached hereto as Appendix C, for more information on the City s policies related to compensated absences. For additional information regarding debt supported by the General Fund, see the captions Retirement Contributions, Police 1% Supplemental Retirement Plan, and Other Post-Employment Benefits herein. Other Long Term Debt. Other long term debt includes the Costa Mesa Public Financing Authority s Revenue Refunding Bonds, Series 2006A, currently outstanding in the aggregate principal amount of $960,000 (the 2006 Bonds ). The 2006 Bonds are secured by revenues consisting primarily of debt service payments on Costa Mesa Community Facility District No (Plaza Tower Public Improvements) 1991 Special Tax Bonds (the 1991 CFD Bonds ). The 1991 CFD Bonds are secured by a special tax levied on property within Costa Mesa Community Facilities District No ( CFD No ). Such special tax is collected by the City on behalf of CFD No. 91-1, however the 1991 CFD Bonds and the debt service payments with respect thereto securing the 2006 Bonds are not obligations of the City payable from City funds. Short-Term Debt. The City currently has no short-term debt outstanding. Estimated Direct and Overlapping Bonded Debt. The estimated direct and overlapping bonded debt of the City as of June 30, 2017 is set forth in Table 9. The information in Table 9 has been derived from data assembled and reported to the City by California Municipal Statistics, Inc. None of the City, the Authority or the Underwriter has independently verified the information in Table 9 and the City, the Authority and the Underwriter do not guarantee its accuracy. A-18

63 TABLE 9 CITY OF COSTA MESA ESTIMATED DIRECT AND OVERLAPPING BONDED DEBT AS OF SEPTEMBER 1, Assessed Valuation: $17,513,150,535 City s Share of DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable (1) Debt 8/1/17 Metropolitan Water District 0.678% $ 507,856 Coast Community College District ,761,222 Rancho Santiago Community College District ,437,846 Rancho Santiago Community College District SFID No ,293,241 Newport Mesa Unified School District ,617,208 Santa Ana Unified School District ,068,423 City of Costa Mesa Community Facilities District No ,000 (2) TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $173,470,796 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Orange County General Fund Obligations 3.336% $ 7,403,451 Orange County Pension Obligation Bonds ,568,798 Orange County Board of Education Certificates of Participation ,718 Coast Community College District General Fund Obligations ,408 Santa Ana Unified School District Certificates of Participation ,338,980 City of Costa Mesa General Fund Obligations ,295,000 (3) TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $41,617,355 OVERLAPPING TAX INCREMENT DEBT (Successor Agencies): Orange County Neighborhood Project Tax Allocation Bonds 4.425% 437,854 Orange County Santa Ana Heights Tax Allocation Bonds ,045 TOTAL OVERLAPPING TAX INCREMENT DEBT $459,899 COMBINED TOTAL DEBT $215,548,050 (4) Ratios to Assessed Valuation: Direct Debt ($785,000) % Total Direct and Overlapping Tax and Assessment Debt % Total Direct Debt ($21,620,000) % Combined Total Debt % Ratios to Redevelopment Successor Agencies Incremental Valuation ($669,878,740): Total Overlapping Tax Increment Debt % (1) The percentage of overlapping debt applicable to the city is estimated using taxable assessed property value. Applicable percentages were estimated by determining the portion of the overlapping district's assessed value that is within the boundaries of the city divided by the district's total taxable assessed value. (2) 2006 Revenue Refunding Bonds. (3) The City of Costa Mesa 2007 Certificates of Participation (Police Facility Expansion Project) will be redeemed with proceeds of the Series 2017 Bonds. (4) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Source: California Municipal Statistics, Inc. A-19

64 Retirement Contributions This caption contains certain information relating to the California Public Employees Retirement System ( CalPERS ). The information is primarily derived from information produced by CalPERS, its independent accountants and actuaries. The City and the Authority have not independently verified the information provided by CalPERS and make no representations nor express any opinion as to the accuracy of the information provided by CalPERS. The comprehensive annual financial reports of CalPERS are available on its Internet website at The CalPERS website also contains CalPERS most recent actuarial valuation reports and other information concerning benefits and other matters. Such information is not incorporated by reference herein. Neither the City nor the Authority can guarantee the accuracy of such information. Actuarial assessments are forward-looking statements that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Actuarial assessments will change with the future experience of the pension plans. The City contributes to CalPERS, an agent multiple-employer public employee defined benefit pension plan, on behalf of 323 City employees who participate in the City s Miscellaneous Plan and 113 City employees who participate in the City s Police Safety Plan. The City also offers a Fire Safety plan administered by CalPERS, in which 70 City employees currently participate. CalPERS provides retirement, disability and death benefits to plan members and beneficiaries. CalPERS acts as a common investment and administrative agent for participating public entities within the State, including the City. CalPERS plan benefit provisions and all other requirements are established by State statute and the City Council. In June 2012, GASB adopted revised standards (GASB Statement No. 68, or GASB 68 ) with respect to accounting and financial reporting by state and local government employers for defined benefit pension plans. The revised standards alter the accounting treatment of defined benefit pension plans, changing the way expenses and liabilities are calculated and how state and local government employers report those expenses and liabilities in their financial statements. Major changes include: (i) the inclusion of unfunded pension liabilities on the local government s balance sheet (previously, such unfunded liabilities were typically included as notes to the local government s financial statements); (ii) pension expense incorporates more rapid recognition of actual experience and investment returns and is no longer based on the employer s actual contribution amounts; (iii) lower actuarial discount rates that are required to be used for underfunded plans in certain cases for purposes of the financial statements; (iv) closed amortization periods for unfunded liabilities that are required to be used for certain purposes of the financial statements; and (v) the difference between expected and actual investment returns to be recognized over a closed five-year smoothing period. The reporting requirements took effect in Fiscal Year GASB 68 is a change in accounting reporting and disclosure requirements, but it does not change the City s pension plan funding obligations. A-20

65 The City participates in separate CalPERS plans for employees based on hire date. The City s plans are part of CalPERS risk pools. Benefit provisions for each plan are set forth below. Hire date CITY OF COSTA MESA SUMMARY OF CALPERS PLAN PROVISIONS AS OF JUNE 30, 2017 MISCELLANEOUS PLAN (AGENT MULTIPLE-EMPLOYER) Prior to March 11, 2012 March 11, 2012 to December 31, 2012 On or After January 1, 2013 (AB 340) Benefit formula 2.5% at % at % at 62 Benefit vesting schedule 5 years of service 5 years of service 5 years of service Benefit payments monthly for life monthly for life monthly for life Retirement age Monthly benefits, as a % of eligible compensation 2.0% to 2.5% 1.092% to 2.418% 1.0% to 2.5% Required employee contribution rates 8% 7% 6.75% Required employer contribution rates % % 6.75% Source: August 2017 CalPERS Actuarial Valuation Report. Hire date CITY OF COSTA MESA SUMMARY OF CALPERS PLAN PROVISIONS AS OF JUNE 30, 2017 POLICE SAFETY PLAN (AGENT MULTIPLE-EMPLOYER) Prior to January 1, 2013 On or After January 1, 2013 (AB 340) Benefit formula 3.0% at % at 57 Benefit vesting schedule 5 years of service 5 years of service Benefit payments monthly for life monthly for life Retirement age Monthly benefits, as a % of eligible compensation 3% 2.0% to 2.7% Required employee contribution rates 9% 11.50% Required employer contribution rates % 11.50% Source: City; August 2017 CalPERS Actuarial Valuation Report. A-21

66 Hire date CITY OF COSTA MESA SUMMARY OF CALPERS PLAN PROVISIONS AS OF JUNE 30, 2017 FIRE SAFETY PLAN (COST-SHARING MULTIPLE-EMPLOYER) Prior to December 30, 2012 December 30, 2012 December 31, 2012 On or After January 1, 2013 (AB 340) Benefit formula 3.0% at % at % at 57 Benefit vesting schedule 5 years of service 5 years of service 5 years of service Benefit payments monthly for life monthly for life monthly for life Retirement age Monthly benefits, as a % of eligible compensation 3% 2.0% to 2.7% 2.0% to 2.7% Required employee contribution rates 9% 9% 11.50% Required employer contribution rates % % 11.50% Source: August 2017 CalPERS Actuarial Valuation Report. City employees who were hired on and after January 1, 2013 and who were not previously CalPERS members participate in the City 2.0% at 62 Miscellaneous Plan, the City s 2.7% at 57 Police Safety Plan and the City s 2.7% at 57 Fire Safety Plan, as applicable; such employees are required to make the full amount of required employee contributions themselves under the California Public Employees Pension Reform Act of 2013 ( AB 340 ), which was signed by the State Governor on September 12, AB 340 established new pension tiers (2.0% at 62 formula) and maximum benefit formulas for miscellaneous and safety plans; the options selected by the City are reflected in the foregoing tables. Benefits for such participants are calculated on the highest average annual compensation over a consecutive 36 month period. Employees are required to pay at least 50% of the total normal cost rate. AB 340 also caps pensionable income for 2017 at $118,775 for employees who participate in Social Security and $142,530 for employees who are not enrolled in Social Security, subject to Consumer Price Index increases, and prohibits retroactive benefits increases, generally prohibiting contribution holidays and purchases of additional non-qualified service credit. CalPERS estimates savings for local agency plans as a result of AB 340 of approximately $1.653 billion to $2.355 billion over the next 30 years, primarily due to increased employee contributions and, as the workforce turns over, lower benefit formulas that will gradually reduce normal costs. Savings specific to the City have not been quantified. Provisions in AB 340 will likely not have a material effect on City contributions in the short term. However, additional employee contributions, limits on pensionable compensation and higher retirement ages for new members will reduce the City s unfunded pension lability and potentially reduce City contribution levels in the long term. For the year ended June 30, 2017, the employer contributions recognized as a reduction to the net pension liability for the Miscellaneous Plan, Police Safety Plan and Fire Safety Plan were $6,226,072, $5,992,098 and $5,009,530 (projected), respectively. The City s Normal Cost contribution rates for the Miscellaneous Plan were 8.981% for Fiscal Year 2016 and 9.150% for Fiscal Year For Fiscal Year 2016, the City s contributions to its Miscellaneous Plan totaled $6,056,123, which was equal to the annual required contribution (the ARC ) of the City. The City s contributions to the Miscellaneous Plan for Fiscal Year 2017 are not yet available. The Normal Cost contribution rates for Fiscal Years 2018, 2019, 2020 and 2021 for the Miscellaneous Plan have been established by CalPERS at 8.677%, 8.999%, 9.5% (projected) and 10.5% (projected), respectively, of annual covered payroll. Based on CalPERS August 2017 actuarial valuation report for the City s Miscellaneous Plan, the City s Fiscal Year 2018, 2019, 2020 and 2021 payments for its unfunded liability for the Miscellaneous Plan have been established at $5,974,842, $6,773,527, $7,692,000 (projected) and $8,347,000 (projected), respectively. The Normal Cost rates and unfunded liability payments set forth in the August 2017 A-22

67 CalPERS actuarial valuation report for the Miscellaneous Plan reflect the impact of upcoming CalPERS discount rate reductions which affect the City s pension obligations beginning in Fiscal Year See the caption Actuarial Methods below. The City s Normal Cost contribution rates for the Police Safety Plan were % for Fiscal Year 2016 and % for Fiscal Year For Fiscal Year 2016, the City s contributions to its Police Safety Plan totaled $5,994,277, which was equal to the ARC of the City. The City s contributions to the Miscellaneous Plan for Fiscal Year 2017 are not yet available. The Normal Cost contribution rates for Fiscal Years 2018, 2019, 2020 and 2021 for the Police Safety Plan have been established by CalPERS at %, %, 21.2% (projected) and 23.1% (projected), respectively, of annual covered payroll. Based on CalPERS July 2017 actuarial valuation report for the City s Police Safety Plan, the City s Fiscal Year 2018, 2019, 2020 and 2021 payments for its unfunded liability for the Police Safety Plan have been established at $5,868,102, $6,926,358, $8,127,000 (projected) and $9,059,000 (projected), respectively. The Normal Cost rates and unfunded liability payments set forth in the August 2017 CalPERS actuarial valuation report for the Police Safety Plan reflect the impact of upcoming CalPERS discount rate reductions which affect the City s pension obligations beginning in Fiscal Year See the caption Actuarial Methods below. The City s Normal Cost contribution rates for the Fire Safety Plan were % for Fiscal Year 2016 and % for Fiscal Year For Fiscal Year 2016, the City s contributions to its Fire Safety Plan totaled $3,786,280, which was $500,000 greater than the ARC of the City for such year. The Normal Cost contribution rates for Fiscal Years 2018, 2019, 2020 and 2021 for the Fire Safety Plan have been established by CalPERS at %, %, 23.3% (projected) and 25.1% (projected), respectively, of annual covered payroll. Based on CalPERS August 2017 actuarial valuation report for the City s Fire Safety Plan, the City s Fiscal Year 2018, 2019, 2020 and 2021 payments for its unfunded liability for the Fire Safety Plan have been established at $4,222,722, $4,855,573, $5,579,000 (projected) and $6,129,000 (projected), respectively. The Normal Cost rates and unfunded liability payments set forth in the August 2017 CalPERS actuarial valuation report for the Fire Safety Plan reflect the impact of upcoming CalPERS discount rate reductions which affect the City s pension obligations beginning in Fiscal Year See the caption Actuarial Methods below. The City s second tier Fire Safety Plan was not in place prior to Fiscal Year 2017; as such, Fiscal Year 2017 is the first year for which information regarding the second tier Fire Safety Plan is available. The City s Normal Cost contribution rate for the second tier Fire Safety Plan was % for Fiscal Year For Fiscal Year 2017, the City s contributions to its second tier Fire Safety Plan totaled $431, which was equal to the ARC of the City. The Normal Cost contribution rates for Fiscal Years 2018, 2019, 2020 and 2021 for the second tier Fire Safety Plan have been established by CalPERS at %, %, 16.4% (projected) and 17.8% (projected), respectively, of annual covered payroll. Based on CalPERS August 2017 actuarial valuation report for the City s second tier Fire Safety Plan, the City s Fiscal Year 2018, 2019, 2020 and 2021 payments for its unfunded liability for the second tier Fire Safety Plan have been established at $544, $316, $790 (projected) and $1,600 (projected), respectively. Fiscal Year 2018 is the first year which the City s AB 340 Fire Safety Plan will be in place; as such, Fiscal Year 2018 is the first year for which information regarding the AB 340 Fire Safety Plan is available. The Normal Cost contribution rates for Fiscal Years 2018, 2019, 2020 and 2021 for the AB 340 Fire Safety Plan have been established by CalPERS at %, %, 12.4% (projected) and 13.1% (projected), respectively, of annual covered payroll. Based on CalPERS August 2017 actuarial valuation report for the City s AB 340 Fire Safety Plan, the City s Fiscal Year 2018, 2019, 2020 and 2021 payments for its unfunded liability for the AB 340 Fire Safety Plan have been established at $4, $55, $150 (projected) and $300 (projected), respectively. The discount rate reduction announced by CalPERS is not anticipated to have a significant impact on the unfunded actuarial liability for the second tier Fire Safety Plan or the AB 340 Fire Safety Plan. The City paid the small unfunded actuarial liability for the second tier Fire Safety Plan in Fiscal Year 2017 (the AB 340 A-23

68 Fire Safety Plan was not yet in place) and intends to do the same in future fiscal years with respect to both plans. The discount rate reduction announced by CalPERS has been incorporated into the current City Financial Plan, which was presented to the City Council in February 2017 as part of the mid-year budget update to the City Council. See the caption CITY FINANCIAL INFORMATION Economic Condition and Outlook of the City. A summary of principal assumptions and methods used to determine the total pension liability for Fiscal Year 2016 is shown below. Miscellaneous Police & Fire Safety Valuation Date June 30, 2014 June 30, 2014 Measurement Date June 30, 2015 June 30, 2015 Actuarial Cost Method Entry-Age Normal Cost Method Entry-Age Normal Cost Method Actuarial Assumptions: Discount Rate 7.65% 7.65% Inflation 2.75% 2.75% Payroll Growth 3.00% 3.00% Projected Salary Increase (1) (1) Investment Rate of Return 7.5% (2) 7.5% (2) Mortality (3) (3) (1) Varies based on age, service and type of employment. (2) Net of pension plan investment expenses, including inflation. (3) The probabilities of mortality are derived using CalPERS membership data for all funds. The mortality table used was developed based on CalPERS specific data and includes 20 years of mortality improvements using Society of Actuaries Scale BB. Source: City. Actuarial Methods. The staff actuaries at CalPERS annually prepare an actuarial valuation which covers a Fiscal Year ending approximately 15 months before the actuarial valuation is delivered (thus, the actuarial valuations delivered to the City in fall 2017 covered the City s Fiscal Year ended June 30, 2016). The actuarial valuations express the City s required contribution rates in percentages of covered payroll, which percentages the City must contribute in the Fiscal Year immediately following the Fiscal Year in which the actuarial valuation is prepared (thus, the City s contribution rate derived from the actuarial valuation as of June 30, 2016, which was delivered in fall 2017, affects the City s Fiscal Year required contribution rate). CalPERS rules require the City to implement the actuary s recommended rates. CalPERS provides a lump sum payment option that the City may opt to pay in July of each year, rather than having payment transmitted as a percentage of each reported biweekly payroll. In calculating the annual actuarially recommended contribution rates, the CalPERS actuary calculates on the basis of certain assumptions the actuarial present value of benefits that CalPERS will fund under the CalPERS plans, which includes two components, the normal cost and the total pension liability. The normal cost represents the actuarial present value of benefits that CalPERS will fund under the CalPERS plans that are attributed to the current year, and the actuarial accrued liability represents the actuarial present value of benefits that CalPERS will fund that are attributed to past years. The total pension liability represents an estimate of the actuarial shortfall between actuarial value of assets on deposit at CalPERS and the present value of the benefits that CalPERS will pay under the CalPERS plans to retirees and active employees upon their retirement. The total pension liability is based on several assumptions such as, among others, the rate of investment return, average life expectancy, average age of retirement, inflation, salary increases and occurrences of disabilities. In addition, the total pension liability includes certain actuarial adjustments such as, among others, the actuarial practice of smoothing losses and gains over multiple years (which is described in more detail below). As a result, the total pension liability may be considered an estimate of the unfunded A-24

69 actuarial present value of the benefits that CalPERS will fund under the CalPERS plans to retirees and active employees upon their retirement and not as a fixed expression of the liability that the City owes to CalPERS under its CalPERS plans. In each actuarial valuation, the CalPERS actuary estimates the actuarial value of the assets (the Actuarial Value ) of the CalPERS plans at the end of the Fiscal Year (which assumes, among other things, that the rate of return during that Fiscal Year equaled the assumed rate of return, currently 7.50%. As described below, these policies and actuarial assumptions have changed significantly in recent years and are expected to change or be modified further by CalPERS in the future. The CalPERS actuary uses a smoothing technique to determine Actuarial Value that is calculated based on certain policies. Certain significant recent changes in assumptions include the following: 1. On December 21, 2016, the CalPERS Board voted to lower the CalPERS discount rate to 7.0% over the next three years in accordance with the following schedule: 7.375% in fiscal year , 7.25% in fiscal year and 7.00% in fiscal year The new discount rate will go into effect July 1, 2017 for the State and July 1, 2018 for public agencies. For the City, the new discount rate will take effect July 1, Lowering the discount rate means that employers that contract with CalPERS to administer their pension plans will see increases in their normal costs and unfunded actuarial liabilities. Active members hired after January 1, 2013 will also see their contribution rates rise under AB 340. CalPERS estimates that the three-year reduction of the discount rate will result in average employer rate increases of approximately 1% to 3% of normal cost as a percentage of payroll for most miscellaneous retirement plans such as the City s. Additionally, many employers will see a 30% to 40% increase in their current unfunded accrued liability payments. These payments are made to amortize unfunded liabilities over 20 years to bring pension funds to a fully funded status over the long-term. The City Financial Plan projects that such discount rate reductions will necessitate increases in General Fund appropriations for retirement benefits ranging from approximately $3.1 million to $4.3 million per year from Fiscal Year 2019 through Fiscal Year See the discussion above for a description of the Normal Cost Rates and unfunded liability payments for the City s retirement plans set forth in the 2017 actuarial reports for each plan, which reflect the impact of the discount rate reduction on the City s pension obligations for Fiscal Year 2019 and the projected effect of such reduction for Fiscal Years 2020 and On November 17, 2015, the CalPERS Board approved changes that could affect the assumed investment return rate in the future. In years in which CalPERS investment returns are more than 2% greater than forecast, the long-term assumed investment return rate will be reduced by a maximum of 0.25%. CalPERS estimates that this change will reduce the assumed investment return rate by approximately 1% (to 6.5%) within 20 years. 3. On February 18, 2014, the CalPERS Board approved changes to actuarial assumptions and methods based upon a recently completed experience study. These changes include: moving from using smoothing of the market value of assets to obtain the actuarial value of assets to direct smoothing of employer contribution rates; increased life expectancy; changes to retirement ages (earlier for some groups and later for others); lower rates of disability retirement; and other changes. 4. On April 17, 2013, the CalPERS Board approved a plan: (i) to replace the current 15-year asset-smoothing policy with a 5-year direct-rate smoothing process; and (ii) to replace the current 30-year rolling amortization of unfunded liabilities with a 30-year fixed amortization period. CalPERS Chief Actuary has stated that the revised approach provides a single measure of funded status and unfunded liabilities, less rate volatility in extreme years, a faster path to full funding and more transparency to employers such as the City about future contribution rates. These changes are expected to accelerate the repayment of unfunded liabilities of the City s CalPERS plan in the near term; the exact magnitude of the potential contribution rate increases is not known at this time, but may be significant. These changes were reflected beginning with the June 30, 2014 actuarial valuation affecting contribution rates for Fiscal Year 2016 and thereafter. The City budgets for its annual pension contributions based on the rates established by CalPERS each year. A-25

70 The total change in the net pension liability for the City s Miscellaneous Plan and Police Safety Plan, using the measurement date of June 30, 2016, is set forth in the following tables. CITY OF COSTA MESA CHANGE IN NET PENSION LIABILITY MISCELLANEOUS PLAN (AGENT MULTIPLE-EMPLOYER) Total Pension Liability Increase (Decrease) Plan Fiduciary Net Position Net Pension Liability (Asset) Balance at June 30, 2015 $ 251,837,852 $ 171,902,350 $ 79,935,502 Changes in the Year: Service cost 3,269,125-3,269,125 Interest on the total pension liability 18,633,944-18,633,944 Differences between actual and expected experience (2,818,846) - (2,818,846) Changes in assumptions (4,399,842) - (4,399,842) Changes in benefit terms Plan to Plan resource movement - 3,064 (3,064) Contributions - employer - 6,226,072 (6,226,072) Contributions - employees - 1,966,557 (1,966,557) Net investment income - 897,287 (897,287) Administrative expenses - (104,766) 104,766 Benefit payments, including refunds of employee contributions (14,145,202) (14,145,202) - Net Changes 4,939,021 (5,156,988) 10,096,009 Balance at June 30, 2016 (Measurement Date) $ 256,776,873 $ 166,745,362 $ 90,031,511 Source: CalPERS GASB 68 Accounting Valuation Report for the City Miscellaneous Plan. A-26

71 CITY OF COSTA MESA CHANGE IN NET PENSION LIABILITY POLICE SAFETY PLAN (AGENT MULTIPLE-EMPLOYER) Total Pension Liability Increase (Decrease) Plan Fiduciary Net Position Net Pension Liability (Asset) Balance at June 30, 2015 $ 255,373,714 $ 162,430,581 $ 92,943,133 Changes in the Year: Service cost 4,011,055-4,011,055 Interest on the total pension liability 19,519,447-19,519,447 Differences between actual and expected experience 4,436,634-4,436,634 Changes in assumptions Changes in benefit terms Plan to Plan resource movement - 72 (72) Contributions - employer - 5,992,098 (5,992,098) Contributions - employees - 1,988,684 (1,988,684) Net investment income - 825,770 (825,770) Administrative expenses - (98,993) 98,993 Benefit payments, including refunds of employee contributions (13,319,431) (13,319,431) - Net Changes 14,647,705 (4,611,800) 19,259,505 Balance at June 30, 2016 (Measurement Date) $ 270,021,419 $ 157,818,781 $ 112,202,638 Source: CalPERS GASB 68 Accounting Valuation Report for the City Police Safety Plan. As of June 30, 2016, the City reported a proportionate share of net pension liability of $59,018,969 for the pooled Fire Safety Plan. The following table presents the net pension liability of the City s CalPERS plans, calculated using the discount rate of 7.65%, as well as what the net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower (6.65%) or 1 percentage point higher (8.65%) than the current rate. The City has adopted a policy under which it will contribute $500,000 per year to reduce its unfunded pension liability. The City also contributes any savings achieved through prepayments of the City s unfunded pension liability to pay down additional unfunded pension liability. Accordingly, the City has budgeted $570,000 in Fiscal Year 2018 to reduce its unfunded liability. This additional contribution is allocated entirely to the Fire Safety Plan. CITY OF COSTA MESA SENSITIVITY OF THE NET PENSION LIABILITY TO CHANGES IN THE DISCOUNT RATE Miscellaneous Plan Police Safety Plan Fire Safety Plan 1% Decrease 6.65% 6.65% 6.65% Net Pension Liability $123,053,521 $150,077,752 $84,029,979 Current Discount Rate 7.65% 7.65% 7.65% Net Pension Liability $90,031,511 $112,202,638 $59,018,969 1% Increase 8.65% 8.65% 8.65% Net Pension Liability $62,816,506 $81,359,864 $38,510,400 Source: CalPERS GASB 68 Accounting Valuation Reports for the City Miscellaneous Plan and Police Safety Plan; City audited financial statements for Fiscal Year 2016 for the Fire Safety Plan. A-27

72 CalPERS earnings reports for Fiscal Years 2010 through 2017 report an investment gain of approximately 13.0%, 21.7%, 1%, 12.5%, 18.4%, 2.4%, 0.6% and 11.2%, respectively. Future earnings performance may increase or decrease future contribution rates for plan participants, including the City. For additional information relating to the City s plans, see Note 13 to the City s audited financial statements for Fiscal Year 2016 attached hereto as Appendix C. No assurance can be provided that the City s CalPERS plan expenses will not increase significantly in the future. Police 1% Supplemental Retirement Plan The Police 1% Supplemental Retirement Plan (the Police 1% Plan ) is a single employer defined benefit plan. The Police 1% Plan currently has only retired participants as all active employees were transferred to the CalPERS 3% at age 50 benefit plan. The number of participants at June 30, 2017 was 19, and the average monthly benefit being paid is $ The retirement benefit is 1% of the highest 12-month earnings for credited services up to 25 years. The maximum benefit is 75% of the highest 12-month earnings for service retirement including all public plan pension benefits but not including Social Security. The 75% is proportionately reduced for less than 25 years of Costa Mesa Police Department service. A summary of principal assumptions and methods used to determine the total pension liability for Fiscal Year 2016 is shown below. Measurement Date June 30, 2017 Actuarial Cost Method Entry-Age Normal Cost Method Actuarial Assumptions: Discount Rate 3.40% Inflation 2.75% Payroll Growth N/A Employer Funding Policy Pay-as-you-go Census Data Provided by Police 1% Plan Sponsor as of June 2017 Mortality Rates based on CalPERS Safety Police Plan annual valuation report as of June 30, 2015 Source: GASB No. 73 Report for Police 1% Plan dated September 13, A-28

73 The total change in the net pension liability for the City s Police 1% Plan was as follows: CITY OF COSTA MESA CHANGE IN NET PENSION LIABILITY POLICE 1% PLAN Balance at June 30, 2016 $ 2,766,672 Changes in the Year: Service cost - Interest on the total pension liability 77,214 Differences between actual and expected experience (107,900) Changes in assumptions - Changes in benefit terms - Plan to Pan resource movement - Contributions employer - Contributions employees - Net investment income - Administrative expenses - Benefit payments, including refunds of employee contributions (208,260) Net Changes (238,946) Balance at June 30, 2017 $ 2,527,726 Source: GASB No. 73 Report for Police 1% Plan dated September 13, The following table presents the net pension liability of the City s Police 1% Plan, calculated using the discount rate of 3.40%, as well as what the net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower (2.40%) or 1 percentage point higher (4.40%) than the current rate: CITY OF COSTA MESA SENSITIVITY OF THE NET PENSION LIABILITY TO CHANGES IN THE DISCOUNT RATE POLICE 1% PLAN 1% Decrease 2.40% Net Pension Liability $2,751,452 Current Discount Rate 3.40% Net Pension Liability $2,527,726 1% Increase 4.40% Net Pension Liability $2,333,153 Source: GASB No. 73 Report for Police 1% Plan dated September 13, For additional information relating to the City s Police 1% Plan, see Note 14 to the City s audited financial statements for Fiscal Year 2016 attached hereto as Appendix C. Defined Contribution Plan On January 1, 2000, the City adopted a Defined Contribution Plan for part-time employees that work under 1,000 hours during the fiscal year and do not meet the eligibility requirements to be enrolled in the CalPERS plans. The Defined Contribution Plan is administered by the Public Agency Retirement Services. As of June 30, 2017, there were 98 active participants in the Defined Contribution Plan. Both the City and employees are required to each contribute 3.75% of gross wages. The City s contribution to the defined contribution plan for the year ended June 30, 2017 was $54,423. A-29

74 Other Post-Employment Benefits The City provides post-employment health care benefits to qualified retired employees. Employees are eligible for such benefits if they were hired prior to January 1, 2004 and retire directly from the City with at least ten years of City service. The City provides a contribution up to a percentage (which varies by retirement date and years of service) of the lesser of $500 per month or the premium for the most popular medical plan elected by the employees. For employees hired on or after January 1, 2004, the City will only pay for the subsidy pursuant to the Public Employees Medical and Hospital Care Act ( PEMCHA ) once such employees meet the CalPERS definition of a retiree. The City provides retiree life insurance of $1,000 for the retiree and $500 for the retiree s spouse. The City s plan is a single-employer defined benefit other post-employment benefits ( OPEB ) plan, with 326 active participants as of June 30, The OPEB plan contributes an amount for the retiree and dependents, as applicable, for certain healthcare services. The contribution requirements for OPEB plan participants and the City are established and may be amended by the City Council. The annual required contribution (the OPEB ARC ) is an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The OPEB ARC is equal to the normal cost each year plus a closed 30 year period amortization of the unfunded actuarial liability. Based on the actuarial valuation of the City s OPEB plan, the OPEB ARC for Fiscal Year 2015 was approximately $2,134,522 and the OPEB ARC for Fiscal Year 2016 was approximately $2,712,574. The OPEB valuation that was prepared as of June 30, 2016, in accordance with GASB Statement No. 45, was used for reporting OPEB information in the City s financial statements for Fiscal Year The City contributed an estimated $1,880,000 to the OPEB plan in Fiscal Year 2017 and expects to contribute $1,915,100 to the OPEB plan in Fiscal Year In October 2016, Nyhart Actuary & Employee Benefits completed an actuarial valuation of the City s OPEB plan based on a valuation date of June 30, The report was developed in accordance with new accounting standards established by GASB Statement No. 45, which requires that the valuation include the value of the implied subsidy of older retired participants by a younger active workforce in a pooled rate medical plan. The City designates a portion of its general fund balance each year for its net annual OPEB obligation. Based on the 2016 actuarial valuation of the City s OPEB plan, the net annual OPEB obligation for Fiscal Year 2016 was $3,946,563. The City is not required to fund the amortization of the unfunded actuarial liability. Based on the 2016 actuarial valuation, the unfunded actuarial accrued liability of the City s OPEB plan was estimated to be approximately $45,889,694 as of July 1, The City s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for Fiscal Year 2012 through Fiscal Year 2016 was as follows: Fiscal Year Annual OPEB Cost (1) Percentage of Annual OPEB Cost Contributed Net OPEB Obligation (2) 2012 $ 2,153, % $ 2,470, ,153, ,897, ,141, ,310, ,141, ,622, ,721, ,946,563 (1) Equal to the OPEB ARC. (2) See Note 16 in Appendix C for a description of the calculation of the net OPEB obligation. Source: City audited financial statements for Fiscal Year 2014 through A-30

75 Valuation Date Historical information with respect to the funded status of the City s OPEB plan is set forth below. Actuarial Accrued Liability Actuarial Value of Assets Unfunded Actuarial Accrued Liability Funded Ratio Annual Covered Payroll Unfunded Actuarial Accrued Liability as Percentage of Payroll 07/01/11 $ 36,429,075 $ -- $ 36,429, % $ 38,315, % 07/01/13 35,828, ,828, ,329, /01/15 45,889, ,889, ,578, Source: City audited financial statements for Fiscal Years 2014 through Actuarial valuations of an ongoing plan involve estimates of the value of expected benefit payments and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the City s financial statements set forth in Appendix B, presents multi-year trend information about whether the actuarial value of OPEB plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Projections of benefits are based on the substantive plan and include the types of benefits in force at the valuation date and the pattern of sharing benefit costs between the City and the plan members to that point. Actuarial calculations reflect a long-term perspective and employ methods and assumptions that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets. Significant methods and assumptions are described in detail in Note 16 to Appendix C. City Investment Policy The City invests its funds in accordance with the City s investment policy (the Investment Policy ), which was most recently amended on June 6, In accordance with Section et seq. of the California Government Code, idle cash management and investment transactions are the responsibility of the City Treasurer. The City s Investment Policy sets forth the policies and procedures applicable to the investment of City funds and designates eligible investments. The Investment Policy sets forth a stated objective, among others, of insuring the safety of invested funds by limiting credit and market risks. Eligible investments are generally limited to the Local Agency Investment Fund which is operated by the California State Treasurer, the County investment pool for local agencies, municipal securities including obligations of a state or a local agency within California rated A by at least one nationally recognized statistical rating organization ( NRSRO ) if long-term debt issued, U.S. Treasury Bills, Notes and Bonds, obligations issued by United States Government agencies, FDIC-insured or negotiable certificates of deposit, repurchase agreements, banker s acceptances and commercial paper rated A1 or equivalent by at least one NRSRO or A by at least one NRSRO if long term debt issued, or better, corporate medium term notes rated A or better by at least one NRSRO, mortgage and asset-backed securities rated of AA or better by an NRSRO, and money market funds rated in the highest category by not less than two NRSROs or SEC registered. Funds are invested in the following order of priority: Safety of Principal and Interest; Liquidity; Yield; and Safekeeping of funds A-31

76 The City Treasurer is required to provide a monthly report to the City Manager and the City Council showing the type of investment, date of maturity, amount invested, current market value, rate of interest, and other such information as may be required by the City Council. A summary of the City s investments as of June 30, 2017 is set forth in the below table. Approximately $51,070,976 (44%) of the total investment portfolio as of June 30, 2017 was attributed to the General Fund. Investment Type CITY OF COSTA MESA INVESTMENTS AS OF JUNE 30, 2017 (1) 12 Months or Less Investment Maturity 13 to 24 Months 25 to 60 Months Federal Agency Securities $ 10,987,742 $ 3,245,414 $ 13,595,867 $ 27,829,023 Local Agency Investment Fund 47,072, ,072,884 U.S. Treasury Securities -- 2,000,469 17,269,139 19,369,608 Commercial Paper 2,982, ,982,380 U.S. Corporate Notes 2,302,253 2,011,051 9,898,826 14,212,130 Money Market Mutual Funds 176, ,708 Held by Trustee -- Costa Mesa Community Facilities District Bonds 165, , , ,000 Money Market Mutual Funds 4,386, ,386,544 Lehman Brothers Holdings, Inc. (bankruptcy) , ,250 Totals $ 68,073,511 $ 7,763,184 $ 41,488,832 $117,325,527 (1) Totals may not add due to rounding. Source: City. Total See Note 2 in Appendix C for further information with respect to City investments as of June 30, A-32

77 APPENDIX B SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS The following is a summary of certain definitions and provisions of the Lease Agreement and the Indenture which are not described elsewhere in the Official Statement. This summary does not purport to be comprehensive and reference should be made to the Indenture for a full and complete statement of its provisions. LEASE AGREEMENT DEFINITIONS Definitions. Unless the context otherwise requires, the terms defined in the Lease Agreement will, for all purposes thereof, have the meanings therein specified, which meanings are equally applicable to both the singular and plural forms of any of the terms therein defined. Capitalized terms that are not otherwise defined therein have the meanings assigned to such terms in the Indenture. Additional Bonds means bonds other than the Series 2017 Bonds issued under the Indenture in accordance with the provisions thereof. Additional Rental Payments means all amounts payable by the City as Additional Rental Payments pursuant to the Lease Agreement. Authority means the Costa Mesa Financing Authority, a joint exercise of powers authority that is organized and existing under the laws of the State of California. Base Rental Deposit Date means the second day next preceding each Interest Payment Date. Base Rental Payments means all amounts payable to the Authority from the City as Base Rental Payments pursuant to the Lease Agreement. Base Rental Payment Schedule means the schedule of Base Rental Payments payable to the Authority from the City pursuant to the Lease Agreement. Bonds means the Series 2017 Bonds and any Additional Bonds. City means the City of Costa Mesa, a municipal corporation and general law city that is duly organized and existing under and by virtue of the Constitution and laws of the State of California. Delivery Date means October 18, Final Termination Date means October 1, 2042, unless extended or sooner terminated as provided in the Lease Agreement. Ground Lease means the Ground Lease, dated as of the date of the Lease Agreement, by and between the City and the Authority, as originally executed and as it may from time to time be amended in accordance with to the provisions thereof and of the Lease Agreement. Hazardous Materials means flammable explosives, polychlorinated biphenyl compounds, heavy metals, chlorinated solvents, cyanide, radon, petroleum products, asbestos or any asbestos containing materials, methane, radioactive materials, pollutants, hazardous materials, hazardous wastes, hazardous, toxic B-1

78 or regulated substances or related materials, as defined in CERCLA, RCRA, CWA, CAA, TSCA and Title III, and the regulations promulgated pursuant thereto, and in all other federal, state or local environmental laws and regulations. Indenture means the Indenture, dated as of the date of the Lease Agreement, by and among the Authority, the City and the Trustee, as originally executed and as it may from time to time be amended or supplemented in accordance with the provisions thereof. Joint Powers Agreement means the Joint Exercise of Powers Agreement, dated as of July 1, 2017, by and between the City and the Costa Mesa Housing Authority, as originally executed and as it may from time to time be amended in accordance with the provisions thereof, which agreement establishes the Authority. Lease Agreement means the Lease Agreement, dated as of July 1, 2017, by and between the City and the Authority, as originally executed and as it may from time to time be amended in accordance with the provisions thereof. Net Insurance Proceeds means any insurance proceeds or condemnation award in excess of $50,000, paid with respect to any of the Property, remaining after payment therefrom of all reasonable expenses incurred in the collection thereof. Permitted Encumbrances means, with respect to the Property, as of any particular time: (a) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the City may, pursuant to provisions of the Lease Agreement, permit to remain unpaid; (b) the Assignment Agreement; (c) the Lease Agreement; (d) the Ground Lease; (e) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law as normally exist with respect to properties similar to the Property for the purposes for which it was acquired or is held by the City; (f) easements, rights of way, mineral rights, drilling rights and other rights (including but not limited to rights in cellular telephone network infrastructure on the Property), reservations, covenants, conditions or restrictions which exist of record as of the Delivery Date which the City certifies in writing will not affect the intended use of the Property or impair the security granted to the Trustee for the benefit of the Owners of the Bonds by the Indenture and the Assignment Agreement and to which the Authority and the City consent in writing; and (g) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the Delivery Date which the City certifies in writing do not affect the intended use of the Property or impair the security granted to the Trustee for the benefit of the Owners of the Bonds by the Indenture and the Assignment Agreement and to which the Authority and the City consent in writing. Property means the 2042 Termination Parcels and, until the Termination Date applicable to the 2026 Termination Parcels, the 2026 Termination Parcels. Rental Payments means, collectively, the Base Rental Payments and the Additional Rental Payments. Rental Period means the twelve-month period commencing on October 1 of each year during the term of the Lease Agreement; provided that the first Rental Period is the period from the Delivery Date through September 30, Series 2017 Bonds means the Costa Mesa Financing Authority 2017 Lease Revenue Bonds issued under the Indenture. Termination Date means: (i) October 1, 2026, with respect to the 2026 Termination Parcels; and (ii) October 1, 2042, with respect to the 2042 Termination Parcels, unless extended or sooner terminated as provided in the Lease Agreement. B-2

79 Trustee means the trustee appointed under the Indenture and referred to therein as the Trustee Termination Parcels means the real property described as such in the Lease Agreement and the improvements located thereon Termination Parcels means the real property described as such in the Lease Agreement and the improvements located thereon. LEASE OF PROPERTY; TERM Lease of Property. (a) The Authority has leased to the City and the City has leased from the Authority the Property, on the terms and conditions set forth in the Lease Agreement, subject to all Permitted Encumbrances. (b) The leasing of the Property by the City to the Authority pursuant to the Ground Lease does not effect or result in a merger of the City s leasehold estate pursuant to the Lease Agreement and its fee estate as lessor under the Ground Lease, and the Authority will continue to have a leasehold estate in the Property pursuant to the Ground Lease throughout the term thereof and of the Lease Agreement. The leasehold interest granted by the City to the Authority pursuant to the Ground Lease is and will be independent of the Lease Agreement; the Lease Agreement is not an assignment or surrender of the leasehold interest granted to the Authority under the Ground Lease. Term; Occupancy. The term of the Lease Agreement will commence on the Delivery Date and end on the applicable Termination Date, unless such term is extended or sooner terminated as provided in the Lease Agreement. If on the applicable Termination Date the Bonds are not fully paid, or provision therefor made in accordance with the Indenture, or the Indenture is not discharged by its terms, or if the Rental Payments remain due and payable or have been abated at any time and for any reason remain due and owing, then the term of the Lease Agreement will be extended until the date upon which: (a) all Bonds are fully paid, or provision therefor made in accordance with the Indenture; or (b) the Indenture is discharged by its terms and all Rental Payments have been paid in full. Notwithstanding the foregoing, the term of the Lease Agreement will in no event be extended more than ten years beyond the applicable Termination Date, such extended date being the Maximum Lease Term. If prior to the Final Termination Date, all Bonds are fully paid, or provision therefor made in accordance with the Indenture, the Indenture will be discharged by its terms and all Rental Payments will have been paid in full, and the term of the Lease Agreement will end simultaneously therewith. Base Rental Payments. RENTAL PAYMENTS (a) Subject to the provisions of the Lease Agreement relating to a revision of the Base Rental Payment Schedule, the City will pay to the Authority, as Base Rental Payments (subject to the provisions of the Lease Agreement) the amount at the times specified in the Base Rental Payment Schedule, a portion of which Base Rental Payments constitute principal, and a portion of which constitute interest. Rental Payments, including Base Rental Payments, will be paid by the City to the Authority for and in consideration of the right to use and occupy the Property and in consideration of the continued right to the quiet use and enjoyment thereof during each Rental Period for which such Rental Payments are to be paid. (b) If the term of the Lease Agreement has been extended pursuant thereto, the obligation of the City to pay Rental Payments will continue to and including the Base Rental Deposit Date preceding the date of termination of the Lease Agreement (as so extended pursuant thereto). Upon such extension, the Base Rental Payments will be established so that they will be sufficient to pay all extended and unpaid Base Rental Payments; provided, however, that the Rental Payments payable in any Rental Period may not exceed the annual fair rental value of the Property. B-3

80 Additional Rental Payments. The City will also pay, as Additional Rental Payments, such amounts as are required for the payment of the following: (a) all taxes and assessments of any type or nature charged to the Authority or the City or affecting the Property or the respective interests or estates of the Authority or the City therein; (b) all reasonable administrative costs of the Authority relating to the Property including, but without limiting the generality of the foregoing, salaries, wages, fees and expenses, compensation and indemnification of the Trustee payable by the Authority under the Indenture, fees of auditors, accountants, attorneys or engineers, and all other necessary and reasonable administrative costs of the Authority or charges required to be paid by it in order to maintain its existence or to comply with the terms of the Indenture or the Lease Agreement or to defend the Authority and its members, officers, agents and employees; (c) insurance premiums for all insurance required pursuant to the Lease Agreement; (d) any amounts with respect to the Lease Agreement or the Bonds required to be rebated to the federal government in accordance with Section 148(f) of the Code; and (e) all other payments required to be paid by the City under the provisions of the Lease Agreement or the Indenture. Amounts constituting Additional Rental Payments payable under the Lease Agreement will be paid by the City directly to the person or persons to whom such amounts are payable. The City will pay all such amounts when due or at such later time as such amounts may be paid without penalty or, in any other case, within 60 days after notice in writing from the Trustee to the City stating the amount of Additional Rental Payments then due and payable and the purpose thereof. Fair Rental Value. The parties have agreed and determined that the annual fair rental value of the Property is not less than the maximum annual Rental Payments due in any year. In making such determination of fair rental value, consideration has been given to the uses and purposes that may be served by the Property and the benefits therefrom which will accrue to the City and the general public. Payments of the Rental Payments for the Property during each Rental Period constitute the total rental for said Rental Period. Payment Provisions. Each installment of Base Rental Payments payable under the Lease Agreement will be paid in lawful money of the United States of America to or upon the order of the Authority at the principal office of the Trustee in Los Angeles, California, or such other place or entity as the Authority or Trustee designate. Each Base Rental Payment will be deposited with the Trustee no later than the Base Rental Deposit Date preceding the Interest Payment Date on which such Base Rental Payment is due. Any Base Rental Payment which is not paid by the City when due and payable under the terms of the Lease Agreement will bear interest from the date when the same is due thereunder until the same is paid at the rate equal to the highest rate of interest on any of the Outstanding Bonds. Notwithstanding any dispute between the Authority and the City, the City will make all Rental Payments when due without deduction or offset of any kind and may not withhold any Rental Payments pending the final resolution of such dispute. In the event of a determination that the City was not liable for said Rental Payments or any portion thereof, said payments or excess of payments, as the case may be, will be credited against subsequent Rental Payments due under the Lease Agreement or refunded at the time of such determination. Amounts required to be deposited by the City with the Trustee pursuant to the Lease Agreement on any date will be reduced to the extent of available amounts on deposit in the Base Rental Payment Fund, the Interest Fund or the Principal Fund. MAINTENANCE, ALTERATIONS AND ADDITIONS Maintenance and Utilities. Throughout the term of the Lease Agreement, as part of the consideration for rental of the Property, all improvement, repair and maintenance of the Property will be the responsibility of B-4

81 the City, and the City will pay for or otherwise arrange for the payment of all utility services supplied to the Property, which may include, without limitation, janitor service, security, power gas, telephone, light, heating, ventilation, air conditioning, water and all other utility services, and will pay for or otherwise arrange for payment of the cost of the repair and replacement of the Property resulting from ordinary wear and tear or want of care on the part of the City or any assignee or sublessee thereof. In exchange for the Rental Payments, the Authority has agreed to provide only the Property. Additions to Property. Subject to the Lease Agreement, the City and any sublessee will, at its own expense, have the right to make additions, modifications and improvements to the Property. To the extent that the removal of such additions, modifications or improvements would not cause material damage to the Property, such additions, modifications and improvements will remain the sole property of the City or such sublessee, and neither the Authority nor the Trustee have any interest therein. Such additions, modifications and improvements may not in any way damage the Property or cause it to be used for purposes other than those authorized under the provisions of state and federal law; and the Property, upon completion of any additions, modifications and improvements made pursuant to the Lease Agreement, will be of a value which is at least equal to the value of the Property immediately prior to the making of such additions, modifications and improvements. Installation of City s Equipment. The City and any sublessee may at any time and from time to time, in its sole discretion and at its own expense, install or permit to be installed items of equipment or other personal property in or upon the Property. All such items will remain the sole property of the City or such sublessee, and neither the Authority nor the Trustee have any interest therein. The City or such sublessee may remove or modify such equipment or other personal property at any time, provided that such party repairs and restores any and all damage to the Property resulting from the installation, modification or removal of any such items. Nothing in the Lease Agreement prevents the City or any sublessee from purchasing items to be installed pursuant thereto under a conditional sale or lease purchase contract, or subject to a vendor s lien or security agreement as security for the unpaid portion of the purchase price thereof, provided that no such lien or security interest will attach to any part of the Property. INSURANCE Commercial General Liability and Property Damage Insurance; Workers Compensation Insurance. (a) The City will maintain or cause to be maintained, throughout the term of the Lease Agreement, a standard commercial general liability insurance policy or policies in protection of the City, the Authority and their respective members, officers, agents and employees. Said policy or policies will provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the use or ownership of the Property. Said policy or policies will provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in a single accident or event, and in a minimum amount of $500,000 for damage to property resulting from a single accident or event. Such commercial general liability and property damage insurance may, however, be in the form of a single limit policy in the amount of $3,000,000 covering all such risks. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried or required to be carried by the City, and may be maintained in whole or in part in the form of self-insurance by the City, provided that such self-insurance complies with the provisions of the Lease Agreement. The Net Insurance Proceeds of such liability insurance will be applied toward extinguishment or satisfaction of the liability with respect to which the Net Insurance Proceeds of such insurance have been paid. (b) The City will maintain or cause to be maintained, throughout the term of the Lease Agreement, workers compensation insurance issued by a responsible carrier authorized under the laws of the State of California to insure employers against liability for compensation under the California Labor Code, or any act enacted as an amendment or supplement thereto or in lieu thereof, such workers compensation B-5

82 insurance to cover all persons employed by the City in connection with the Property and to cover full liability for compensation under any such act; provided, however, that the foregoing obligations may be satisfied by self-insurance, provided that such self-insurance complies with the provisions of the Lease Agreement. (c) The City will maintain or cause to be maintained, fire, lightning and special extended coverage insurance (which includes coverage for vandalism and malicious mischief, but need not include coverage for earthquake damage) on all improvements constituting any part of the Property in an amount equal to the greater of 100% of the replacement cost of such improvements or 100% of the outstanding principal amount of the Bonds. The City has an insurance policy which provides replacement cost coverage. All insurance required to be maintained pursuant to the foregoing provisions may be subject to a deductible in an amount not to exceed $500,000. The foregoing obligations may be satisfied by self-insurance, provided that such self-insurance complies with the provisions of the Lease Agreement. (d) The City will maintain rental interruption insurance to cover the Authority s loss, total or partial, of Base Rental Payments resulting from the loss, total or partial, of the use of any part of the Property as a result of any of the hazards required to be covered pursuant to the Lease Agreement in an amount sufficient at all times to pay an amount not less than the product of two times the maximum amount of Base Rental Payments scheduled to be paid during any Rental Period. The City is not permitted to self-insure the foregoing obligation. (e) The insurance required by the Lease Agreement will be provided by reputable insurance companies with claims paying abilities determined, in the reasonable opinion of a professionally certified risk manager or an independent insurance consultant, to be adequate for the purposes thereof. Title Insurance. The City will provide, at its own expense, one or more CLTA or ALTA title insurance policies for the Property, in the aggregate amount of not less than the initial aggregate principal amount of the Series 2017 Bonds. Such policy or policies will insure: (a) the fee interest of the City in the Property; (b) the Authority s ground leasehold estate in the Property under the Ground Lease; and (c) the City s leasehold estate under the Lease Agreement in the Property, subject only to Permitted Encumbrances. All Net Insurance Proceeds received under said policy or policies will be deposited with the Trustee and applied as provided in the Indenture. So long as any of the Bonds remain Outstanding, each policy of title insurance obtained pursuant to the Indenture or the Lease Agreement or required thereby must provide that all proceeds thereunder will be payable to the Trustee for the benefit of the Bond Owners. Additional Insurance Provision; Form of Policies. The City will pay or cause to be paid when due the premiums for all insurance policies required by the Lease Agreement, and will promptly furnish or cause to be furnished evidence of such payments to the Trustee. All such policies must provide that the Trustee be given 30 days notice of the expiration thereof or any intended cancellation thereof. The Trustee will be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss agreed to by the Trustee. The City will cause to be delivered to the Trustee on or before October 1 each year, commencing October 1, 2018, a Written Certificate of the City stating that such policies are in full force and effect and that the City is in full compliance with the foregoing requirements. The Trustee is entitled to rely upon said Written Certificate of the City as to the City s compliance therewith. The Trustee is not responsible for the sufficiency of coverage or amounts of such policies. Self-Insurance. Insurance provided through a California joint powers authority of which the City is a member or with which the City contracts for insurance will be deemed to be self-insurance for purposes of the Lease Agreement. Any self-insurance maintained by the City pursuant to the Lease Agreement must comply with the following terms: (a) the self-insurance program and any self-insured retentions maintained by the City are approved in writing by the City s Risk Management Department, a professionally certified risk manager or an independent insurance consultant; (b) the self-insurance program includes an actuarially sound claims B-6

83 reserve fund out of which each self-insured claim is paid, the adequacy of each such fund is evaluated on an annual basis by the City s Risk Management Department, a professionally certified risk manager or an independent insurance consultant and any deficiencies in any self-insured claims reserve fund are remedied in accordance with the recommendation of the City s Risk Management Department, a professionally certified risk manager or an independent insurance consultant, as applicable; and (c) in the event that the self-insurance program is discontinued, the actuarial soundness of its claims reserve fund, as determined by a professionally certified risk manager or by an independent insurance consultant, will be maintained. Defaults and Remedies. DEFAULTS AND REMEDIES (a) (i) If the City fails: (A) to pay any Rental Payment payable under the Lease Agreement when the same becomes due and payable, time being expressly declared to be of the essence in the Lease Agreement; or (B) to keep, observe or perform any other term, covenant or condition contained therein or in the Indenture to be kept or performed by the City; or (ii) upon the happening of any of the events specified in the Lease Agreement, the City is deemed to be in default thereunder and it is lawful for the Authority to exercise any and all remedies available pursuant to law or granted pursuant thereto. The City will in no event be in default in the observance or performance of any covenant, condition or agreement in the Lease Agreement on its part to be observed or performed, other than as referred to in clause (i)(a) or (ii) of the preceding sentence, unless the City has failed, for a period of 30 days or such additional time as is reasonably required, to correct any such default after notice by the Authority to the City properly specifying wherein the City has failed to perform any such covenant, condition or agreement. Upon any such default, the Authority, in addition to all other rights and remedies it may have at law, has the option to do any of the following: (1) To terminate the Lease Agreement in the manner therein provided on account of default by the City, notwithstanding any re-entry or re-letting of the Property as provided for in clause (2) below, and to re-enter the Property and remove all persons in possession thereof and all personal property whatsoever situated upon the Property and place such personal property in storage in any warehouse or other suitable place, for the account of and at the expense of the City. In the event of such termination, the City has agreed to surrender immediately possession of the Property, without let or hindrance, and to pay the Authority all damages recoverable at law that the Authority may incur by reason of default by the City, including, without limitation, any costs, loss or damage whatsoever arising out of, in connection with, or incident to any such re-entry upon the Property and removal and storage of such property by the Authority or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. Neither notice to pay Rental Payments or to deliver up possession of the Property given pursuant to law nor any entry or reentry by the Authority nor any proceeding in unlawful detainer, or otherwise, brought by the Authority for the purpose of effecting such re-entry or obtaining possession of the Property nor the appointment of a receiver upon initiative of the Authority to protect the Authority s interest under the Lease Agreement will of itself operate to terminate the Lease Agreement, and no termination of the Lease Agreement on account of default by the City will be or become effective by operation of law or acts of the parties thereto, or otherwise, unless and until the Authority has given written notice to the City of the election on the part of the Authority to terminate the Lease Agreement. The City has covenanted and agreed that no surrender of the Property or of the remainder of the term of the Lease Agreement or any termination thereof will be valid in any manner or for any purpose whatsoever unless stated by the Authority by such written notice. (2) Without terminating the Lease Agreement: (x) to collect each installment of Rental Payments as the same become due and enforce any other terms or provisions thereof to be kept or performed by the City, regardless of whether or not the City has abandoned the Property; or (y) to exercise any and all rights of entry and re-entry upon the Property. In the event that the Authority does not elect to terminate the Lease Agreement in the manner provided for in clause (1) above, the City will remain liable and has agreed to keep or perform all covenants and conditions contained in the Lease Agreement to be kept or performed by the City and, if the Property is not re-let, to pay the full amount of the Rental Payments to the B-7

84 end of the term of the Lease Agreement or, in the event that the Property is re-let, to pay any deficiency in Rental Payments that results therefrom; and has further agreed to pay said Rental Payments and/or Rental Payment deficiency punctually at the same time and in the same manner as provided in the Lease Agreement for the payment of Rental Payments thereunder, notwithstanding the fact that the Authority may have received in previous years or may receive thereafter in subsequent years Rental Payments in excess of the Rental Payments therein specified, and notwithstanding any entry or re-entry by the Authority or suit in unlawful detainer, or otherwise, brought by the Authority for the purpose of effecting such re-entry or obtaining possession of the Property. Should the Authority elect to re-enter as provided in the Lease Agreement, the City has irrevocably appointed the Authority as the agent and attorney-in-fact of the City to re-let the Property, or any part thereof, from time to time, either in the Authority s name or otherwise, upon such terms and conditions and for such use and period as the Authority may deem advisable and to remove all persons in possession thereof and all personal property whatsoever situated upon the Property and to place such personal property in storage in any warehouse or other suitable place, for the account of and at the expense of the City, and the City has indemnified and agreed to save harmless the Authority from any costs, loss or damage whatsoever arising out of, in connection with, or incident to any such re-entry upon and re-letting of the Property and removal and storage of such property by the Authority or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. The City has agreed that the terms of the Lease Agreement constitute full and sufficient notice of the right of the Authority to re-let the Property in the event of such re-entry without effecting a surrender of the Lease Agreement, and has further agreed that no acts of the Authority in effecting such re-letting constitute a surrender or termination of the Lease Agreement irrespective of the use or the term for which such re-letting is made or the terms and conditions of such re-letting, or otherwise, but that, on the contrary, in the event of such default by the City the right to terminate the Lease Agreement vests in the Authority to be effected in the sole and exclusive manner provided for in clause (1) above. The City has further agreed to pay the Authority the cost of any alterations or additions to the Property necessary to place the Property in condition for re-letting immediately upon notice to the City of the completion and installation of such additions or alterations. The City has waived any and all claims for damages caused or which may be caused by the Authority in re-entering and taking possession of the Property as provided in the Lease Agreement and all claims for damages that may result from the destruction of or injury to the Property and all claims for damages to or loss of any property belonging to the City, or any other person, that may be in or upon the Property. (b) If: (i) the City s interest in the Lease Agreement or any part thereof is assigned or transferred, either voluntarily or by operation of law or otherwise, without the written consent of the Authority and, as provided for in the Lease Agreement; or (ii) the City or any assignee files any petition or institutes any proceeding under any act or acts, state or federal, dealing with or relating to the subject or subjects of bankruptcy or insolvency, or under any amendment of such act or acts, either as a bankrupt or as an insolvent, or as a debtor, or in any similar capacity, wherein or whereby the City asks or seeks or prays to be adjudicated a bankrupt, or is to be discharged from any or all of the City s debts or obligations, or offers to the City s creditors to elect a composition or extension of time to pay the City s debts or asks, seeks or prays for reorganization or to effect a plan of reorganization, or for a readjustment of the City s debts, or for any other similar relief, or if any such petition or any such proceedings of the same or similar kind or character be filed or be instituted or taken against the City, or if a receiver of the business or of the property or assets of the City is appointed by any court, except a receiver appointed at the instance or request of the Authority, or if the City makes a general assignment for the benefit of the City s creditors; or (iii) the City abandons or vacates the Property, then the City will be deemed to be in default under the Lease Agreement. (c) In addition to the other remedies set forth in the Lease Agreement, upon the occurrence of an event of default, the Authority and its assignee are entitled to proceed to protect and enforce the rights vested in the Authority and its assignee by the Lease Agreement or by law. The provisions of the Lease Agreement and the duties of the City and of its city council, officers or employees are enforceable by the Authority or its assignee by mandamus or other appropriate suit, action or proceeding in any court of B-8

85 competent jurisdiction. Without limiting the generality of the foregoing, the Authority and its assignee have the right to bring the following actions: (1) Accounting. By action or suit in equity to require the City and its city council, officers and employees and its assigns to account as the trustee of an express trust. (2) Injunction. By action or suit in equity to enjoin any acts or things which may be unlawful or in violation of the rights of the Authority or its assignee. (3) Mandamus. By mandamus or other suit, action or proceeding at law or in equity to enforce the Authority s or its assignee s rights against the City (and its city council, officers and employees) and to compel the City to perform and carry out its duties and obligations under the law and its covenants and agreements with the City as provided in the Lease Agreement. Each and all of the remedies given to the Authority under the Lease Agreement or by any law now or later enacted are cumulative and the single or partial exercise of any right, power or privilege thereunder does not impair the right of the Authority to the further exercise thereof or the exercise of any or all other rights, powers or privileges. The term re-let or re-letting as used in the Lease Agreement includes, but is not limited to, re-letting by means of the operation by the Authority of the Property. If any statute or rule of law validly limits the remedies given to the Authority under the Lease Agreement, the Authority nevertheless will be entitled to whatever remedies are allowable under any statute or rule of law. In the event that the Authority prevails in any action brought to enforce any of the terms and provisions of the Lease Agreement, the City has agreed to pay a reasonable amount as and for attorney s fees incurred by the Authority in attempting to enforce any of the remedies available to the Authority thereunder. Notwithstanding anything to the contrary contained in the Lease Agreement, the Authority has no right upon a default thereunder by the City to accelerate Rental Payments. (d) Notwithstanding anything to the contrary contained in the Lease Agreement, the termination of the Lease Agreement by the Authority and its assignees on account of a default by the City thereunder will not effect or result in a termination of the Ground Lease. Waiver. Failure of the Authority to take advantage of any default on the part of the City will not be, or be construed as, a waiver thereof, nor will any custom or practice which may grow up between the parties in the course of administering such instrument be construed to waive or to lessen the right of the Authority to insist upon performance by the City of any term, covenant or condition of the Lease Agreement, or to exercise any rights given the Authority on account of such default. A waiver of a particular default will not be deemed to be a waiver of any other default or of the same default subsequently occurring. The acceptance of Rental Payments under the Lease Agreement will not be, or be construed to be, a waiver of any term, covenant or condition of the Lease Agreement. EMINENT DOMAIN; PREPAYMENT Eminent Domain. If all of the Property (or portions thereof such that the remainder is not usable for public purposes by the City) is taken under the power of eminent domain, the term of the Lease Agreement will cease as of the day that possession is so taken. If less than all of the Property is taken under the power of eminent domain and the remainder is usable for public purposes by the City at the time of such taking, then the Lease Agreement will continue in full force and effect as to such remainder, and the parties waive the benefits of any law to the contrary, and in such event there will be a partial abatement of the Rental Payments in accordance with the provisions thereof. So long as any Bonds are Outstanding, any award made in eminent domain proceedings for the taking of the Property, or any portion thereof, will be paid to the Trustee and applied to the redemption of Bonds as provided in the Indenture and in the corresponding provisions of any B-9

86 Supplemental Indenture pursuant to which Additional Bonds are issued. Any such award made after all of the Bonds, and all other amounts due under the Indenture and the Lease Agreement, have been fully paid, will be paid to the Authority and to the City as their respective interests may appear. Prepayment. (a) The City may prepay all or a portion of the Base Rental Payments attributable to the Series 2017 Bonds which are payable after October 1, 2027 from any source of available funds, on October 1, 2027 or any date thereafter, by paying: (i) all or a portion, as selected by the City, of the principal components of such Base Rental Payments; and (ii) the accrued but unpaid interest component of such Base Rental Payments to be prepaid to the date of such prepayment. (b) The City may prepay, from any source of available funds, all or any portion of the Base Rental Payments attributable to the Series 2017 Bonds by depositing with the Trustee moneys or securities as provided, and subject to the terms and conditions set forth, in the Indenture in an amount that is sufficient to make such Base Rental Payments when due or to make such Base Rental Payments through a specified date on which the City has a right to prepay such Base Rental Payments pursuant to clause (a) above, and to prepay such Base Rental Payments on such prepayment date, at a prepayment price determined in accordance with the Lease Agreement. (c) If less than all of the Base Rental Payments attributable to the Series 2017 Bonds are prepaid pursuant to the Lease Agreement then, as of the date of such prepayment pursuant to the Lease Agreement, or the date of a deposit pursuant to the Lease Agreement, the principal and interest components of such Base Rental Payments will be recalculated by the City and transmitted to the Trustee in order to take such prepayment into account. The City has agreed that if, following a partial prepayment of such Base Rental Payments, the Property is damaged or destroyed or taken by eminent domain, or a defect in title to the Property is discovered, the City will not be entitled to, and by such prepayment waives the right of, abatement of such prepaid Base Rental Payments and the City will not be entitled to any reimbursement of such Base Rental Payments. (d) If all of the Base Rental Payments are prepaid in accordance with the provisions of the Lease Agreement then, as of the date of such prepayment pursuant thereto and, if applicable, the corresponding provisions thereof relating to the prepayment of Base Rental Payments attributable to Additional Bonds, or deposit pursuant to the Lease Agreement and, if applicable, such corresponding provisions, and payment of all other amounts owed under the Lease Agreement, the term of the Lease Agreement will be terminated. (e) Prepayments of Base Rental Payments attributable to the Series 2017 Bonds made pursuant to the Lease Agreement will be applied to the redemption of the Series 2017 Bonds as directed by the City and as provided in the Indenture. COVENANTS Right of Entry. The Authority and its assignees have the right to enter upon and to examine and inspect the Property during reasonable business hours (and in emergencies at all times) for any purpose connected with the Authority s rights or obligations under the Lease Agreement, and for all other lawful purposes. Liens. In the event that the City at any time during the term of the Lease Agreement causes any changes, alterations, additions, improvements, or other work to be done or performed or materials to be supplied, in or upon the Property, the City will pay, when due, all sums of money that may become due for, or purporting to be for, any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to or for the City in, upon or about the Property and which may be secured by a mechanic s, B-10

87 materialmen s or other lien against the Property or the Authority s interest therein, and will cause each such lien to be fully discharged and released at the time that the performance of any obligation secured by any such lien matures or becomes due, except that, if the City desires to contest any such lien, it may do so as long as such contestment is in good faith. If any such lien is reduced to final judgment and such judgment or such process as may be issued for the enforcement thereof is not promptly stayed, or if so stayed and said stay thereafter expires, the City will forthwith pay and discharge said judgment. Quiet Enjoyment. The parties to the Lease Agreement have mutually covenanted that the City, by keeping and performing the covenants and agreements that are contained therein, will at all times during the term of the Lease Agreement peaceably and quietly have, hold and enjoy the Property without suit, trouble or hindrance from the Authority. Authority Not Liable. The Authority and its directors, officers, agents and employees are not liable to the City or to any other party whomsoever for any death, injury or damage that may result to any person or property by or from any cause whatsoever in, on or about the Property. To the extent permitted by law, the City will, at its expense, indemnify and hold the Authority and the Trustee and all directors, members, officers, agents and employees thereof harmless against and from any and all claims by or on behalf of any person, firm, corporation or governmental authority arising from the acquisition, construction, occupation, use, operation, maintenance, possession, conduct or management of or from any work done in or about the Property or from the subletting of any part thereof, including any liability for violation of conditions, agreements, restrictions, laws, ordinances, or regulations affecting the Property or the occupancy or use thereof, but excepting the negligence or willful misconduct of the persons or entity seeking indemnity. The City has also covenanted and agreed, at its expense, to pay and indemnify and save the Authority and the Trustee and all directors, officers and employees thereof harmless against and from any and all claims arising from: (a) any condition of the Property and the adjoining sidewalks and passageways; (b) any breach or default on the part of the City in the performance of any covenant or agreement to be performed by the City pursuant to the Lease Agreement; (c) any act or negligence of licensees in connection with their use, occupancy or operation of the Property; or (d) any accident, injury or damage whatsoever caused to any person, firm or corporation in or about the Property or upon or under the sidewalks and from and against all costs, reasonable counsel fees, expenses and liabilities incurred in any action or proceeding brought by reason of any claim referred to in the Lease Agreement, but excepting the negligence or willful misconduct of the person or entity seeking indemnity. In the event that any action or proceeding is brought against the Authority or the Trustee or any director, member, officer or employee thereof by reason of any such claim, the City, upon notice from the Authority or the Trustee or such director, member, officer employee thereof, has covenanted to resist or defend such action or proceeding by counsel reasonably satisfactory to the Authority or the Trustee or such director, member, officer or employee thereof. Assignment and Subleasing. Neither the Lease Agreement nor any interest of the City thereunder may be sold, mortgaged, pledged, assigned or transferred by the City by voluntary act or by operation by law or otherwise. The Property may not be subleased in whole or in part by the City without the prior written consent of the Authority. Any such sublease is subject to all of the following conditions: (a) the Lease Agreement and the obligation of the City to make all Rental Payments thereunder will remain the primary obligation of the City; (b) the City will, within 30 days after the delivery thereof, furnish or cause to be furnished to the Authority and the Trustee a true and complete copy of such sublease; (c) no such sublease by the City will cause the Property to be used for a purpose other than a governmental or proprietary function authorized under the provisions of the Constitution and laws of the State of California; (d) any sublease of the Property by the City will explicitly provide that such sublease is subject to all rights of the Authority under the Lease Agreement, including the right to re-enter and re-let the Property or terminate the Lease Agreement upon a default by the City; and (e) the City will furnish the Authority and the Trustee with an Opinion of Counsel to the effect that such sublease will not, in and of itself, cause the interest on the Bonds to be included in gross income for federal income tax purposes. B-11

88 Title to Property. Upon the termination or expiration of the Lease Agreement (other than as provided therein), and the first date upon which the Bonds are no longer Outstanding, all right, title and interest in and to the Property will vest in the City. Upon any such termination or expiration, the Authority will execute such conveyances, deeds and other documents as may be necessary to effect such vesting of record. Authority s Purpose. The Authority has covenanted that, prior to the discharge of the Lease Agreement and the Bonds, it will not engage in any activities that are inconsistent with the purposes for which the Authority is organized, as set forth in the Joint Powers Agreement. Environmental Compliance. (a) The City will not use or permit the Property or any part thereof to be used to generate, manufacture, refine, treat, store, handle, transport or dispose of, transfer, produce or process Hazardous Materials, except, and only to the extent, if necessary to maintain the improvements on the Property or conduct lawful activities of the City on the Property and then, only in compliance with all federal, state and local laws and regulations, now or later in effect, with respect to Hazardous Materials, nor will it permit, as a result of any intentional or unintentional act or omission on its part or by any tenant, subtenant, licensee, guest, invitee, contractor, employee and agent, the storage, transportation, disposal or use of Hazardous Materials or the release or threat of release of Hazardous Materials on, from or beneath the Property or onto any other property excluding, however, those Hazardous Materials in those amounts ordinarily found in the inventory of a municipal government, the use, storage, treatment, transportation and disposal of which is in compliance with all environmental regulations. (b) The City will comply with, and will cause all tenants, subtenants, licensees, guests, invitees, contractors, employees and agents on the Property to comply with, all environmental regulations, and will keep the Property free and clear of any liens imposed pursuant thereto; provided, however, that notwithstanding that a portion of the foregoing covenant is limited to the City s use of its best efforts, the City will remain solely responsible for ensuring such compliance and such limitation will not diminish or affect in any way the City s environmental compliance obligations as provided in the Lease Agreement. Upon receipt of any notice from any person with regard to the release of Hazardous Materials on, from or beneath the Property, the City will give prompt written notice thereof to the Trustee prior to the expiration of any period in which to respond to such notice under any environmental regulation. (c) The City will, to the extent permitted by law, defend, indemnify and hold harmless the Trustee, the Series 2017 Bond Owners, their partners, depositors and each of their respective employees, agents, officers, directors, trustees, successors and assigns, from and against any claims, demands, penalties, fines, attorneys fees (including, without limitation, attorneys fees and expenses incurred to enforce the indemnification contained in the foregoing clause), consultants fees, investigation and laboratory fees, liabilities, settlements, court costs, damages, losses, costs or expenses of whatever kind or nature, known or unknown, contingent or otherwise, occurring in whole or in part, arising out of, or in any way related to: (i) the disposal, release, threat of release, discharge, storage or transportation of any Hazardous Materials on, from or beneath the Property; (ii) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials; (iii) any lawsuit brought or threatened, settlement reached or governmental order relating to Hazardous Materials on, from or beneath the Property; (iv) any violation of environmental regulations or clauses (a) or (b) above by the City or any of its agents, tenants, employees, contractors, licensees, guests, subtenants or invitees; and (v) the imposition of any governmental lien for the recovery of environmental cleanup or removal costs. To the extent that the City is strictly liable under any environmental regulation, its obligation to the Series 2017 Bond Owners and the other indemnitees under the foregoing indemnification will likewise be without regard to fault on its part with respect to the violation of any environmental regulation which results in liability to any indemnitee. The foregoing obligations and liabilities under will survive the payment and satisfaction of all Series 2017 Bonds, and with regard to the Trustee the resignation and removal of the Trustee. B-12

89 Covenant against Condemnation. The City has covenanted and agreed, to the extent that it may lawfully do so, that so long as any of the Series 2017 Bonds remain Outstanding and unpaid, the City will not exercise the power of condemnation with respect to the Property. The City has further covenanted and agreed, to the extent that it may lawfully do so, that if for any reason the foregoing covenant is determined to be unenforceable or if the City should fail or refuse to abide by such covenant and condemns the Property, then the appraised value of the Property will not be less than: (a) if such Series 2017 Bonds are then subject to redemption, the principal and interest components of the Series 2017 Bonds outstanding through the date of their redemption; or (ii) if such Series 2017 Bonds are not then subject to redemption, the amount necessary to defease such Series 2017 Bonds to the first available redemption date in accordance with the Indenture. NO CONSEQUENTIAL DAMAGES; USE OF THE PROPERTY; SUBSTITUTION OR RELEASE No Consequential Damages. In no event will the Authority or the Trustee be liable for any incidental, indirect, special or consequential damage in connection with or arising out of the Lease Agreement or the City s use of the Property. Use of the Property. The City will not use, operate or maintain the Property improperly, carelessly, in violation of any applicable law or in a manner contrary to that contemplated by the Lease Agreement. In addition, the City has agreed to comply in all respects (including, without limitation, with respect to the use, maintenance and operation of the Property) with all laws of the jurisdictions in which its operations may extend and any legislative, executive, administrative or judicial body exercising any power or jurisdiction over the Property; provided, however, that the City may contest in good faith the validity or application of any such law or rule in any reasonable manner which does not, in the opinion of the Authority, adversely affect the estate of the Authority in and to any of the Property or its interest or rights under the Lease Agreement. Substitution or Release of the Property. The City has the right to substitute alternate real property for any portion of the Property or to release a portion of the Property from the Lease Agreement. All costs and expenses incurred in connection with such substitution or release will be borne by the City. Notwithstanding any substitution or release of Property pursuant to the Lease Agreement, there will be no reduction in or abatement of the Base Rental Payments due from the City thereunder as a result of such substitution or release. Any such substitution or release of any portion of the Property is subject to the following specific conditions, which have been made conditions precedent to such substitution or release: (a) The City has delivered a Written Certificate to the Trustee setting forth its findings that the Property, as constituted after such substitution or release: (i) has an annual fair rental value at least equal to the maximum Base Rental Payments payable by the City in any Rental Period; and (ii) has a useful life in excess of the final maturity of any Outstanding Bonds; (b) the City has obtained or caused to be obtained a CLTA or ALTA title insurance policy or policies with respect to any substituted property in the amount at least equal to the aggregate principal amount of any Outstanding Bonds of the type and with the endorsements described in the Lease Agreement; (c) the City has provided the Trustee with an Opinion of Counsel to the effect that such substitution or release will not, in and of itself, cause the interest on the Bonds to be included in gross income for federal income tax purposes; (d) the City, the Authority and the Trustee have executed, and the City has caused to be recorded with the Orange County Recorder, any document necessary to reconvey to the City the portion of the Property being released and to include any substituted real property in the description of the Property contained in the Lease Agreement and in the Ground Lease; and B-13

90 Bonds. (e) the City has provided notice of such substitution to each rating agency then rating the MISCELLANEOUS Law Governing. THE LEASE AGREEMENT WILL BE GOVERNED EXCLUSIVELY BY THE PROVISIONS THEREOF AND BY THE LAWS OF THE STATE OF CALIFORNIA AS THE SAME FROM TIME TO TIME EXIST. Validity and Severability. If for any reason the Lease Agreement is held by a court of competent jurisdiction to be void, voidable or unenforceable by the Authority or by the City, or if for any reason it is held by such a court that any of the covenants and conditions of the City thereunder, including the covenant to pay Rental Payments, is unenforceable for the full term thereof; then and in such event the Lease Agreement is and will be deemed to be a Lease Agreement under which the Rental Payments are to be paid by the City annually in consideration of the right of the City to possess, occupy and use the Property, and all of the terms, provisions and conditions of the Lease Agreement, except to the extent that such terms, provisions and conditions are contrary to or inconsistent with such holding, will remain in full force and effect. Net-Net-Net Lease. The Lease Agreement will be deemed and construed to be a net-net-net lease and the City has agreed that the Rental Payments will be an absolute net return to the Authority, free and clear of any expenses, charges or set-offs whatsoever and notwithstanding any dispute between the City and the Authority. Taxes. The City will pay or cause to be paid all taxes and assessments of any type or nature charged to the Authority or affecting the Property or the respective interests or estates therein; provided, however, that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the City is obligated to pay only such installments as are required to be paid during the term of the Lease Agreement as and when the same become due. The City or any sublessee may, at the City s or such sublessee s expense and in its name, in good faith contest any such taxes, assessments, utility and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom unless the Authority or the Trustee notify the City or such sublessee that, in the opinion of independent counsel, by nonpayment of any such items, the interest of the Authority in the Property will be materially endangered or the Property, or any part thereof, will be subject to loss or forfeiture, in which event the City or such sublessee will promptly pay such taxes, assessments or charges or provide the Authority with full security against any loss which may result from nonpayment, in form satisfactory to the Authority and the Trustee. Amendments. (a) The Lease Agreement and the Ground Lease may be amended and the rights and obligations of the Authority and the City thereunder may be amended at any time by an amendment thereto which will become binding upon execution and delivery by the Authority and the City, but only with the prior written consent of the Owners of a majority of the principal amount of the Bonds then Outstanding pursuant to the Indenture, provided that no such amendment may: (i) extend the payment date of any Base Rental Payments, reduce the interest component or principal component of any Base Rental Payments or change the prepayment terms and provisions, without the prior written consent of the Owner of each Bond so affected; or (ii) reduce the percentage of the principal amount of the Bonds the consent of the Owners of which is required for the execution of any amendment of the Lease Agreement or the Ground Lease. (b) The Lease Agreement and the Ground Lease and the rights and obligations of the Authority and the City thereunder may also be amended at any time by an amendment thereto which will B-14

91 become binding upon execution by the Authority and the City, without the written consents of any Owners, but only to the extent permitted by law and only for any one or more of the following purposes: (i) to add to the agreements, conditions, covenants and terms required by the Authority or the City to be observed or performed therein other agreements, conditions, covenants and terms thereafter to be observed or performed by the Authority or the City, or to surrender any right or power reserved therein to or conferred therein on the Authority or the City, and which in either case will not materially adversely affect the interests of the Owners, as evidenced by an Opinion of Bond Counsel; (ii) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained therein or in regard to questions arising thereunder which the Authority or the City may deem desirable or necessary and not inconsistent therewith, and which do not materially adversely affect the interests of the Owners, as evidenced by an Opinion of Bond Counsel; (iii) to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of the interest on the Bonds; (iv) to provide for the substitution or release of all or a portion of the Property in accordance with the provisions of the Lease Agreement; Indenture; or (v) to provide for the issuance of Additional Bonds in accordance with the (vi) to make such other changes therein or modifications thereto as the Authority or the City may deem desirable or necessary, and which do not materially adversely affect the interests of the Owners, as evidenced by an Opinion of Bond Counsel. Assignment. The City and the Authority have acknowledged the assignment of the Lease Agreement (except for the Authority s obligations and its rights to give consents or approvals thereunder), and the Base Rental Payments payable thereunder, to the Trustee pursuant to the Assignment Agreement. To the extent that the Lease Agreement confers upon or gives or grants the Trustee any right, remedy or claim under or by reason of the Lease Agreement, the Trustee has been explicitly recognized as being a third-party beneficiary thereunder and may enforce any such right, remedy or claim conferred, given or granted thereunder. INDENTURE DEFINITIONS Definitions. Unless the context otherwise requires, the terms defined in the Indenture will for all purposes thereof and of any amendment thereof or supplement thereto and of the Bonds and of any certificate, opinion, request or other document mentioned therein have the meanings defined therein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined therein. Capitalized terms that are not otherwise defined in the Indenture have the meanings assigned to such terms in the Lease Agreement. Additional Bonds means Bonds other than the Series 2017 Bonds issued under the Indenture in accordance with the provisions thereof. Act means the Marks-Roos Local Bond Pooling Act of 1985, commencing with Section 6584 of the California Government Code. B-15

92 Additional Rental Payments means all amounts payable by the City as Additional Rental Payments pursuant to the Lease Agreement. Assignment Agreement means the Assignment Agreement, dated as of the date of the Indenture, by and between the Authority and the Trustee. Authority means the Costa Mesa Financing Authority, a joint exercise of powers entity that is duly organized and existing under and by virtue of the laws of the State of California. Authorized Authority Representative means the Chairperson, Vice Chairperson, Executive Director, Treasurer and Secretary of the Authority, or any other person authorized by the Board of Directors of the Authority to act on behalf of the Authority under or with respect to the Indenture. Authorized City Representative means the Mayor of the City, the Mayor Pro Tem of the City, the City Manager of the City, the Director of Finance of the City or the City Clerk, or any other person authorized by the City Council of the City to act on behalf of the City under or with respect to the Indenture. Authorized Denominations means $5,000 or any integral multiple thereof. Base Rental Payment Fund means the fund by that name established in accordance with the Indenture. Base Rental Payments means all amounts payable to the Authority by the City as Base Rental Payments pursuant to the Lease Agreement. Beneficial Owner means, whenever used with respect to a Book-Entry Bond, the person whose name is recorded as the beneficial owner of such Book-Entry Bond or a portion of such Book Entry Bond by a Participant on the records of such Participant or such person s subrogee. Bonds means the Series 2017 Bonds and any Additional Bonds issued under the Indenture. Book-Entry Bonds means the Bonds of a Series registered in the name of the nominee of DTC, or any successor securities depository for such Series of Bonds, as the registered owner thereof pursuant to the terms and provisions of the Indenture. Business Day means a day which is not: (a) a Saturday, Sunday or legal holiday; (b) a day on which banking institutions in the State of California, or in any state in which the Office of the Trustee is located, are required or authorized by law (including executive order) to close; or (c) a day on which the New York Stock Exchange is closed. Cede & Co. means Cede & Co., the nominee of DTC, and any successor nominee of DTC with respect to a Series of Book-Entry Bonds. City means the City of Costa Mesa, a municipal corporation and general law city that is duly organized and existing under and by virtue of the Constitution and laws of the State of California. Closing Date means October 18, Code means the Internal Revenue Code of 1986, as amended. Construction Fund means the fund by that name established in accordance with the Indenture. B-16

93 Continuing Disclosure Certificate means the Continuing Disclosure Certificate, dated as of the date of the Indenture, executed by the City, as originally executed and as it may from time to time be amended in accordance with the provisions thereof. DTC means The Depository Trust Company, a limited-purpose trust company organized under the laws of the State of New York, and its successors as securities depository for any Series of Book-Entry Bonds, including any such successor appointed pursuant to the Indenture. Federal Securities means: (a) non-callable direct general obligations of the United States of America (including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America), fully and unconditionally guaranteed as to timely payment; and (b) obligations of any agency, department or instrumentality of the United States of America the timely payment of principal of and interest on which are fully guaranteed by the United States of America, provided that such securities are eligible for defeasance under the then-existing criteria of S&P. Ground Lease means the Ground Lease, dated as of the date of the Indenture, by and between the City and the Authority, as originally executed and as it may from time to time be amended in accordance with the provisions thereof and of the Lease Agreement. Indenture means the Indenture, dated as of July 1, 2017, by and among the City, the Authority and the Trustee, as originally executed and as it may be amended or supplemented from time to time by any Supplemental Indenture. Information Services means the Municipal Securities Rulemaking Board through the Electronic Municipal Marketplace Access (EMMA) website; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other services providing information with respect to called bonds as the Authority may designate in a Written Certificate of the Authority delivered to the Trustee. Interest Fund means the fund by that name established in accordance with the Indenture. Interest Payment Date means April 1 and October 1 of each year, commencing on April 1, Lease Agreement means the Lease Agreement, dated as of the date of the Indenture, by and between the City and the Authority, as originally executed and as it may be from time to time amended in accordance with the provisions thereof. Moody s means Moody s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, except that if such corporation no longer performs the function of a securities rating agency for any reason, the term Moody s will be deemed to refer to any other nationally recognized securities rating agency selected by the Authority. Net Insurance Proceeds Fund means the fund by that name established in accordance with the Indenture. Office of the Trustee means the principal corporate trust office of the Trustee in Los Angeles, California, or such other office as may be specified to the Authority and the City by the Trustee in writing, except that with respect to presentation of Bonds for payment or for registration of transfer and exchange such term means the office or the agency of the Trustee at which, at any particular time, its corporate trust agency is conducted as specified to the Authority and the City by the Trustee in writing. Opinion of Counsel means a written opinion of counsel of recognized national standing in the field of law relating to municipal bonds, appointed and paid by the Authority or the City and which written opinion, if to be delivered to the Trustee, is satisfactory to the Trustee. B-17

94 Outstanding, when used as of any particular time with reference to Bonds, means (subject to the provisions of the Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except: (a) Bonds theretofore canceled by the Trustee or surrendered to the Trustee for cancellation; (b) Bonds with respect to which all liability of the Authority has been discharged in accordance with the Indenture; and (c) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds have been authenticated and delivered by the Trustee pursuant to the Indenture. Owner means, with respect to a Bond, the Person in whose name such Bond is registered on the Registration Books. Participant means any entity which is recognized as a participant by DTC in the book-entry system of maintaining records with respect to Book-Entry Bonds. Participating Underwriter has the meaning ascribed thereto in the Continuing Disclosure Certificate. Permitted Investments means any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein (the Trustee is entitled to rely upon the investment direction of the City as a determination that such investment is a legal investment): (a) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the timely payment of principal of and interest on which are fully and unconditionally guaranteed by the United States of America. (b) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): (i) U.S. Export-Import Bank (Eximbank) Direct obligations or fully guaranteed certificates of beneficial ownership; (ii) Farmers Home Administration (FmHA) Certificates of beneficial ownership; (iii) Federal Financing Bank; (iv) Federal Housing Administration Debentures (FHA); (v) General Services Administration Participation certificates; (vi) Government National Mortgage Association (GNMA or Ginnie Mae ) GNMA guaranteed mortgage-backed bonds; GNMA guaranteed pass-through obligations; (vii) U.S. Maritime Administration Guaranteed Title XI financing; and (viii) U.S. Department of Housing and Urban Development (HUD) Project Notes; Local Authority Bonds; New Communities Debentures U.S. government guaranteed debentures; and U.S. Public Housing Notes and Bonds U.S. government guaranteed public housing notes and bonds. (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself): (i) Federal Home Loan Bank System Senior debt obligations; (ii) Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac ) Participation Certificates; and Senior debt obligations; (iii) Federal National Mortgage Association (FNMA or Fannie Mae ) Mortgagebacked securities and senior debt obligations; (iv) Student Loan Marketing Association (SLMA or Sallie Mae ) Senior debt obligations; (v) Resolution Funding Corp. (REFCORP) obligations; and (vi) Farm Credit System Consolidated systemwide bonds and notes. (d) Money market mutual funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of AAAm- G; AAA-m; or AA-m and if rated by Moody s rated Aaa, Aa1 or Aa2, including funds for which the Trustee and its affiliates provide investment advisory, custodial transfer agency and other management services, and receive and retain a fee for such services provided to the fund. B-18

95 (e) Certificates of deposit (including those placed by a third party pursuant to a separate agreement between the Authority and the Trustee) secured at all times by collateral described in clauses (a) and/or (b) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks or mutual savings banks whose short term obligations are rated A-1+ or better by S&P and Prime-1 by Moody s. The collateral must be held by a third party and the bondholders must have a perfected first security interest in the collateral. (f) Bank deposit products, certificates of deposit (including those placed by a third party pursuant to a separate agreement between the Authority and the Trustee), savings accounts, deposit accounts, including time deposits, trust funds, trust accounts, overnight bank deposits, interest bearing accounts, interest bearing money market accounts, banker s acceptances, money market deposits which are fully insured by FDIC, including BIF and SAIF, including those of the Trustee and its affiliates. (g) (h) by S&P. Investment agreements, including guaranteed investment contracts. Commercial paper rated, at the time of purchase, Prime-1 by Moody s and A-1 or better (i) Bonds or notes issued by any state or municipality which are rated by Moody s and S&P in one of the two highest long-term rating categories assigned by such agencies. (j) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of Prime-1 or A3 or better by Moody s and A-1+ or better by S&P. (k) Repurchase agreements or reverse repurchase agreements (Repos) that provide for the transfer of securities from a dealer bank or securities firm (seller/borrower) to the Trustee (buyer/lender), and the transfer of cash from the Trustee to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the Trustee in exchange for the securities at a specified date. Repos must satisfy the following criteria: (a) Repos must be among the City, the Trustee and a dealer bank or securities firm; (i) Primary dealers on the Federal Reserve reporting dealer list which are rated A or better by S&P and Moody s; or (ii) Banks rated A or above by S&P and Moody s; (b) The written repo contract must include the following: (i) Securities which are acceptable for transfer are: (I) Direct U.S. Governments; or (II) Federal agencies backed by the full faith and credit of the U.S. government (and FNMA & FHLMC); (ii) The term of the repo may be up to 30 days; (iii) The collateral must be delivered to the City or the Trustee (if Trustee is not supplying the collateral) or third party acting as agent for the Trustee (if the trustee is supplying the collateral) before/simultaneous with payment (perfection by possession of certificated securities); (iv) Valuation of Collateral: (I) The securities must be valued weekly, marked-to-market at current market price plus accrued interest; (II) The value of collateral must be equal to 104% of the amount of cash transferred by the City or the Trustee, on behalf of the City, to the dealer bank or security firm under the repo plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by District or the Trustee, on behalf of the City, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%; and (III) legal opinion which must be delivered to the City and the Trustee. Repos must also meet guidelines under state law for legal investment of public funds. (l) The Local Agency Investment Fund of the State, created pursuant to Section of the California Governmental Code, to the extent that the Trustee is authorized to register such investment in its own name. B-19

96 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 Fund means the fund by that name established in accordance with the Indenture. Project has the meaning set forth in the recitals to the Indenture. Project Costs means all costs of acquiring, constructing and installing the 2017 Project, including, but not limited to: (a) all costs which the Authority or the City are required to pay to a seller or any other person under the terms of any contract or contracts for the purchase of the 2017 Project; (b) all costs which the Authority or the City are required to pay a contractor or any other person for the acquisition, construction and installation of the 2017 Project; (c) obligations of the Authority or the City incurred for services (including obligations payable to the Authority or the City for actual out-of-pocket expenses of the Authority or the City) in connection with the acquisition, construction and installation of the 2017 Project, including reimbursement to the Authority or the City for all advances and payments made in connection with the 2017 Project prior to or after delivery of the Bonds; (d) the actual out-of-pocket costs of the Authority or the City for test borings, surveys, estimates and preliminary investigations therefor, as well as for the performance of all other duties required by or consequent to the proper acquisition, construction and installation of the 2017 Project, including administrative expenses under the Lease Agreement and hereunder relating to the acquisition, construction and installation of the 2017 Project; and (e) any sums required to reimburse the Authority or the City for advances made by the Authority or the City for any of the above items or for any other costs incurred and for work done by the Authority or the City which are properly chargeable to the 2017 Project. Rebate Fund means the fund by that name established in accordance with the Indenture. Rebate Requirement has the meaning ascribed thereto in the Tax Certificate. Record Date means the fifteenth day of the month next preceding an Interest Payment Date, whether or not such day is a Business Day. Redemption Fund means the fund by that name established in accordance with the Indenture. Redemption Price means the aggregate amount of principal of, accrued interest to the date of redemption on and premium, if any, on the Bonds upon the redemption thereof pursuant to the Indenture. Registration Books means the records maintained by the Trustee for the registration of ownership and registration of transfer of the Bonds pursuant to the Indenture. Rental Payments means, collectively, the Base Rental Payments and the Additional Rental Payments. Rental Period means the period from the Closing Date through September 30, 2018 and, thereafter, the twelve-month period commencing on October 1 of each year during the term of the Lease Agreement. Representation Letter means the Letter of Representations from the Authority to DTC, or any successor securities depository for any Series of Book-Entry Bonds, in which the Authority makes certain representations with respect to issues of its securities for deposit by DTC or such successor depository. S&P means S&P Global Ratings, a Standard & Poor s Financial Services LLC business, its successors and assigns, except that if such entity no longer performs the functions of a securities rating agency for any reason, the term S&P will be deemed to refer to any other nationally recognized securities rating agency selected by the Authority. B-20

97 Securities Depositories means The Depository Trust Company; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other securities depositories as the Authority may designate in a Written Certificate of the Authority delivered to the Trustee. Series means the Series 2017 Bonds executed, authenticated and delivered on the Closing Date and identified pursuant to the Indenture and any Additional Bonds issued pursuant to a Supplemental Indenture and identified as a separate Series of Bonds. Series 2017 Bonds means the Costa Mesa Financing Authority 2017 Lease Revenue Bonds issued under the Indenture. Supplemental Indenture means any supplemental indenture amendatory of or supplemental to the Indenture, but only if and to the extent that such Supplemental Indenture is specifically authorized thereunder. Tax Certificate means the Tax Certificate executed by the Authority and the City at the time of issuance of the Series 2017 Bonds relating to the requirements of Section 148 of the Code, as originally executed and as it may from time to time be amended in accordance with the provisions thereof. Trustee means U.S. Bank National Association, a national banking association duly organized and existing under and by virtue of the laws of the United States, or any successor thereto as Trustee thereunder, appointed as provided therein Project has the meaning set forth in the recitals to the Indenture. Written Certificate of the Authority and Written Request of the Authority mean, respectively, a written certificate or written request signed in the name of the Authority by an Authorized Authority Representative. Any such certificate or request may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined will be read and construed as a single instrument. Written Certificate of the City and Written Request of the City mean, respectively, a written certificate or written request signed in the name of the City by an Authorized City Representative. Any such certificate or request may, but need, not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined will be read and construed as a single instrument. Equal Security. In consideration of the acceptance of the Bonds by the Owners thereof, the Indenture will be deemed to be and will constitute a contract among the Authority, the City, the Trustee and the Owners from time to time of all Bonds authorized, executed, issued and delivered thereunder and then Outstanding to secure the full and final payment of the principal of, premium, if any, and interest on all Bonds which may from time to time be authorized, executed, issued and delivered thereunder, subject to the agreements, conditions, covenants and provisions contained therein; and all agreements and covenants set forth therein to be performed by or on behalf of the Authority or the City are for the equal and proportionate benefit, protection and security of all Owners of the Bonds without distinction, preference or priority as to security or otherwise of any Bonds over any other Bonds by reason of the number or date thereof or the time of authorization, sale, execution, issuance or delivery thereof or for any cause whatsoever, except as expressly provided therein. THE BONDS Transfer and Exchange of Bonds. Any Bond may, in accordance with its terms, be transferred upon the Registration Books by the Person in whose name it is registered, in person or by such person s duly authorized attorney, upon surrender of such Bond for cancellation, accompanied by delivery of a written instrument of transfer, duly executed in a form acceptable to the Trustee. Whenever any Bond or Bonds are B-21

98 surrendered for transfer, the Authority will execute and the Trustee will authenticate and deliver a new Bond or Bonds of the same Series in a like aggregate principal amount, in any Authorized Denomination. The Trustee will require the Bond Owner requesting such transfer to pay any tax or other governmental charge required to be paid with respect to such transfer. The Bonds may be exchanged at the Office of the Trustee for a like aggregate principal amount of Bonds of the same Series of other Authorized Denominations. The Trustee will require the payment by the Bond Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. The Trustee is not obligated to make any transfer or exchange of Bonds of a Series pursuant to the Indenture during the period established by the Trustee for the selection of Bonds of such Series for redemption, or with respect to any Bonds of such Series selected for redemption. Registration Books. The Trustee will keep or cause to be kept, at the Office of the Trustee, sufficient records for the registration and transfer of ownership of the Bonds, which will be open to inspection during regular business hours and upon reasonable notice by the City; and, upon presentation for such purpose, the Trustee will, under such reasonable regulations as it may prescribe, register or transfer or cause to be registered or transferred, on such records, the ownership of the Bonds as provided in the Indenture. Temporary Bonds. The Bonds of a Series may be issued in temporary form exchangeable for definitive Bonds of such Series when ready for delivery. Any temporary Bonds may be printed, lithographed or typewritten, will be of such authorized denominations as may be determined by the Authority, will be in fully registered form without coupons and may contain such reference to any of the provisions of the Indenture as may be appropriate. Every temporary Bond will be executed by the Authority and authenticated by the Trustee upon the same conditions and in substantially the same manner as the definitive Bonds. If the Authority issues temporary Bonds of a Series, it will execute and deliver definitive Bonds of such Series as promptly thereafter as practicable, and thereupon the temporary Bonds of such Series may be surrendered, for cancellation, at the Office of the Trustee and the Trustee will authenticate and deliver in exchange for such temporary Bonds an equal aggregate principal amount of definitive Bonds of such Series in Authorized Denominations. Until so exchanged, the temporary Bonds of such Series are entitled to the same benefits under the Indenture as definitive Bonds of such Series authenticated and delivered thereunder. Bonds Mutilated, Lost, Destroyed or Stolen. If any Bond becomes mutilated, the Authority, at the expense of the Owner of said Bond, will execute, and the Trustee will thereupon authenticate and deliver, a new Bond of like tenor and Series 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 will be canceled by it and delivered to, or in accordance with the order of, the Authority. If any Bond is lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee and, if such evidence and indemnity satisfactory to the Trustee is given, the Authority, at the expense of the Owner, will execute, and the Trustee will thereupon authenticate and deliver, a new Bond of like tenor and Series in lieu of and in replacement for the Bond so lost, destroyed or stolen (or if any such Bond has matured or has been selected for redemption, instead of issuing a replacement Bond, the Trustee may pay the same without surrender thereof). The Authority may require payment by the Owner of a sum not exceeding the actual cost of preparing each replacement Bond issued under the Indenture and of the expenses which may be incurred by the Authority and the Trustee. Any Bond of a Series issued under the provisions of the Indenture in lieu of any Bond of such Series alleged to be lost, destroyed or stolen will constitute an original additional contractual obligation on the part of the Authority whether or not the Bond so alleged to be lost, destroyed or stolen be at any time enforceable by anyone, and will be entitled to the benefits of the Indenture with all other Bonds of such Series secured by the Indenture. B-22

99 Book-Entry Bonds. (a) Prior to the issuance of a Series of Bonds, the Authority may provide that such Series of Bonds will initially be issued as Book-Entry Bonds and, in such event, the Bonds of such Series for each maturity will be in the form of a separate single fully registered Bond (which may be typewritten). The Series 2017 Bonds will initially be issued as Book-Entry Bonds. Except as provided in the Indenture, the registered Owner of all of the Book-Entry Bonds will be Cede & Co., as nominee of DTC. Notwithstanding anything to the contrary contained in the Indenture, payment of interest with respect to any Book-Entry Bond registered as of each Record Date in the name of Cede & Co. will be made by wire transfer of same-day funds to the account of Cede & Co. on the Interest Payment Date at the address indicated on the Record Date for Cede & Co. in the Registration Books or as otherwise provided in the Representation Letter. (b) The Trustee and the Authority may treat DTC (or its nominee) as the sole and exclusive Owner of Book-Entry Bonds registered in its name for the purposes of payment of the principal, premium, if any, or interest with respect to Book-Entry Bonds, selecting Book-Entry Bonds or portions thereof to be redeemed, giving any notice permitted or required to be given to Owners of Book-Entry Bonds under the Indenture, registering the transfer of Book-Entry Bonds, obtaining any consent or other action to be taken by Owners of Book-Entry Bonds and for all other purposes whatsoever, and neither the Trustee nor the Authority will be affected by any notice to the contrary. Neither the Trustee nor the Authority have any responsibility or obligation to any Participant, any person claiming a beneficial ownership interest in Book-Entry Bonds under or through DTC or any Participant, or any other person which is not shown on the Registration Books as being an Owner, with respect to the accuracy of any records maintained by DTC or any Participant, the payment by DTC or any Participant of any amount in respect of the principal, premium, if any, or interest with respect to Book-Entry Bonds, any notice which is permitted or required to be given to Owners of Book-Entry Bonds under the Indenture, the selection by DTC or any Participant of any person to receive payment in the event of a partial redemption of Book-Entry Bonds, or any consent given or other action taken by DTC as Owner of Book-Entry Bonds. The Trustee will pay all principal, premium, if any and interest with respect to Book-Entry Bonds, only to DTC, and all such payments will be valid and effective to fully satisfy and discharge the Authority s obligations with respect to the principal, premium, if any, and interest with respect to the Book- Entry Bonds to the extent of the sum or sums so paid. Except under the conditions of the Indenture, no person other than DTC will receive an executed Book-Entry Bond for each separate stated maturity. 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 Cede & Co., and subject to the provisions in the Indenture with respect to record dates, the term Cede & Co. in the Indenture will refer to such new nominee of DTC. (c) In the event that: (i) DTC, including any successor as securities depository for a Series of Bonds, determines not to continue to act as securities depository for such Series of Bonds; or (ii) the Authority determines that the incumbent securities depository will no longer so act, and delivers a written certificate to the Trustee to that effect, then the Authority will discontinue the book-entry system with the incumbent securities depository for such Series of Bonds. If the Authority determines to replace the incumbent securities depository for such Series of Bonds with another qualified securities depository, the Authority will prepare or direct the preparation of a new single, separate fully registered Bond of such Series for the aggregate outstanding principal amount of Bonds of such Series of each maturity, registered in the name of such successor or substitute qualified securities depository, or its nominee, or make such other arrangement acceptable to the Authority, the Trustee and the successor securities depository for the Bonds of such Series as are not inconsistent with the terms of the Indenture. If the Authority fails to identify another qualified successor securities depository for such Series of Bonds to replace the incumbent securities depository, then the Bonds of such Series will no longer be restricted to being registered in the Registration Books in the name of the incumbent securities depository or its nominee, but will be registered in whatever name or names the incumbent securities depository for such Series of Bonds, or its nominee, designate. In such event the Authority will execute, and deliver to the Trustee, a sufficient quantity of Bonds of such Series B-23

100 to carry out the transfers and exchanges provided in the Indenture. All such Bonds of such Series will be in fully registered form in Authorized Denominations. (d) Notwithstanding any other provision of the Indenture to the contrary, so long as any Book-Entry Bond is registered in the name of DTC, or its nominee, all payments with respect to the principal, premium, if any, and interest with respect to such Book-Entry Bond and all notices with respect to such Book- Entry Bond will be made and given, respectively, as provided in the Representation Letter. (e) In connection with any notice or other communication to be provided to Owners of Book-Entry Bonds pursuant to the Indenture by the Authority, the City or the Trustee with respect to any consent or other action to be taken by Owners, the Authority, the City or the Trustee, as the case may be, will establish a record date for such consent or other action and give DTC notice of such record date not less than 15 calendar days in advance of such record date to the extent possible. Construction Fund. ISSUANCE OF BONDS; APPLICATION OF PROCEEDS (a) The Trustee will establish and maintain a separate fund designated the Construction Fund. On the Closing Date there will be deposited in the Construction Fund the amount specified in the Indenture. (b) The moneys in the Construction Fund will be used and withdrawn by the Trustee from time to time to pay Project Costs upon submission of a Written Request of the City in substantially the form attached to the Indenture stating: (i) the Person to whom payment is to be made; (ii) the amount to be paid, together with payment instructions; (iii) the purpose for which the obligation was incurred; (iv) that such payment constitutes a Project Cost and is a proper charge against the Construction Fund; and (v) that such amounts have not been the subject of a prior disbursement from the Construction Fund, in each case together with a statement or invoice for each amount requested thereunder. Each such Written Request of the City will be sufficient evidence to the Trustee of the facts stated therein and the Trustee has no duty to confirm the accuracy of such facts. (c) Upon the filing of a Written Certificate of the City stating that the 2017 Project has been completed and that all Project Costs have been paid, the Trustee will transfer and apply the amount, if any, remaining in the Construction Fund: (x) if such amount is equal to or greater than $50,000, to the Redemption Fund to be used to optionally redeem Bonds, provided that the amount so transferred does not exceed the amount required to provide for the redemption of all Outstanding Bonds; and (y) if such amount is less than $50,000, to the Base Rental Payment Fund to be used for the purposes thereof, and the Construction Fund will thereafter be closed. Conditions for the Issuance of Additional Bonds. The Authority may at any time issue one or more Series of Additional Bonds (in addition to the Series 2017 Bonds) payable from Base Rental Payments as provided in the Indenture on a parity with all other Bonds theretofore issued under the Indenture, but only subject to the following conditions, which have been made conditions precedent to the issuance of such Additional Bonds: (a) The issuance of such Additional Bonds has been authorized under and pursuant to the Indenture and has been provided for by a Supplemental Indenture which specifies the following: (1) the application of the proceeds of the sale of such Additional Bonds; (2) the principal amount and designation of such Series of Additional Bonds and the denomination or denominations of the Additional Bonds; (3) the date, the maturity date or dates, the interest payment dates and the dates on which mandatory sinking fund redemptions, if any, are to be made for such Additional Bonds; provided, however, that: (i) the serial Bonds of such Series of Additional Bonds will be payable as to principal annually on October 1 of each year in which principal falls due, and the term Bonds of such Series of Additional Bonds have annual mandatory sinking B-24

101 fund redemptions on October 1; (ii) the Additional Bonds will be payable as to interest semiannually on April 1 and October 1 of each year, except that the first installment of interest may be payable on either April 1 or October 1 and will be for a period of not longer than twelve months and the interest will be payable thereafter semiannually on April 1 and October 1; (iii) all Additional Bonds of a Series of like maturity will be identical in all respects, except as to number or denomination; and (iv) serial maturities of serial Bonds or mandatory sinking fund redemptions for term Bonds, or any combination thereof, will be established to provide for the redemption or payment of such Additional Bonds on or before their respective maturity dates; (4) the redemption premiums and terms, if any, for such Additional Bonds; (5) the form of such Additional Bonds; and (6) such other provisions that are appropriate or deemed necessary by the Authority and are not inconsistent with the provisions of the Indenture; (b) The Authority is in compliance with all agreements, conditions, covenants and terms contained in the Indenture, in the Lease Agreement and in the Ground Lease required to be observed or performed by it; (c) The City is in compliance with all agreements, conditions, covenants and terms contained in the Indenture, in the Lease Agreement and in the Ground Lease required to be observed or performed by it; and (d) The Ground Lease has been amended, to the extent necessary, and the Lease Agreement has been amended so as to increase the Base Rental Payments payable by the City thereunder by an aggregate amount equal to the principal of and interest on such Additional Bonds, payable at such times and in such manner as may be necessary to provide for the payment of the principal of and interest on such Additional Bonds; provided, however, that no such amendment will be made such that the sum of Base Rental Payments, including any increase in the Base Rental Payments as a result of such amendment, plus Additional Rental Payments, in any Rental Period is in excess of the annual fair rental value of the Property after taking into account the use of the proceeds of any Additional Bonds issued in connection therewith (evidence of the satisfaction of such condition will be made by a Written Certificate of the City); and Nothing contained in the Indenture limits the issuance of any bonds or other obligations payable from Base Rental Payments if, after the issuance and delivery of such bonds or other obligations, none of the Bonds theretofore issued under the Indenture will be Outstanding. Notwithstanding satisfaction of the other conditions to the issuance of Additional Bonds set forth in the Indenture, Additional Bonds may not be issued if an Event of Default (or any event which, once all notice or grace periods have passed, would constitute an Event of Default) exists, unless such default will be cured upon such issuance. Procedure for the Issuance of Additional Bonds. At any time after the sale of any Additional Bonds in accordance with the Act, such Additional Bonds will be executed by the Authority for issuance under the Indenture and will be delivered to the Trustee and thereupon swill be authenticated and delivered by the Trustee, but only upon receipt by the Trustee of the following: (a) Certified copies of the Supplemental Indenture authorizing the issuance of such Additional Bonds, the amendment to the Lease Agreement required by the Indenture and the amendment to the Ground Lease, if any, required by the Indenture, together with satisfactory evidence that such amendment to the Lease Agreement and such amendment to the Ground Lease, if any, have been duly recorded; (b) A Written Request of the Authority as to the delivery of such Additional Bonds; (c) An opinion of Bond Counsel substantially to the effect that: (i) the Indenture (including all Supplemental Indentures), the Lease Agreement (including the amendment thereto required by the Indenture) and the Ground Lease (including any amendment thereto required by the Indenture) have been B-25

102 duly authorized, executed and delivered by, and constitute the valid and binding obligations of, the Authority and the City, enforceable in accordance with their terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors rights and by the application of equitable principles and by the exercise of judicial discretion in appropriate cases and subject to the limitations on legal remedies against political subdivisions in the State of California); (ii) such Additional Bonds constitute valid and binding special obligations of the Authority payable solely from Base Rental Payments as provided in the Indenture and are enforceable in accordance with their terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors rights and by the application of equitable principles and by the exercise of judicial discretion in appropriate cases and subject to the limitations on legal remedies against political subdivisions in the State of California); and (iii) the issuance of such Additional Bonds, in and of itself, will not adversely affect the exclusion of interest on the Bonds Outstanding prior to the issuance of such Additional Bonds from gross income for federal income tax purposes; been met; (d) a Written Certificate of the Authority that the requirements of the Indenture have (e) a Written Certificate of the City that the requirements of the Indenture and the Lease Agreement have been met, and a Written Certificate of the City as to the fair rental value of the Property, after giving effect to the execution and delivery of the Additional Bonds, and to the use of proceeds received therefrom; and (f) Such further documents as are required by the provisions of the Indenture or by the provisions of the Supplemental Indenture authorizing the issuance of such Additional Bonds. Additional Bonds. So long as any of the Bonds remain Outstanding, the Authority will not issue any Additional Bonds or obligations payable from the Base Rental Payments, except pursuant to the Indenture. SECURITY FOR BONDS; FLOW OF FUNDS; INVESTMENTS Pledge; Special Obligations. All obligations of the Authority under the Indenture are special obligations of the Authority, payable solely from Rental Payments and the other assets pledged therefor thereunder; provided, however, that all obligations of the Authority under the Bonds are special obligations of the Authority, payable solely from Base Rental Payments and the other assets pledged therefor thereunder. Neither the faith and credit nor the taxing power of the Authority, the City or the State of California, or any political subdivision thereof, is pledged to the payment of the Bonds. Flow of Funds. (a) The Trustee will establish and maintain separate funds designated the Base Rental Payment Fund, the Interest Fund, the Principal Fund, the Redemption Fund and the Net Insurance Proceeds Fund. All Base Rental Payments will be paid directly by the City to the Trustee, and if received by the Authority at any time will be transferred by the Authority with the Trustee within one Business Day after the receipt thereof. All Base Rental Payments received by the Trustee will be deposited by the Trustee in the Base Rental Payment Fund. (b) The Trustee will transfer the amounts on deposit in the Base Rental Payment Fund, at the times and in the manner provided in the Indenture, to the following respective funds: (i) Interest Fund. On the Business Day immediately preceding each Interest Payment Date, the Trustee will transfer from the Base Rental Payment Fund to the Interest Fund the amount, if any, necessary to cause the amount on deposit in the Interest Fund to be equal to the interest due on the Bonds on such Interest Payment Date. B-26

103 (ii) Principal Fund. On the Business Day immediately preceding each October 1, commencing October 1, 2018, the Trustee will transfer from the Base Rental Payment Fund to the Principal Fund the amount, if any, necessary to cause the amount on deposit in the Principal Fund to be equal to the principal amount of the Bonds due on such October 1 either as a result of the maturity thereof or mandatory sinking fund redemption payments required to be made with respect thereto. Moneys in the Principal Fund will be used by the Trustee for the purpose of paying the principal of the Bonds when due and payable at their maturity dates or upon earlier mandatory sinking fund redemption. (iii) Redemption Fund. The Trustee, on the redemption date specified in the Written Request of the City filed with the Trustee at the time that any prepaid Base Rental Payment is paid to the Trustee pursuant to the Lease Agreement, will deposit in the Redemption Fund that amount of moneys representing the portion of the Base Rental Payments designated as prepaid Base Rental Payments. Additionally, the Trustee will deposit in the Redemption Fund any amounts required to be deposited therein pursuant to the Indenture. Moneys in the Redemption Fund will be used by the Trustee for the purpose of paying the principal of and interest and premium, if any, on Series 2017 Bonds redeemed pursuant to the provisions of the Indenture and Additional Bonds redeemed pursuant to the corresponding provisions of the Supplemental Indenture pursuant to which such Additional Bonds are issued; provided, however, that moneys deposited in the Redemption Fund may also be used to purchase Outstanding Series 2017 Bonds or Additional Bonds in the manner provided in the Indenture. Purchases of Outstanding Series 2017 Bonds or Additional Bonds may be made by the Authority at public or private sale as and when and at such prices as the Authority may in its discretion determine, but only at prices (including brokerage or other expenses) not more than par plus accrued interest, plus, in the case of moneys set aside for an optional redemption or an extraordinary redemption, the premium applicable at the next following call date according to the premium schedule established pursuant to the redemption provisions of the Indenture, as applicable, or in the case of Additional Bonds the premium established in any Supplemental Indenture. Any accrued interest payable upon the purchase of Series 2017 Bonds or Additional Bonds may be paid from the amount reserved in the Interest Fund. (iv) Surplus. Moneys on deposit in the Base Rental Payment Fund not necessary to make any of the payments required above may be expended by the Authority at any time for any purpose permitted by law as directed by the Authority. (c) Upon receipt of a Written Certificate of the City pursuant to the Lease Agreement that the City has commenced repairs of the Property, the Trustee will transfer moneys from the Redemption Fund at the times and in the manner required by the Indenture if and to the extent there are insufficient funds in the Base Rental Payment Fund to make such transfers. Upon receipt of a Written Certificate of the City pursuant to the Lease Agreement that the City has completed repairs of the Property and will recommence to make Base Rental Payments or that the City has determined not to make such repairs and made the certifications required pursuant to the Lease Agreement, the Trustee will transfer any funds remaining on deposit in the Redemption Fund to the City for any lawful use. Application of Net Insurance Proceeds. If the Property or any portion thereof is damaged or destroyed, subject to the further requirements of the Indenture, the City will, as expeditiously as possible, continuously and diligently prosecute or cause to be prosecuted the repair or replacement thereof, unless the City elects not to repair or replace the Property or the affected portion thereof in accordance with the provisions of the Indenture. The Net Insurance Proceeds (other than Net Insurance Proceeds of rental interruption insurance), including the proceeds of any self-insurance, received on account of any damage or destruction of the Property or a portion thereof will as soon as possible be deposited with the Trustee and be held by the Trustee in the Net Insurance Proceeds Fund and made available for and, to the extent necessary, will be applied to the cost of repair or replacement of the Property or the affected portion thereof upon receipt of a Written Request of the City, together with invoices therefor. Each such Written Request of the City will be sufficient evidence to the B-27

104 Trustee of the facts stated therein and the Trustee has no duty to confirm the accuracy of such facts. Pending such application, such proceeds may be invested by the Trustee as directed by the City in Permitted Investments that mature not later than such times moneys are expected to be needed to pay such costs of repair or replacement. Notwithstanding the foregoing, the City will, within 60 days of the occurrence of the event of damage or destruction, notify the Trustee in writing as to whether the City intends to replace or repair the Property or the portions of the Property which were damaged or destroyed. If the City does intend to replace or repair the Property or portions thereof, the City will deposit with the Trustee the full amount of any insurance deductible to be credited to the Net Insurance Proceeds Fund. In the event of any damage to or destruction of the Property caused by one of the perils covered by the insurance required by the Lease Agreement which would result in an abatement of rental payments or any portion thereof pursuant thereto, then the City will apply the Net Insurance Proceeds, together with other legally available funds that the City elects to contribute, to the repair, reconstruction or replacement of the damaged or destroyed portions of the Property; provided, however, that the City is not required to repair or replace any portion of the Property pursuant to the Indenture if such Net Insurance Proceeds, together with any other amounts held under the Indenture and any other legally available funds made available by the City at its election, are sufficient to prepay: (i) all of the Outstanding Bonds; or (ii) a portion of the Outstanding Bonds such that the resulting Base Rental Payments under the Indenture in any Rental Period following such partial prepayment are sufficient to pay in such Rental Period the principal of and interest on all Bonds to remain Outstanding immediately after such partial redemption. If the City is not required to replace or repair the Property, or the affected portion thereof, or to use such amounts to redeem Bonds, in each case as set forth in the Indenture, then such proceeds will, if there is first delivered to the Trustee a Written Certificate of the City to the effect that the annual fair rental value of the Property after such damage or destruction, and after any repairs or replacements made as a result of such damage or destruction, is at least equal to 100% of the maximum amount of Base Rental Payments becoming due under the Lease Agreement in the then current Rental Period or any subsequent Rental Period and the fair replacement value of the Property after such damage or destruction is at least equal to the principal amount of the Outstanding Bonds, be paid to the City to be used for any lawful purpose. The proceeds of any award in eminent domain received in respect to the Property will be deposited by the Trustee in the Redemption Fund and applied to the redemption of Bonds pursuant to the Indenture and the corresponding provisions of any Supplemental Indenture pursuant to which Additional Bonds are issued. Title Insurance. Proceeds of any policy of title insurance received by the Trustee in respect of the Property will be applied and disbursed by the Trustee as follows: (a) if the City determines that the title defect giving rise to such proceeds has not substantially interfered with its use and occupancy of the Property and will not result in an abatement of Rental Payments payable by the City under the Lease Agreement, such proceeds will be remitted to the City and used for any lawful purpose thereof; or (b) if the City determines that the title defect giving rise to such proceeds has substantially interfered with its use and occupancy of the Property and will result in an abatement of Rental Payments payable by the City under the Lease Agreement, then, upon written direction of the City, the Trustee will immediately deposit such proceeds in the Redemption Fund and such proceeds will be applied to the redemption of Bonds in the manner provided in the Indenture and the corresponding provisions of any Supplemental Indenture pursuant to which Additional Bonds are issued. Rebate Fund. (a) Establishment. The Trustee will establish a fund for the Bonds designated the Rebate Fund when required in accordance with the Indenture. Absent an Opinion of Counsel that the exclusion from gross income for federal income tax purposes of interest on the Bonds will not be adversely affected, the Authority will cause to be deposited in the Rebate Fund such amounts as are required to be deposited therein pursuant to the Indenture and the Tax Certificate. All money at any time deposited in the B-28

105 Rebate Fund will be held by the Trustee in trust for payment to the United States Treasury. All amounts on deposit in the Rebate Fund for the Bonds will be governed by the Indenture and the Tax Certificate, unless and to the extent that the Authority delivers to the Trustee an opinion of Bond Counsel that the exclusion from gross income for federal income tax purposes of interest on the Bonds will not be adversely affected if such requirements are not satisfied. Notwithstanding anything to the contrary contained in the Indenture or in the Tax Certificate, the Trustee: (1) will be deemed conclusively to have complied with the provisions thereof if it follows all Written Requests of the Authority or Written Requests of the City; (2) has no liability or responsibility to enforce compliance by the Authority or the City with the terms of the Tax Certificate and will not be deemed to have knowledge of the terms thereof; (3) may rely conclusively on the Authority s or the City s calculations and determinations and certifications relating to rebate matters; and (4) has no responsibility to independently make any calculations or determinations or to review the Authority s or the City s calculations or determinations thereunder. (i) Annual Computation. Within 55 days of the end of each Bond Year (as such term is defined in the Tax Certificate), the Authority will 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 (e.g., the temporary investments exceptions of Section 148(f)(4)(B) and the construction expenditures exception of Section 148(f)(4)(C) of the Code), and taking into account whether the election pursuant to Section 148(f)(4)(C)(vii) of the Code (the 1½% Penalty ) has been made), for such purpose treating the last day of the applicable Bond Year as a computation date, within the meaning of Section (b) of the Treasury Regulations (the Rebatable Arbitrage ). The Authority will obtain expert advice as to the amount of the Rebatable Arbitrage to comply with the foregoing provisions. (ii) Annual Transfer. Within 55 days of the end of each Bond Year, upon the Written Request of the Authority or Written Request of the City, an amount will be deposited to the Rebate Fund by the Trustee from any Rental Payments legally available for such purpose (as specified by the Authority or the City in the aforesaid Written Request), if and to the extent required, so that the balance in the Rebate Fund equals the amount of Rebatable Arbitrage so calculated in accordance with clause (i) above. In the event that immediately following the transfer required by the previous sentence, the amount then on deposit to the credit of the Rebate Fund exceeds the amount required to be on deposit therein, upon Written Request of the Authority or Written Request of the City, the Trustee will withdraw the excess from the Rebate Fund and then credit the excess to the Base Rental Payment Fund. (iii) Payment to the Treasury. The Trustee will pay, as directed by Written Request of the Authority, to the United States Treasury, out of amounts in the Rebate Fund: (1) Not later than 60 days after the end of: (X) the fifth Bond Year; and (Y) each applicable fifth Bond Year thereafter, an amount equal to at least 90% of the Rebatable Arbitrage calculated as of the end of such Bond Year; and (2) Not later than 60 days after the payment of all of the Bonds, an amount equal to 100% of the Rebatable Arbitrage calculated as of the end of such applicable Bond Year, and any income attributable to the Rebatable Arbitrage, computed in accordance with Section 148(f) of the Code and Section of the Treasury Regulations. In the event that, prior to the time of any payment required to be made from the Rebate Fund, the amount in the Rebate Fund is not sufficient to make such payment when such payment is due, the Authority will calculate or cause to be calculated the amount of such deficiency and deposit an amount received from any legally available source equal to such deficiency prior to the time such payment is due. Each payment required to be made pursuant to the foregoing provisions will be made to the Internal Revenue Service Center, Ogden, Utah on or before the date on which such payment is due, and will be accompanied by Internal Revenue Service Form 8038-T (prepared by the Authority), or will be made in such other manner as provided under the Code. B-29

106 (b) Disposition of Unexpended Funds. Any funds remaining in the Rebate Fund after redemption and payment of the Bonds and the payments described in clause (a) above being made may be withdrawn by the Authority and utilized in any manner by the Authority. (c) Survival of Defeasance. Notwithstanding anything in the Indenture to the contrary, the obligation to comply with the Rebate Fund requirements of the Indenture will survive the defeasance or payment in full of the Bonds. Investment of Moneys. Except as otherwise provided in the Indenture, all moneys in any of the funds or accounts established pursuant to the Indenture and held by the Trustee will be invested by the Trustee solely in Permitted Investments, as directed in writing by the Authority. Moneys in all funds and accounts held by the Trustee will be invested in Permitted Investments maturing not later than the date on which it is estimated that such moneys will be required for the purposes specified in the Indenture; provided, however, that such Permitted Investments may be redeemed at par so as to be available on each Interest Payment Date. Absent timely written direction from the Authority, the Trustee will hold any funds held by it uninvested. Subject to the provisions of the Indenture, all interest, profits and other income received from the investment of moneys in any fund or account established pursuant to the Indenture will be retained in such fund or account. Permitted Investments acquired as an investment of moneys in any fund established under the Indenture will be credited to such fund. In determining fair market value, the Trustee may use and rely conclusively on any generally recognized securities pricing service available to it (including brokers and dealers in securities). The Trustee may act as principal or agent in the making or disposing of any investment. Upon the Written Request of the Authority, the Trustee will sell or present for redemption any Permitted Investments so purchased whenever it is necessary to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund to which such Permitted Investments is credited, and the Trustee will not be liable or responsible for any loss resulting from any investment made or sold pursuant to the Indenture. For purposes of investment, the Trustee may commingle moneys in any of the funds and accounts established under the Indenture. The Trustee may make any investments under the Indenture through the bond or investment department or trust investment department of the entity acting as Trustee thereunder, or those of such entity s parent or any affiliate, and such entity, or its parent or affiliate, as applicable, is entitled to its normal, customary and reasonable compensation for such services. The entity acting as Trustee under the Indenture, or any of its affiliates, may act as sponsor, advisor or manager in connection with any investments made by the Trustee thereunder and such entity, or its affiliate, as applicable, is entitled to its normal, customary and reasonable compensation for such services. The Authority and the City have acknowledged that, to the extent that regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Authority and the City the right to receive brokerage confirmations of security transactions as they occur, at no additional cost, the Authority and the City have specifically waived receipt of such confirmations to the extent permitted by law. COVENANTS Compliance with Agreements. The Trustee will not authenticate or deliver any Bonds in any manner other than in accordance with the provisions of the Indenture, and the Authority and the City will not suffer or permit any default by them to occur thereunder, but will faithfully comply with, keep, observe and perform all B-30

107 of the agreements, conditions, covenants and terms thereof required to be complied with, kept, observed and performed by them. Compliance with Ground Lease and Lease Agreement. The Authority and the City will faithfully comply with, keep, observe and perform all of the agreements, conditions, covenants and terms contained in the Ground Lease and the Lease Agreement required to be complied with, kept, observed and performed by them and, together with the Trustee, will enforce the Ground Lease and the Lease Agreement against the other party thereto in accordance with their respective terms. Observance of Laws and Regulations. The Authority, the City and the Trustee will faithfully comply with, keep, observe and perform all valid and lawful obligations or regulations now or later imposed on them by contract, or prescribed by any law of the United States of America or of the State of California, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of each and every franchise, right or privilege now owned or later acquired by them, including their right to exist and carry on their respective businesses, to the end that such franchises, rights and privileges are maintained and preserved and do not become abandoned, forfeited or in any manner impaired. Other Liens. The City will keep the Property and all parts thereof free from judgments and materialmen s and mechanics liens and free from all claims, demands, encumbrances and other liens of whatever nature or character, and free from any claim or liability which materially impairs the City in conducting its business or utilizing the Property, and the Trustee at its option (after first giving the City ten days written notice to comply therewith and failure of the City to so comply within such ten-day period) may, but is in no event obligated to, defend against any and all actions or proceedings, or may pay or compromise any claim or demand asserted in any such actions or proceedings; provided, however, that, in defending against any such actions or proceedings or in paying or compromising any such claims or demands, the Trustee will not in any event be deemed to have waived or released the City from liability for or on account of any of its agreements and covenants contained in the Indenture, or from its liability thereunder and to perform such agreements and covenants. So long as any Bonds are Outstanding, none of the Trustee, the Authority or the City will create or suffer to be created any pledge of or lien on the amounts on deposit in any of the funds or accounts created under the Indenture, other than the pledge and lien thereof. The Authority, the City and the Trustee will not encumber the Property other than in accordance with the Ground Lease, the Lease Agreement, the Indenture and the Assignment Agreement. Prosecution and Defense of Suits. The City will promptly, upon request of the Trustee (which request the Trustee is not required to make), take such action from time to time as may be necessary or proper to remedy or cure any cloud upon or defect in the title to the Property or any part thereof, whether now existing or later developing, will prosecute all actions, suits or other proceedings as may be appropriate for such purpose and will indemnify and save the Trustee harmless from all cost, damage, expense or loss, including attorneys fees and expenses, which it or the Owners may incur by reason of any such cloud, defect, action, suit or other proceeding. Accounting Records and Statements. The Trustee will keep proper accounting records in which complete and correct entries are made of all transactions of the Trustee relating to the receipt, deposit and disbursement of the Base Rental Payments, and such accounting records will be available for inspection by the Authority and the City at reasonable hours and under reasonable conditions upon reasonable notice. Recordation and Filing. The City will record, or cause to be recorded, with the appropriate county recorder, the Lease Agreement, the Ground Lease and the Assignment Agreement, or memoranda thereof. Tax Covenants. Notwithstanding any other provision of the Indenture, absent an Opinion of Counsel that the exclusion from gross income of the interest on the Bonds will not be adversely affected for federal B-31

108 income tax purposes, the City and the Authority have covenanted to comply with all applicable requirements of the Code necessary to preserve such exclusion from gross income with respect to the Bonds and have specifically covenanted, without limiting the generality of the foregoing, as follows: (a) Private Activity. The City and the Authority will not take any action or refrain from taking any action or make any use of the proceeds of the Bonds or of any other moneys or property which would cause the Bonds to be private activity bonds within the meaning of Section 141 of the Code; (b) Arbitrage. The City and the Authority will make no use of the proceeds of the Bonds or of any other amounts or property, regardless of the source, and will not take any action or refrain from taking any action which would cause the Bonds to be arbitrage bonds within the meaning of Section 148 of the Code; (c) Federal Guarantee. The City and the Authority will make no use of the proceeds of the Bonds and will not take or omit to take any action that would cause the Bonds to be federally guaranteed within the meaning of Section 149(b) of the Code; (d) Information Reporting. The City and the Authority will take or cause to be taken all necessary action to comply with the informational reporting requirement of Section 149(e) of the Code necessary to preserve the exclusion of interest on the Bonds pursuant to Section 103(a) of the Code; (e) Hedge Bonds. The City and the Authority will make no use of the proceeds of the 2017C Bonds or any other amounts or property, regardless of the source, and will not take any action or refrain from taking any action that would cause the Bonds to be considered hedge bonds within the meaning of Section 149(g) of the Code unless the City and the Authority take all necessary action to assure compliance with the requirements of Section 149(g) of the Code to maintain the exclusion from gross income of interest on the Bonds for federal income tax purposes; and (f) Miscellaneous. The City and the Authority will not take any action or refrain from taking any action inconsistent with its expectations stated in the Tax Certificate and will comply with the covenants and requirements stated therein and incorporated by reference in the Indenture. The foregoing tax covenants are not applicable to, and nothing contained in the Indenture will be deemed to prevent the City and the Authority from causing the Trustee to issue revenue bonds or to execute and deliver contracts payable on a parity with the Bonds, the interest with respect to which has been determined by an Opinion of Counsel to be subject to federal income taxation. Continuing Disclosure. The City will comply with and carry out all of the provisions of the Continuing Disclosure Certificate. Notwithstanding any other provision of the Indenture, failure of the City to comply with the Continuing Disclosure Certificate will not constitute an event of default under the Indenture; provided, however, that the Trustee may (and, at the written direction of any Participating Underwriter or the holders of at least 25% of the aggregate principal amount of Outstanding Bonds, and upon being indemnified to its reasonable satisfaction therefor, will) or any holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order. Further Assurances. Whenever and so often as requested to do so by the Trustee, the Authority and the City will promptly execute and deliver or cause to be executed and delivered all such other and further assurances, documents or instruments and promptly do or cause to be done all such other and further things as may be necessary or reasonably required in order to further and more fully vest in the Trustee all advantages, benefits, interests, powers, privileges and rights conferred or intended to be conferred upon it by the Indenture or by the Assignment Agreement, the Ground Lease or the Lease Agreement and to preserve the priority of the pledge of the Rental Payments under applicable law. B-32

109 DEFAULT AND LIMITATIONS OF LIABILITY Action on Default. If an event of default (within the meaning of the Lease Agreement) happens, then such event of default will constitute an event of default under the Indenture. The Trustee will give notice, as assignee of the Authority, of an event of default under the Lease Agreement to the City to the extent that it has actual knowledge thereof. In each and every case during the continuance of an event of default, the Trustee may and, at the direction of the Owners of not less than a majority of the aggregate principal amount of Bonds then Outstanding, and upon being indemnified to its reasonable satisfaction therefor, will, upon notice in writing to the City and the Authority, exercise any of the remedies granted to the Authority under the Lease Agreement and, in addition, take whatever action at law or in equity may appear necessary or desirable to enforce its rights as assignee pursuant to the Assignment Agreement or to protect and enforce any of the rights vested in the Trustee or the Owners by the Indenture or by the Bonds, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement or for the enforcement of any other legal or equitable right, including any one or more of the remedies set forth in the Indenture. Other Remedies of the Trustee. Subject to the provisions of the Indenture, the Trustee has the right: (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the Authority or the City or any member, director, officer or employee thereof, and to compel the Authority or the City or any such member, director, officer or employee to perform or carry out its or his or her duties under law and the agreements and covenants required to be performed by it or him or her contained in the Indenture; (b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Trustee; or (c) by suit in equity upon the happening of any event of default under the Indenture to require the Authority and the City to account as the trustee of an express trust. Nothing in the Indenture will be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Owner any plan of reorganization, arrangement, adjustment or composition affecting the Bonds or the rights of any Owner thereof, or to authorize the Trustee to vote in respect of the claim of any Owner in any such proceeding without the approval of the Owners so affected. Non-Waiver. A waiver of any default or breach of duty or contract by the Trustee will 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 the Trustee to exercise any right or remedy accruing upon any default or breach of duty or contract will impair any such right or remedy or 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 Trustee by law or by the Indenture may be enforced and exercised from time to time and as often as the Trustee deems expedient. If any action, proceeding or suit to enforce any right or to exercise any remedy is abandoned or determined adversely to the Trustee or any Owner, then subject to any adverse determination, the Trustee, such Owner, the Authority and the City will be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken. Remedies Not Exclusive. Subject to the provisions of the Indenture, no remedy conferred upon or reserved to the Trustee is intended to be exclusive of any other remedy, and each such remedy is cumulative and in addition to every other remedy given under the Indenture or now or later existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by any law. The assertion or employment of any right or remedy under the Indenture, or otherwise, will not prevent the concurrent assertion or employment of any other appropriate right or remedy. No Liability by the Authority to the Owners. Except as expressly provided in the Indenture, the Authority has no any obligation or liability to the Owners with respect to the payment when due of the Base Rental Payments by the City, or with respect to the performance by the City of the other agreements and B-33

110 covenants required to be performed by it contained in the Lease Agreement or the Indenture, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Indenture. No Liability by the City to the Owners. Except for the payment when due of the Base Rental Payments and the performance of the other agreements and covenants required to be performed by it contained in the Lease Agreement, the Ground Lease or the Indenture, the City has no obligation or liability to the Owners with respect to the Indenture or the preparation, execution, delivery or transfer of the Bonds or the disbursement of the Base Rental Payments by the Trustee to the Owners, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Indenture. No Liability of the Trustee to the Owners. Except as expressly provided in the Indenture, the Trustee has no obligation or liability to the Owners with respect to the payment when due of the Base Rental Payments by the City, or with respect to the performance by the Authority or the City of the other agreements and covenants required to be performed by them contained in the Lease Agreement, the Ground Lease or the Indenture. Application of Amounts After Default. All payments received by the Trustee with respect to the rental of the Property after a default by the City pursuant to the Lease Agreement (including, without limitation, any proceeds received in connection with the sale, assignment or sublease of the Authority s right, title and interest in the Ground Lease), and all damages or other payments received by the Trustee for the enforcement of any rights and powers of the Trustee under the Lease Agreement, will be deposited into the Base Rental Payment Fund and as soon as practicable thereafter applied, together with all other funds held under the Indenture (except funds in the Rebate Fund): (a) to the payment of all amounts due to the Trustee under the Indenture; (b) to the payment of all amounts then due for interest on the Bonds, in respect of which, or for the benefit of which, money has been collected (other than Bonds which have become payable prior to such event of default and money for the payment of which is held by the Trustee), ratably without preference or priority of any kind, according to the amounts of interest on such Bonds due and payable; and (c) to the payment of all amounts then due for principal of the Bonds, in respect of which, or for the benefit of which, money has been collected (other than Bonds which have become payable prior to such event of default and money for the payment of which is held by the Trustee), ratably without preference or priority of any kind, according to the amounts of principal of such Bonds due and payable. Trustee May Enforce Claims Without Possession of Bonds. All rights of action and claims under the Indenture or the Bonds may be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee will be brought in its own name as trustee of an express trust, and any recovery of judgment will, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Owners in respect of which such judgment has been recovered. Limitation on Suits. No Owner of any Bond has any right to institute any proceeding, judicial or otherwise, with respect to the Indenture, or for the appointment of a receiver or Trustee, or for any other remedy thereunder, unless: (a) such Owner has previously given written notice to the Trustee of a continuing event of default; (b) the Owners of not less than 25% of the aggregate principal amount of Bonds then Outstanding have made written request to the Trustee to institute proceedings in respect of such event of default in its own name as Trustee thereunder; (c) such Owner or Owners have afforded to the Trustee indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceedings; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60 day period by the Owners of a majority of the aggregate principal amount of Bonds then Outstanding; it being understood and intended that no one or more Owners has any right in any manner whatever by virtue of, or by availing of, any provision of the Indenture to affect, B-34

111 disturb or prejudice the rights of any other Owner, or to obtain or seek to obtain priority or preference over any other Owner or to enforce any right under the Indenture, except in the manner therein provided and for the equal and ratable benefit of all the Owners. THE TRUSTEE Employment of the Trustee. The Authority has appointed and employed the Trustee to receive, deposit and disburse the Base Rental Payments, to authenticate, deliver and transfer the Bonds and to perform the other functions contained in the Indenture, all in the manner provided therein and subject to the conditions and terms thereof. By executing and delivering the Indenture, the Trustee has accepted the appointment and employment referred to therein and accepts the rights and obligations of the Trustee provided therein, subject to the conditions and terms thereof. Other than when an event of default has occurred and is continuing, the Trustee undertakes to perform such duties and only such duties as are specifically set forth in the Indenture, and no implied covenants or obligations may be read into the Indenture against the Trustee. In case an event of default has occurred and is continuing, the Trustee will 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 man would exercise or use under the circumstances in the conduct of his own affairs. Duties, Removal and Resignation of the Trustee. The Authority may, by an instrument in writing, remove the Trustee initially a party to the Indenture and any successor thereto unless an event of default has occurred and then is continuing, and will remove the Trustee initially a party the Indenture and any successor thereto if at any time: (a) requested to do so by an instrument or concurrent instruments in writing signed by the Owners of a majority of the aggregate principal amount of Bonds at the time Outstanding (or their attorneys duly authorized in writing); or (b) the Trustee ceases to be eligible in accordance with the following sentence, and will appoint a successor Trustee. The Trustee and any successor Trustee must be a banking corporation or association or trust company having (or if such banking corporation or association or trust company is a member of a bank holding company, its bank holding company has) a combined capital (exclusive of borrowed capital) and surplus of at least $50,000,000 and subject to supervision or examination by federal or state authorities. If such banking corporation or association 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 purposes of the Indenture the combined capital and surplus of such bank, association or trust company will be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Trustee may at any time resign by giving written notice of such resignation to the Authority and the City and by giving notice, by first class mail, postage prepaid, of such resignation to the Owners at their addresses appearing on the Registration Books. Upon receiving such notice of resignation, the Authority will promptly appoint a successor Trustee by an instrument in writing; provided, however, that in the event that the Authority does not appoint a successor Trustee within 30 days following receipt of such notice of resignation, the resigning Trustee may, at the expense of the Authority, petition the appropriate court having jurisdiction to appoint a successor Trustee. Any resignation or removal of a Trustee and appointment of a successor Trustee will become effective only upon acceptance of appointment by the successor Trustee. Any corporation, association or agency into which the Trustee may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation or transfer to which it is a party, provided that such entity meets the combined capital and surplus requirements of the Indenture, ipso facto, will be and become successor trustee under the Indenture and vested with all the trusts, powers, discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any instrument or any further act, deed or conveyance on the part of any of the parties to the Indenture, anything in the Indenture to the contrary notwithstanding. B-35

112 Compensation of the Trustee. The City will from time to time, subject to any written agreement then in effect with the Trustee, pay the Trustee reasonable compensation for all its services rendered under the Indenture and reimburse the Trustee for all its reasonable advances and expenditures (which will not include overhead expenses except as such expenses are included as a component of the Trustee s stated annual fees) under the Indenture, including but not limited to advances to and reasonable fees and reasonable expenses of accountants, agents, appraisers, consultants or other experts, and counsel not directly employed by the Trustee but an attorney or firm of attorneys retained by the Trustee, employed by it in the exercise and performance of its rights and obligations thereunder. The Trustee may take whatever legal actions are lawfully available to it directly against the Authority or the City. The City will, to the extent permitted by law, indemnify and save the Trustee and its officers, directors, agents and employees harmless against any liabilities, costs, suits, judgments, damages, claims or expenses, including those of its attorneys, which it may incur in the exercise and performance of its powers and duties under the Indenture, under the Lease Agreement, or in connection with any document or transaction contemplated thereunder, including the enforcement of any remedies and the defense of any suit, and which are not due to its negligence or its misconduct. The duty of the City to indemnify the Trustee will survive the termination and discharge of the Indenture and the earlier removal or resignation of the Trustee. No provision of the Indenture requires the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under the Indenture or in the exercise of any of its rights or powers thereunder. Upon an event of default, and only upon an event of default, the Trustee will have a first lien with right of payment prior to payment on account of principal of and premium, if any, and interest on any Bond, upon the trust estate for the foregoing fees, charges and expenses incurred by it. When the Trustee incurs expenses or renders services after the occurrence of an event of default, such expenses and the compensation for such services are intended to constitute expenses of administration under any federal or state bankruptcy, insolvency, arrangement, moratorium, reorganization or other debtor relief law. Protection of the Trustee. The Trustee will be protected and will incur no liability in acting or proceeding in good faith upon any affidavit, bond, certificate, consent, notice, request, requisition, resolution, statement, telegram, voucher, waiver or other paper or document which it in good faith believes to be genuine and to have been adopted, executed or delivered by the proper party or pursuant to any of the provisions of the Indenture, and the Trustee is under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument, but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements. The Trustee is under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request or direction of any of the Owners of the Bonds pursuant thereto, unless such Owners have offered to the Trustee security or indemnity, reasonably satisfactory to the Trustee, against the reasonable costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. The Trustee may consult with counsel, who may be counsel to the Authority or the City, with regard to legal questions, and the opinion of such counsel will be full and complete authorization and protection in respect to any action taken or suffered by it under the Indenture in good faith in accordance therewith. The Trustee is not responsible for the sufficiency of the Bonds or the Lease Agreement, or of the assignment made to it by the Assignment Agreement, or for statements made in any preliminary or final official statement relating to the Bonds, or of the title to the Property. Whenever in the administration of its rights and obligations under the Indenture the Trustee deems it necessary or desirable that a matter be proved or established prior to taking or suffering any action thereunder, such matter (unless other evidence in respect thereof is specifically prescribed) may be deemed to be conclusively proved and established by a Written Certificate of the City or a Written Certificate of the Authority, and such certificate will be full warrant to the Trustee for any action taken or suffered under the B-36

113 provisions of the Indenture upon the faith thereof, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as it deems reasonable. The Trustee may buy, sell, own, hold and deal in any of the Bonds and may join in any action which any Owner may be entitled to take with like effect as if the Trustee were not a party to the Indenture. The Trustee, either as principal or agent, may also engage in or be interested in any financial or other transaction with the Authority or the City, and may act as agent, depository or trustee for any committee or body of Owners or of owners of obligations of the Authority or the City as freely as if it were not the Trustee under the Indenture. The Trustee may, to the extent reasonably necessary, execute any of the trusts or powers of the Indenture and perform any rights and obligations required of it thereunder by or through agents, attorneys or receivers, and is entitled to advice of counsel concerning all matters of trust and its rights and obligations under the Indenture, and the Trustee is not answerable for the negligence or misconduct of any such agent, attorney or receiver selected by it with reasonable care; provided, however, that in the event of any negligence or misconduct of any such attorney, agent or receiver, the Trustee will in a commercially reasonable manner pursue all remedies of the Trustee against such agent, attorney or receiver. The Trustee is not liable for any error of judgment made by it in good faith unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. The Trustee will not be answerable for the exercise of any trusts or powers under the Indenture or for anything whatsoever in connection with the funds established under the Indenture, except only for its own willful misconduct or negligence. The Trustee will not be deemed to have knowledge of an event of default unless it has actual knowledge thereof. The Trustee may, on behalf of the Owners, intervene in any judicial proceeding to which the Authority or the City is a party and which, in the opinion of the Trustee and its counsel, affects the Bonds or the security therefor, and will do so if requested in writing by the Owners of at least 5% of the aggregate principal amount of Bonds then Outstanding, provided that the Trustee has no duty to take such action unless it has been indemnified to its reasonable satisfaction against all risk or liability arising from such action. The Trustee s rights to immunities and protection from liability under the Indenture and its rights to payment of its fees and expenses will survive its resignation or removal and final payment or defeasance of the Bonds. All indemnifications and releases from liability granted in the Indenture to the Trustee will extend to the directors, officers, employees and agents of the Trustee. The permissive right of the Trustee to do things enumerated in the Indenture will not be construed as a duty, and the Trustee will not be answerable for other than its negligence or willful default. The Trustee has no responsibility or liability with respect to any information, statements or recitals in any offering memorandum or other disclosure material prepared or distributed with respect to the issuance of these Bonds. The Trustee is not accountable for the use or application by the Borrower of any of the Bonds or the proceeds thereof or for the use or application of any money paid over by the Trustee in accordance with the provisions of the Indenture or for the use and application of money received by any paying agent. The Trustee has the right to accept and act upon instructions, including funds transfer instructions ( Instructions ) given pursuant to the Indenture and delivered using Electronic Means. ( Electronic Means means the following communications methods: , facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Trustee, or another method or system specified by the Trustee as available for use in connection with its services under the B-37

114 Indenture). The Authority and the City will provide to the Trustee an incumbency certificate listing officers with the authority to provide such Instructions ( Authorized Officers ) and containing specimen signatures of such Authorized Officers, which incumbency certificate will be amended by the Authority whenever a person is to be added or deleted from the listing. If the Authority elects to give the Trustee Instructions using Electronic Means and the Trustee in its discretion elects to act upon such Instructions, the Trustee s understanding of such Instructions will be deemed controlling. The Authority has understood and agreed that the Trustee cannot determine the identity of the actual sender of such Instructions and that the Trustee will conclusively presume that directions that purport to have been sent by an Authorized Officer listed on the incumbency certificate provided to the Trustee have been sent by such Authorized Officer. The Authority will be responsible for ensuring that only Authorized Officers transmit such Instructions to the Trustee and that the Authority and all Authorized Officers are solely responsible to safeguard the use and confidentiality of applicable user and authorization codes, passwords and/or authentication keys upon receipt by the Authority. The Trustee will not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee s reliance upon and compliance with such Instructions notwithstanding the fact that such directions conflict or are inconsistent with a subsequent written instruction. The Authority has agreed: (i) to assume all risks arising out of the use of Electronic Means to submit Instructions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized Instructions, and the risk of interception and misuse by third parties; (ii) that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to the Trustee and that there may be more secure methods of transmitting Instructions than the method(s) selected by the Authority; (iii) that the security procedures (if any) to be followed in connection with its transmission of Instructions provide to it a commercially reasonable degree of protection in light of its particular needs and circumstances; and (iv) to notify the Trustee immediately upon learning of any compromise or unauthorized use of the security procedures. The Trustee is not liable to the parties to the Indenture or deemed in breach or default thereunder if and to the extent its performance thereunder is prevented by reason of force majeure. The term force majeure means an occurrence that is beyond the control of the Trustee and could not have been avoided by exercising due care. Force majeure includes but is not limited to acts of God, terrorism, war, riots, strikes, fire, floods, earthquakes, epidemics or other similar occurrences. In acting or omitting to act pursuant to the Assignment Agreement, Lease Agreement, the Ground Lease or any other document executed in connection therewith, the Trustee is entitled to all of the rights, immunities and indemnities accorded to it under the Indenture and the Lease Agreement. Modifications and Amendments Permitted. MODIFICATION OR AMENDMENTS (a) The Indenture and the rights and obligations of the Authority, the City, the Owners of the Bonds and the Trustee may be modified or amended from time to time and at any time by a Supplemental Indenture, which the Authority, the City and the Trustee may enter into with the written consent of the Owners of a majority in aggregate principal amount of all Bonds then Outstanding which have been filed with the Trustee. No such modification or amendment may: (i) extend the fixed maturity of any Bonds, or reduce the amount of principal thereof or the rate of interest thereon, or extend the time of payment, without the consent of the Owner of each Bond so affected; or (ii) reduce the aforesaid percentage of Bonds the consent of the Owners of which is required to effect any such modification or amendment; or (iii) permit the creation of any lien on the Base Rental Payments and other assets pledged under the Indenture prior to or on a parity with the lien created by the Indenture or deprive the Owners of the Bonds of the lien created by the Indenture on such Base Rental Payments and other assets (except as expressly provided in the Indenture), without the consent of the Owners of all of the Bonds then Outstanding. It is not necessary for the consent of the Bond Owners to approve the particular form of any Supplemental Indenture, but it will be sufficient if such consent approves the substance thereof. B-38

115 (b) The Indenture and the rights and obligations of the Authority, the City, the Trustee and the Owners of the Bonds may also be modified or amended from time to time and at any time by a Supplemental Indenture, which the Authority, the City and the Trustee may enter into without the consent of any Bond Owners, for any one or more of the following purposes: (i) to add to the covenants and agreements of the Authority or the City contained in the Indenture other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power therein reserved to or conferred upon the Authority or the City; (ii) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision contained in the Indenture; (iii) to provide for the issuance of one or more Series of Additional Bonds, and to provide the terms and conditions under which such Series of Additional Bonds may be issued, subject to and in accordance with the provisions of the Indenture; (iv) to modify, amend or supplement the Indenture in such manner as to permit the qualification thereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute later in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute; (v) to modify, amend or supplement the Indenture in such manner as to cause interest on the Bonds to be excludable from gross income for purposes of federal income taxation by the United States of America; and (vi) in any other respect whatsoever as the Authority and the City may deem necessary or desirable, provided that such modification or amendment does not materially adversely affect the interests of the Bond Owners under the Indenture, in the opinion of Bond Counsel filed with the Authority, the City and the Trustee. (c) Promptly after the execution by the Authority, the City and the Trustee of any Supplemental Indenture, the Trustee will mail a notice (the form of which will be furnished to the Trustee by the Authority), by first class mail postage prepaid, setting forth in general terms the substance of such Supplemental Indenture, to the Owners of the Bonds at the respective addresses shown on the Registration Books. Any failure to give such notice, or any defect therein, will not, however, in any way impair or affect the validity of any such Supplemental Indenture. (d) No Supplemental Indenture may modify any of the rights or obligations of the Trustee without its prior written consent. (e) In executing, or accepting the additional trusts created by, any Supplemental Indenture permitted by the Indenture or the modification thereby of the trusts created by the Indenture, the Trustee will receive, and will be fully protected in relying upon, an opinion addressed and delivered to the Trustee stating that the execution of such Supplemental Indenture is permitted by and in compliance with the Indenture and that the execution and delivery thereof will not in and of itself adversely affect the exclusion from federal gross income tax of interest on the Bonds. Effect of Supplemental Indenture. Upon the execution of any Supplemental Indenture pursuant to the Indenture, the Indenture will be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under the Indenture of the Authority, the City, the Trustee and all Owners of Bonds Outstanding will thereafter be determined, exercised and enforced thereunder subject in all B-39

116 respects to such modification and amendment, and all of the terms and conditions of any such Supplemental Indenture will be deemed to be part of the terms and conditions of the Indenture for any and all purposes. Endorsement of Bonds; Preparation of New Bonds. Bonds delivered after the execution of any Supplemental Indenture pursuant to the Indenture may, and if the Authority so determines will, bear a notation by endorsement or otherwise in form approved by the Authority and the Trustee as to any modification or amendment provided for in such Supplemental Indenture, and, in that case, upon demand of the Owner of any Bonds Outstanding at the time of such execution and presentation of such Owner s Bonds for such purpose at the Office of the Trustee a suitable notation will be made on such Bonds. If the Supplemental Indenture so provides, new Bonds so modified as to conform, in the opinion of the Authority and the Trustee, to any modification or amendment contained in such Supplemental Indenture, will be prepared and executed by the Authority and authenticated by the Trustee, and upon demand of the Owners of any Bonds then Outstanding will be exchanged at the Office of the Trustee, without cost to any Bond Owner, for Bonds then Outstanding, upon surrender for cancellation of such Bonds, in equal aggregate principal amount of the same interest rate and maturity. Amendment of Particular Bonds. The provisions of the Indenture do not prevent any Bond Owner from accepting any amendment as to the particular Bonds held by such Owner. DEFEASANCE Discharge of Indenture. If the Authority pays or causes to be paid or there is otherwise paid to the Owners of all Outstanding Bonds the principal thereof and the interest and premium, if any, thereon at the times and in the manner stipulated in the Indenture and the Bonds, then the Owners of such Bonds will cease to be entitled to the pledge of the Base Rental Payments and the other assets as provided therein, and all agreements, covenants and other obligations of the Authority and the City to the Owners of such Bonds thereunder will thereupon cease, terminate and become void and be discharged and satisfied. In such event, the Trustee will execute and deliver to the Authority and the City all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee will pay over or deliver to the City all money or securities held by it pursuant to the Indenture which are not required for the payment of the principal of and interest and premium, if any, on such Bonds. Subject to the provisions of the above paragraph, when any of the Bonds have been paid and if, at the time of such payment, the Authority and the City have kept, performed and observed all of the covenants and promises in such Bonds and in the Indenture required or contemplated to be kept, performed and observed by them on or prior to that time, then the Indenture will be considered to have been discharged in respect of such Bonds and such Bonds will cease to be entitled to the lien of the Indenture and such lien and all covenants, agreements and other obligations of the Authority and the City under the Indenture will cease, terminate become void and be completely discharged as to such Bonds. Notwithstanding the satisfaction and discharge of the Indenture or the discharge thereof in respect of any Bonds, those provisions thereof relating to the maturity of the Bonds, interest payments and dates thereof, exchange and transfer of Bonds, replacement of mutilated, destroyed, lost or stolen Bonds, the safekeeping and cancellation of Bonds, non-presentment of Bonds, and the duties of the Trustee in connection with all of the foregoing, will remain in effect and be binding upon the Trustee and the Owners of the Bonds and the Trustee will continue to be obligated to hold in trust any moneys or investments then held by the Trustee for the payment of the principal of and interest and premium, if any, on the Bonds, to pay to the Owners of Bonds the funds so held by the Trustee as and when such payment becomes due. Notwithstanding the satisfaction and discharge of the Indenture or the discharge thereof in respect of any Bonds, those provisions thereof relating to the compensation and indemnity of the Trustee will remain in effect and be binding upon the Trustee, the City and the Authority. B-40

117 Bonds Deemed To Have Been Paid. If moneys have been set aside and held by the Trustee for the payment or redemption of any Bonds and the interest thereon at the maturity or redemption date thereof, such Bonds will be deemed to have been paid within the meaning and with the effect provided in the Indenture. Any Outstanding Bonds will 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 the Indenture if: (a) in case any of such Bonds are to be redeemed on any date prior to their maturity date, the Authority has given to the Trustee in form satisfactory to it irrevocable instructions to mail, on a date in accordance with the provisions of the Indenture, notice of redemption of such Bonds on said redemption date, said notice to be given in accordance with the Indenture; (b) there has been deposited with the Trustee either: (i) money in an amount which is sufficient; or (ii) Federal Securities that are not subject to redemption other than at the option of the holder thereof, 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, will, as verified in writing by an independent certified public accountant, be sufficient to pay when due the interest to become due on such Bonds on and prior to the maturity date or redemption date thereof, as the case may be, and the principal of and premium, if any, on such Bonds; and (c) in the event that such Bonds are not by their terms subject to redemption within the next succeeding 60 days, the Authority has given the Trustee in form satisfactory to it irrevocable instructions to mail as soon as practicable, a notice to the owners of such Bonds that the deposit required by clause (b) above has been made with the Trustee and that such Bonds, are deemed to have been paid in accordance with the Indenture and stating the maturity date or redemption date upon which money is to be available for the payment of the principal of and premium, if any, on such Bonds. Payment of Bonds After Discharge of Indenture. Notwithstanding any provisions of the Indenture, to the extent permitted by law, any moneys held by the Trustee in trust for the payment of the principal of, or premium or interest on, any Bonds and remaining unclaimed for two years after the date of deposit of such moneys, will be repaid to the Authority (without liability for interest) free from the trusts created by the Indenture, and all liability of the Trustee with respect to such moneys will thereupon cease; provided, however, that before the repayment of such moneys to the Authority as aforesaid, the Trustee may (at the cost of the Authority) first mail, by first class mail postage prepaid, to the Owners of Bonds which have not yet been paid, at the respective addresses shown on the Registration Books, a notice, in such form as may be deemed appropriate by the Trustee with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the Authority of the moneys held for the payment thereof. MISCELLANEOUS Benefits of Indenture Limited to Parties. Nothing contained in the Indenture, expressed or implied, is intended to give to any person other than the Authority, the City, the Trustee and the Owners any claim, remedy or right under or pursuant thereto, and any agreement, condition, covenant or term required therein to be observed or performed by or on behalf of the Authority or the City is for the sole and exclusive benefit of the Trustee and the Owners. Successor Deemed Included in all References to Predecessor. Whenever the Authority, the City or the Trustee, or any officer thereof, is named or referred to in the Indenture, such reference will be deemed to include the successor to the powers, duties and functions that are presently vested in the Authority, the City or the Trustee, or such officer, and all agreements, conditions, covenants and terms required by the Indenture to be observed or performed by or on behalf of the Authority, the City or the Trustee, or any officer thereof, will bind and inure to the benefit of the respective successors thereof whether so expressed or not. 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 take acknowledgments of deeds to be recorded in the state or territory in which he purports to act that the B-41

118 person signing such declaration, request or other instrument or writing acknowledged to him the execution thereof, or by an affidavit of a witness of such execution duly sworn to before such notary public or other officer, or by such other proof as the Trustee may accept which it may deem sufficient. The ownership of any Bonds and the amount, payment date, number and date of owning the same may be proved by the Registration Books. Any declaration, request or other instrument in writing of the Owner of any Bond will bind all future Owners of such Bond with respect to anything done or suffered to be done by the Authority, the City or the Trustee in good faith and in accordance therewith. Waiver of Personal Liability. Notwithstanding anything contained in the Indenture to the contrary, no member, officer or employee of the Authority or the City is individually or personally liable for the payment of any moneys, including without limitation, the principal of or interest on the Bonds, but nothing contained therein relieves any member, officer or employee of the City or the Authority from the performance of any official duty provided by any applicable provisions of law, by the Lease Agreement or by the Indenture. Destruction of Bonds. Whenever in the Indenture provision is made for the cancellation by the Trustee and the delivery to the Authority of any Bonds, the Trustee may, in lieu of such cancellation and delivery, destroy such Bonds. Funds and Accounts. Any fund or account required to be established and maintained in the Indenture 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 funds and accounts will at an times be maintained in accordance with sound accounting practice and with due regard for the protection of the security of the Bonds and the rights of the Owners. The Trustee may commingle any of the moneys held by it under the Indenture for investment purposes only; provided, however, that the Trustee will account separately for the moneys in each fund or account established pursuant thereto. The Trustee may establish such funds and accounts as it deems necessary or appropriate to perform its obligations under the Indenture. Partial Invalidity. If any one or more of the agreements, conditions, covenants or terms required in the Indenture to be observed or performed by or on the part of the Authority, the City or the Trustee are contrary to law, then such agreement or agreements, such condition or conditions, such covenant or covenants or such term or terms will be null and void to the extent contrary to law and will be deemed separable from the remaining agreements, conditions, covenants and terms thereof and will in no way affect the validity thereof or of the Bonds, and the Owners will retain all the benefit, protection and security afforded to them under any applicable provisions of law. The Authority, the City and the Trustee have declared that they would have executed the Indenture, and each and every Article, Section, paragraph, subsection, sentence, clause and phrase thereof and would have authorized the execution and delivery of the Bonds pursuant thereto irrespective of the fact that any one or more Articles, Sections, paragraphs, subsections, sentences, clauses or phrases thereof or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid. Disqualified Bonds. In determining whether the Owners of the requisite aggregate principal amount of Bonds have concurred in any demand, request, direction, consent or waiver under the Indenture, Bonds which are actually known by the Trustee to be owned or held by or for the account of the Authority or the City, or by any Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Authority or the City, will be disregarded and deemed not to be Outstanding for the purpose of any such determination; except that, in determining whether the Trustee is protected in relying upon any such demand, request, direction, consent or waiver of an Owner, only Bonds which the Trustee actually knows to be owned or held by or for the account of the Authority or the City, or by any Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Authority or the City, will be B-42

119 disregarded unless all Bonds are so owned or held, in which case such Bonds will be considered Outstanding for the purpose of such determination. Bonds so owned which have been pledged in good faith may be regarded as Outstanding for the purposes of the Indenture if the pledgee establishes to the satisfaction of the Trustee the pledgee s right to vote such Bonds and that the pledgee is not a Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Authority or the City. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel is full protection to the Trustee. Upon request of the Trustee, the Authority and the City will specify in a Written Certificate of the City and Authority those Bonds disqualified pursuant to the Indenture and the Trustee may conclusively rely on such Certificate. Money Held for Particular Bonds. The money held by the Trustee for the payment of the interest, principal or premium due on any date with respect to particular Bonds (or portions of Bonds in the case of Bonds redeemed in part only) will, on and after such date and pending such payment, be set aside on its books and held in trust by it for the Owners of the Bonds entitled thereto, subject, however, to the provisions of the Indenture but without any liability for interest thereon. Payment on Non-Business Days. In the event that any payment is required to be made under the Indenture on a day which is not a Business Day, such payment is made on the next succeeding Business Day with the same effect as if made on such non-business Day. California Law. The Indenture will be construed and governed in accordance with the laws of the State of California. Notice to Rating Agencies. The Trustee will provide S&P, if the Bonds are then rated by S&P, and Moody s, if the Bonds are then rated by Moody s, with prompt notice of any substitution or release of property pursuant to the Lease Agreement. B-43

120 [THIS PAGE INTENTIONALLY LEFT BLANK]

121 APPENDIX C COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY OF COSTA MESA FOR THE YEAR ENDED JUNE 30, 2016

122 [THIS PAGE INTENTIONALLY LEFT BLANK]

123 CITY OF COSTA MESA, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FISCAL YEAR ENDED JUNE 30, 2016

124 Art in Public Places Utility Box Beautification Project PHASE I & PHASE II COMPLETED The City of Costa Mesa Cultural Arts Committee is dedicated to incorporating art into public spaces and is especially interested in incorporating the work of local artists in such spaces whenever possible. A pilot program was launched in early 2015 to spotlight a handful of utility boxes as beautiful art pieces. Five distinct, artistic designs are now spotlighted along the Placentia Avenue corridor on the west-side of the city and one vibrant design is located at the entrance to the OC Fairgrounds, across from Costa Mesa City Hall.

125 CITY OF COSTA MESA, CALIFORNIA Comprehensive Annual Financial Report For the fiscal year ended June 30, 2016 Prepared by: Finance Department Colleen O Donoghue, CPA Assistant Finance Director

126 [THIS PAGE INTENTIONALLY LEFT BLANK]

127 CITY OF COSTA MESA, CALIFORNIA Comprehensive Annual Financial Report For the fiscal year ended June 30, 2016 TABLE OF CONTENTS INTRODUCTORY SECTION: Letter of Transmittal List of Principal Officials Organizational Chart GFOA Certificate of Achievement for Excellence in Financial Reporting Page i vi vii viii FINANCIAL SECTION: Independent Auditors Report 1 Management s Discussion and Analysis (Required Supplementary Information) 5 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Position 18 Statement of Activities 19 Fund Financial Statements: Governmental Funds: Balance Sheet 22 Reconciliation of the Balance Sheet to the Statement of Net Position 25 Statement of Revenues, Expenditures and Changes in Fund Balances 26 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances to the Statement of Activities 29 Proprietary Funds: Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position Statement of Cash Flows 32 Fiduciary Funds: Statement of Net Position 33 Statement of Changes in Net Position 34 Notes to the Basic Financial Statements 35

128 CITY OF COSTA MESA, CALIFORNIA Comprehensive Annual Financial Report For the fiscal year ended June 30, 2016 TABLE OF CONTENTS, (CONTINUED) Page Required Supplementary Information: Fire Safety Plan: Schedule of Proportionate Share of the Net Pension Liability 89 Schedule of Contributions 90 Miscellaneous Plan: Schedule of Changes in the Net Pension Liability and Related Ratios 91 Schedule of Contributions 92 Police Safety Plan: Schedule of Changes in the Net Pension Liability and Related Ratios 93 Schedule of Contributions 94 Police 1% Supplemental Retirement Plan: Schedule of Changes in the Net Pension Liability and Related Ratios 95 Schedule of Contributions 96 Other Post-Employment Benefit Plan: Schedule of Funding Progress 97 Schedule of Revenues, Expenditures and Changes in Fund Balances Budget and Actual: General Fund 100 Housing Authority Special Revenue Fund 102 HOME Program Special Revenue Fund 103 Notes to Required Supplementary Information 104 Supplementary Schedules: Nonmajor Governmental Funds: Combining Balance Sheet Combining Statement of Revenues, Expenditures and 105 Changes in Fund Balances 106 Nonmajor Special Revenue Funds: 107 Combining Balance Sheet 108 Combining Statement of Revenues, Expenditures and Changes in Fund Balances 110 Schedule of Revenues, Expenditures and Changes in Fund Balances Budget and Actual: Special Gas Tax Fund 112 Proposition 172 Fund 113 Air Quality Improvement Fund 114 Community Development Fund 115 Supplemental Law Enforcement Services Fund 116 Narcotics Forfeiture Fund 117 Local Law Enforcement Block Grant Fund 118 Office of Traffic Safety Fund 119

129 CITY OF COSTA MESA, CALIFORNIA Comprehensive Annual Financial Report For the fiscal year ended June 30, 2016 TABLE OF CONTENTS, (CONTINUED) Page Nonmajor Debt Service Fund: 121 Balance Sheet Nonmajor Debt Service 122 Statement of Revenues, Expenditures and Changes in Fund Balances Nonmajor Debt Service 123 Major and Nonmajor Capital Projects Funds: 125 Combining Balance Sheet 126 Combining Statement of Revenues, Expenditures and Changes in Fund Balances Schedule of Revenues, Expenditures and Changes in Fund 128 Balances Budget and Actual: Parking Districts Fund Drainage Fees Fund Traffic Impact Fees Fund 132 Fire System Development Fees Fund 133 Park Development Fund Major Fund Capital Improvements Fund Major Fund Measure M2 Fund Major Fund 136 Internal Service Funds: 137 Combining Statement of Net Position 138 Combining Statement of Revenues, Expenses and Changes in Net Position Combining Statement of Cash Flows Agency Funds: 141 Combining Statement of Fiduciary Assets and Liabilities 142 Combining Statement of Changes in Fiduciary Assets and Liabilities 143 STATISTICAL SECTION: Table Net Position by Component Last Ten Fiscal Years Changes in Net Position Last Ten Fiscal Years Fund Balances of Governmental Funds Last Ten Fiscal Years Changes in Fund Balance of Governmental Funds Last Ten Fiscal Years Tax Revenues by Source, Governmental Funds Last Ten Fiscal Years Taxable Sales by Category Last Ten Calendar Years 6 151

130 CITY OF COSTA MESA, CALIFORNIA Comprehensive Annual Financial Report For the fiscal year ended June 30, 2016 TABLE OF CONTENTS, (CONTINUED) Table Page Principal Sales Tax Remitters by Category Current Year and Nine Years Ago Direct and Overlapping Sales Tax Rates Last Ten Fiscal Years Property Tax Levies and Collections-General Fund Last Ten Fiscal Years Assessed Value and Estimated Actual Value of Taxable Property Last Ten Fiscal Years Direct and Overlapping Property Tax Rates Last Ten Fiscal Years Principal Property Taxpayers Current Year and Nine Years Ago Ratio of General Bonded Debt Outstanding and Legal Debt Margin Last Ten Fiscal Years Ratio of Outstanding Debt by Type - Last Ten Fiscal Years Direct and Overlapping Governmental Activities Debt Demographic and Economic Statistics Last Ten Calendar Years Principal Employers - Current Year and Nine Years Ago Operating Indicators by Function/Program Last Ten Fiscal Years Full Time Equivalent City Government Employees by Function/Program Last Ten Fiscal Years Capital Asset Statistics by Function/Program Last Ten Fiscal Years

131 CITY OF COSTA MESA CALIFORNIA INTRODUCTORY SECTION

132 [THIS PAGE INTENTIONALLY LEFT BLANK]

133 CITY OF COSTA MESA 77 FAIR DRIVE, P,O BOX 1200, COSTA MESA, CA FROM THE OFFICE OF THE FINANCE DIRECTOR -CITY TREASURER November 30, 2016 Honorable Mayor, Councilmembers, and Chief Executive Officer: The Comprehensive Annual Financial Report (CAFR) of the City of Costa Mesa (City) for the fiscal year ended June 30, 2016, is hereby submitted. These statements have been prepared in conformity with Generally Accepted Accounting Principles (GAAP) and audited in accordance with generally accepted auditing standards by an independent public accounting firm of licensed certified public accountants. This report consists of management's representations concerning finances of the City. Responsibility for both accuracy of the data, and completeness and fairness of presentation, including all disclosures, rests with management. To provide a reasonable basis for making these representations, management has established a comprehensive internal control framework that is designed both to protect the government's assets from loss, theft, or misuse and to compile sufficient reliable information for preparation of financial statements in conformity with GAAP. Because the cost of internal controls should not outweigh their benefits, the City's comprehensive framework of internal controls has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatement. As management, we assert that, to the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of various funds and component units of the City. All disclosures necessary to enable the reader to gain an understanding of the City's financial activities have been included. The City's financial statements for the year ended June 30, 2016, have been audited by White Nelson Diehl Evans LLP, an independent public accounting firm of licensed certified public accountants. The independent auditor concluded, based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the City's financial statements for the fiscal year ended June 30, 2016, and that the statements are fairly presented in conformity with GAAP. The independent auditor's report is presented as the first component in the financial section of this report. GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The MD&A can be found immediately following the independent auditor's report.

134 PROFILE OF THE GOVERNMENT The City, incorporated in 1953, has an estimated population of 111,835 and a land area of 16.8 square miles. It is located in the southern coastal area of Orange County, California, and is bordered by the cities of Santa Ana, Newport Beach, Huntington Beach, Fountain Valley, and Irvine. The City is approximately 35 miles southeast of Los Angeles and 85 miles northwest of San Diego. At its nearest point, the City is approximately 1.5 miles from the Pacific Ocean. The City is also home to the world-renowned Henry and Renee Segerstrom Concert Hall, the Segerstrom Center for the Arts, and the Orange County Fairgrounds. The City has operated under the council-manager form of government since incorporation. Policy making and legislative authority are vested in the City Council, which consists of a Mayor, Mayor Pro Tem, and a three-member Council. The City Council is responsible, among other things, for passing ordinances, adopting the budget, appointing members to commissions and committees, appointing the Treasurer, and hiring the Chief Executive Officer and City Attorney. The Chief Executive Officer is responsible for carrying out policies and ordinances approved by the City Council, overseeing the day-to-day operations of the City, and appointing department heads. The City Council is elected at large on a non-partisan basis. Council members are elected to four-year staggered terms, with two or three Council members elected every two years. The City is a "full service city" and provides a wide range of services. These services include: police and fire protection; animal control; emergency medical aid; building safety regulation and inspection; street lighting; land use planning and zoning; housing and community development; maintenance and improvement of streets and related structures; traffic safety, maintenance, and improvement; and a full range of recreational and cultural programs. A "full-service city" is defined as a city that is financially responsible for the full set of basic tax-dependent municipal services within its jurisdiction including police, fire, parks and recreation, streets, and land-use planning. The City maintains budgetary controls, the objective of which is to ensure compliance with legal provisions embodied in the annual budget approved by the City Council. Annual budgets are legally adopted for all governmental funds on a basis consistent with generally accepted accounting principles, except for certain special revenue and debt service funds for which annual budgets are not adopted. Budgetary control for management purposes is maintained as authorized by Council at the department functional level within individual funds. The Chief Executive Officer submits the budget to the City Council, who adopts it prior to the beginning of the fiscal year. Public hearings are conducted prior to budget adoption. Supplemental appropriations, when required during the fiscal year, are also approved by the City Council. Intrafunctional budgetary amendments are approved by the Chief Executive Officer. ECONOMIC CONDITION The City, like other municipalities has continually been burdened by the financial pressures and impacts imposed by Federal, State, and County governments. Since the early 1980's, these governmental units have passed on to municipalities a myriad of unfunded mandates or service/regulatory requirements and also, have eliminated or redistributed significant sources of revenue. Most recently, the State of California dissolved all redevelopment agencies during fiscal year The City continues to meet these challenges to ensure a high level of service to our residents. 11

135 In light of those impacts, the City benefits from its unique positioning both geographically and within its retail sales base. The local economy is primarily based on retail commercial business and light manufacturing of electronics, pharmaceuticals, and plastics. South Coast Plaza Shopping Center is the single largest commercial activity center in the City. Sales volume generated by South Coast Plaza, secures its place as the highest volume regional shopping center in the nation. Sales and property tax revenues generated from this shopping center comprise a significant portion ofthe City'S total tax revenues. In fiscal year 2016, the City'S strong economic base continued to produce solid increases in sales and transient occupancy tax revenues over the prior year. The largest General Fund revenue increase was from sales taxes in the amount of$6.4 million or 12.7%, while expenditures increased by 4.5%. The General Fund had an operating surplus of $22.7 million before net other financing uses of$12.1 million. The City expects the local economy to remain stable with moderate growth in the next fiscal year. Major Developments: MAJOR AND FUTURE DEVELOPMENT INITIATIVES Baker Street Apartment Project (125 East Baker Street) - This proposed development is to be located on a 4.17 acre triangular-shaped parcel. The developer is proposing to replace existing office building and surface parking areas with a five-story 240 unit apartment building and a parking structure. The apartment unit breakdown is proposed as follows: 26 studio and studio plus loft units, 117 one-bedroom and one-bedroom plus loft units, 85 two-bedroom and two-bedroom plus loft units, and 12 three-bedroom and three-bedroom plus loft units. On-site amenities will include common open space, recreation areas, a pool, and a clubhouse. This project was approved by the Planning Commission and City Council in It is currently under construction. The Lighthouse ( Whittier Avenue) - This Plan is for the development of an 89-unit, threestory mixed-use development, and it will consist of 49 residential units and 40 live/work units within the Mesa West Bluffs Plan area. The Planning Commission approved the Plan in November 2014 and is currently under construction. Residential Mid-Rise (580 Anton Blvd) - This project proposes demolition of21,349 square feet of the Lakes Pavilions Retail Center and construction of a 250-unit midrise residential building. This building would consist of five stories for residential purposes above a three level parking garage. It would include 438 parking spaces with additional ancillary retail and amenity spaces. This project is currently under construction. Superior Pointe (1695 Superior Avenue) - In July 2013, City Council screened an Urban Master Plan ("Plan") project for development of29 live/work units. The developer returned in September 2013 for screening of a second Plan project for development of an additional 20 live/work units. These projects were combined into a single development with 49-unit live/work units receiving Planning Commission approval in November This development project is currently under construction. 111

136 Maple Crossing (Intersection of Maple Street and Victoria Street) - The developer for this 37 -unit development has submitted construction plans for plan check. The three-story detached residences will be arranged around a central open space. Private street names and addresses have been assigned for the project. The project consolidates three existing lots (2.28 acres) and replaces 27 apartments, and is currently under construction. Future Developments: City Common (Southwest corner of Harbor Boulevard and Hamilton Street) - This 1.53 acre site is proposed for construction of a single lot detached single family condominium development. This project will consist of 28 two and three-bedroom, three story, detached homes with 27 twocar garages for three-bedroom homes and single-car garages for two-bedroom homes. Open space for the development is proposed at 58 percent ofthe total acreage. Ganahl Lumber Relocation/Expansion (1100 Bristol Street) - This proposed Project would include construction of a new lumberyard and store for Ganahl Lumber Company. The existing store is located on an adjacent property to the south. The new store would replace the existing store with a state-of-the-art building materials facility. The new facility would include a 65,263 square foot main building and 34,000 square feet of shed buildings for various lumber storage/milling activities. This project is currently in plan check. "UFC" Gym (2860 Harbor Blvd.) - This project converts the Mitsubishi Dealership into a 15,000 square foot gym. A conditional use permit for a physical fitness facility was issued. The proposed hours of operation are 24 hours a day, seven days a week. This project was approved by the City Council in September DeNova Homes (929 Baker Street) - This subdivision of a 4.71 acre (205,168 square foot) lot located at 929 Baker Street into a residential development with 56-units of two-story, detached common interest residential development including a 0.10 acre private park. This plan was approved by the City Council in July Independent and Assisted Living Facility (1640 Monrovia Ave) - This project consists of 111 units of independent and assisted living facility in a 4-story building to include amenities such as a fitness center, dance studio, cafe, bar/lounge in addition to a small even space and ancillary office space. This project was approved by City Council in July Self-Storage Facility (375 Bristol Street) - The plans for construction ofa new 90,910 square foot self-storage facility was approved by City Council in November DEBT ADMINTSTRATION The City accounts for general debt service in three different funds that are combined into the Financing Authority Fund in the financial statements. Sources of revenues for retirement of outstanding bonded indebtedness include general property and sales taxes. In September, Moody's Investors Service has upgraded the rating of the City of Costa Mesa's Refunding Certificates of Participation, Series 2003 (Public Facilities Project) and Refunding Certificates of Participation, Series 2007 (Police Facility Expansion) to Aa3 from AI. IV

137 In October 2015, Standard and Poor's Rating Services affirmed its "A" rating and gave a stable outlook for the Costa Mesa Redevelopment Agency outstanding Tax Allocation Bonds. The City continuously reviews existing debt for refunding possibilities to lower total debt service requirements. The City has also adopted a comprehensive set of debt policies covering all aspects of debt issuance in order to consolidate information for debt obligations and maintain or improve its good credit standing. FINANCIAL REPORTING A WARDS The Government Finance Officers Association of the United States and Canada (GFOA) has awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Costa Mesa for its Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, This was the eighteenth consecutive year that the City has received this prestigious award. In order to be awarded a Certificate of Achievement for Excellence in Financial Reporting, the City published an easily readable and efficiently organized CAFR whose contents conformed to program standards. Such reports must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our June 30, 2016 report continues to conform to the Certificate of Achievement program requirements and it will be submitted to the GFOA to determine its eligibility for the Certificate. ACKNOWLEDGEMENTS Special recognition is extended to the entire Finance Department staff for their ongoing dedication and efficient services provided to all City departments and citizens on a daily basis. Special appreciation is also extended specifically to Accounting Division staff who contributed to and participated in the coordination and preparation of this CAFR. In addition, our deepest appreciation is also extended to the Central Services Division staff for their assistance in the design of the cover of this report and printing of this document. Further, thanks are also extended to our independent auditors, White Nelson Diehl Evans LLP for their expertise and advice. Members of the City Council have continued to express their interest and support of the Finance Department in the planning of responsible and proactive financial operations for the City. Through team efforts ofthe City Council, Chief Executive Officer, Department Directors, and employees, the City will continue to provide the high level of service currently provided to the citizens of our community. Due to consistent policies of the City Council and each employee's commitment to maintain superior service level standards, the City of Costa Mesa has been able to maintain a sound financial base from which to operate. Respectfully submitted, ~~ STEPHEN DUNIVENT Interim Finance Director v

138 City of Costa Mesa List of Principal Officials June 30, 2016 Mayor Stephen M. Mensinger City Council Katrina Foley Sandra L. Genis Gary Monahan James M. Righeimer Chief Executive Officer Thomas R. Hatch Assistant Chief Executive Officer Rick Francis Assistant Chief Executive Officer/Administrative Services Director -- Tamara Letourneau City Attorney (Contract) Thomas P. Duarte Interim Development Services Director Jay Trevino Interim Finance Director Stephen Dunivent Information Technology Director Steve Ely Interim Public Services Director Raja Sethuraman Fire Chief Dan Stefano Police Chief Rob Sharpnack vi

139 CITY OF COSTA MESA, CALIFORNIA City of Costa Mesa, California Organization Chart Citizens of Costa Mesa City Council Mayor and four Council Members 0.48" 0.53" 0.02" Council Appointed Committees and Commissions Senior Commission Parks & Recreation Commission Planning Commission Chief Executive Officer Administration City Clerk Human Resources Risk Management City Attorney Contracted Fire Public Services Police Administration Operations/EMS Prevention Administration Engineering Services Transportation Services Maintenance Services Police Administration Police Field Operations Police Support Services $ Information Technology Development Services Administration Planning Building Safety Housing and Community Development Successor Agency Community Improvement Finance Administration Financial Operations Financial Planning Parks & Community Services Recreation Visit our website at vii

140 'N 't Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting Presented to City of Costa Mesa California For its Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2015 Executive Director/CEO r~ ~, viii

141 CITY OF COSTA MESA CALIFORNIA INDEPENDENT AUDITORS REPORT

142 The Honorable Mayor and Members of the City Council of the City of Costa Mesa Costa Mesa, California Report on the Financial Statements INDEPENDENT AUDITORS REPORT We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Costa Mesa (the City), as of and for the year ended June 30, 2016, and the related notes to the basic 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 auditors 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 auditors consider internal control relevant to the City 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 City 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 Michelle Drive, Suite 300, Irvine, CA Tel: Fax: Offices located in Orange and San Diego Counties

143 Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Costa Mesa, as of June 30, 2016, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Notes 1(i) and 24 to the financial statements, the City adopted Governmental Accounting Standards Board s Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement No. 68, and Amendments to Certain Provisions of GASB Statements 67 and 68. The adoption of this standard required retrospective application resulting in a $730,205 reduction of previously reported net position of the governmental activities. Our opinions are not modified with respect to this matter. Other Matters Partial Prior Year Comparative Information The financial statements include partial prior year comparative information. Such information does not include all of the information required to constitute a presentation in accordance with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the City s financial statements for the year ended June 30, 2015 from which such partial information was derived. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, the schedule of proportionate share of the net pension liability and the schedule of contributions - fire safety plans, the schedule of changes in the net pension liability and related ratios and the schedule of contributions - miscellaneous, police safety, and police 1% supplemental retirement plans, the schedule of funding progress -other post-employment benefit plan, and budgetary comparison schedules, identified as Required Supplementary Information (RSI) in the accompanying table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the 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 RSI 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 the audit of the basic financial statements. We do not express an opinion or provide any assurance on the RSI because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 2

144 Other Matters (Continued) 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 and individual major fund schedules (supplementary section), and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplementary section is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary section is 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 30, 2016, 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 the City s internal control over financial reporting and compliance. Irvine, California November 30,

145 4

146 CITY OF COSTA MESA CALIFORNIA MANAGEMENT S DISCUSSION AND ANALYSIS

147 MANAGEMENT S DISCUSSION AND ANALYSIS As management of the City of Costa Mesa (City), we offer readers of the City s financial statements this narrative overview and analysis of the financial activities for the fiscal year ended June 30, We encourage all readers to consider information presented here in conjunction with additional information that we have furnished in our letter of transmittal, which can be found on pages i v of this report. FINANCIAL HIGHLIGHTS Assets and deferred outflows of resources of the City s primary government exceeded its liabilities and deferred inflows of resources at the close of fiscal year 2016 by $86.2 million (net position). Of this amount, $(159.4) million (unrestricted net position deficit) resulted from the implementation of Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions, and Amendment of GASB Statement No. 27 and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date, and Amendment of GASB Statement No. 68. These statements established standards for measuring and recognizing liabilities for defined benefit pension plans. Total net position increased by $19.5 million from the prior fiscal year total of $66.7 million, as restated from $67.4 million. As of the close of fiscal year 2016, governmental funds reported combined ending fund balances of $107.4 million, an increase of $13.9 million in comparison with the prior year. At the end of fiscal year 2016, general fund unassigned fund balance was $32.0 million or 32% of general fund expenditures of $99.3 million. The unassigned fund balance may be used to meet the government s ongoing obligations. Long-term debt had a net decrease of $2.7 million or 6% during fiscal year This decrease was primarily attributable to principal payments on outstanding bonds payable and a reduction in the outstanding claims payable liability and employee leave benefits payable. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the 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 required supplementary information in addition to the basic financial statements themselves. 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 assets, deferred outflows of resources, liabilities and deferred inflows of resources, with the difference between the assets/deferred outflows of resources and liabilities/deferred inflows of resources 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 is improving or deteriorating. 5

148 The statement of activities presents information to show 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 result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). Both government-wide financial statements distinguish functions of the City 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). Governmental activities include general government, protection of persons and property, community programs, public services, and interest on long-term debt. The City has no business-type activities or discretely presented component units. The basic government-wide financial statements can be found on pages of this report. 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, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the City s funds 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 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 funds balance sheet and statement of revenues, expenditures, and changes in fund balances provide reconciliations to facilitate this comparison between governmental funds and governmental activities. The City maintains twenty-one individual governmental funds. Information is presented separately in the governmental funds balance sheet and statement of revenues, expenditures, and changes in fund balances for the General, Housing Authority, HOME Program, Park Development, Capital Improvements and Measure M2 funds, all of which are considered to be major funds. Data from the other fifteen governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these nonmajor governmental funds is provided in the form of combining statements elsewhere in this report. The City adopts an annual appropriated budget for its General, Special Revenue and Capital Projects funds. Budgetary comparison statements have been provided for these fund types to demonstrate compliance with this budget. The basic governmental fund financial statements can be found on pages of this report. 6

149 Proprietary Funds The City maintains one type of proprietary fund, an internal service fund. Internal service funds are an accounting device used to accumulate and allocate costs internally among various City functions. The City uses internal service funds to account for equipment and information technology replacement, workers compensation, general liability, and unemployment insurance functions. Because each of these functions predominantly benefits governmental rather than business-type functions, they have been included within governmental activities in the government-wide financial statements. Proprietary funds provide the same type of information as government-wide financial statements, only in more detail. Proprietary fund financial statements provide separate information for the Equipment Replacement, Self Insurance Workers Compensation/General Liability/Unemployment and Information Technology Replacement funds, each of which are considered to be nonmajor funds. Each of the internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for these nonmajor internal service funds is provided in the form of combining statements elsewhere in this report. The basic proprietary fund financial statements can be found on pages of this report. Fiduciary Funds Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statements because resources of these funds are not available to support the City s own programs and services. The accounting method used for fiduciary funds is much like that used for proprietary funds. The basic fiduciary fund financial statements can be found on page of this report. Notes to the Basic Financial Statements The notes provide additional information that is essential to a full understanding of data provided in the government-wide and fund financial statements. The notes to the basic financial statements can be found on pages of this report. Other Information In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information concerning the City. Required supplementary information can be found on pages of this report. The combining statements referred to earlier in connection with nonmajor governmental funds and internal service funds are presented immediately following the required supplementary information section. Combining and individual fund statements and schedules can be found on pages of this report. 7

150 GOVERNMENT-WIDE FINANCIAL ANALYSIS City assets and deferred outflows of resources exceeded liabilities and deferred inflows of resources by $86.2 million at June 30, A significant portion of the City s total net position reflects its investment in capital assets (e.g., land, buildings, machinery, and equipment), less related outstanding debt used to acquire assets that are still in service. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City s investment in its capital assets is reported net of related debt, it should be noted that resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Condensed Statement of Net Position Primary Government Percent June 30 June 30 Increase/ Increase/ (Decrease) (Decrease) Assets: Current and other assets $ 133,570, ,459,269 14,111, % Capital assets, net of accumulated depreciation 234,283, ,824, , % Total assets 367,854, ,283,517 14,570, % Deferred outflows of resources 17,587,718 15,466,821 2,120, % Liabilities: Current and other liabilities 15,705,659 15,130, , % Long-term liabilities 270,777, ,202,321 16,575, % Total liabilities 286,483, ,333,189 17,150, % Deferred inflows of resources 12,809,260 32,014,338 (19,205,078) % Net position: Net investment in capital assets 216,195, ,133,458 5,062, % Restricted 29,311,111 27,105,613 2,205, % Unrestricted (159,357,224) (170,836,260) 11,479, % Total net position $ 86,149,353 67,402,811 18,746, % At the end of fiscal year 2016, the City continued to report positive balances in two of the three categories of net position for the government as a whole, as well as for its separate governmental activities. However, the unrestricted net position reported a negative balance of $159.4 million due to the implementation of GASB Statements No. 68 and 71 for defined benefit pension plans. During fiscal year 2016, the City s total net position increased by $19.5 million from prior fiscal year net position of $67.4 million, as restated. 8

151 Changes in Net Position Governmental Activities Revenues: Program Revenues: Charges for services $14,662,180 $12,887,625 Operating contributions and grants 4,907,815 8,562,955 Capital contributions and grants 3,370,260 5,143,592 General revenues: Taxes: Property taxes 26,168,612 24,139,297 Sales and use taxes 58,524,162 52,117,128 Transient occupancy tax 8,622,505 7,995,154 Franchise taxes 5,060,402 4,885,925 Business license tax 973, ,408 Other intergovernmental, unrestricted 11,209,989 5,660,305 Investment income 1,871,216 1,692,528 Miscellaneous 913, ,533 Total revenues 136,284, ,988,450 Expenses: General government 24,631,010 25,225,607 Protection of persons and property 63,956,413 64,184,047 Community programs 4,639,743 10,189,480 Public services 22,498,495 21,549,681 Interest on long-term debt 1,081,605 1,210,723 Total expenses 116,807, ,359,538 Change in net position 19,476,747 2,628,912 Net position at beginning of year 66,672,606 64,773,899 Restatement of net position - (730,205) Net position at end of year $86,149,353 $66,672,606 9

152 Governmental Activities Governmental activities increased the City s net position by $19.5 million and key elements attributable to this increase are as follows: Property tax revenues increased by $2.0 million or 8.4% from fiscal year This increase resulted primarily from increase in the taxable assessed value of property in the City, additions to the property tax base as a result of new construction activity. Sales tax revenues increased by $6.4 million or 12.3% from fiscal year This increase was due to a good local economy primarily related to retail and automobile sales. Plus, the City received $6.8 million for the final Triple Flip payment from the State. Overall expenses decreased by $5.6 million or 4.5% from fiscal year Within this category, the largest variance occurred in the community programs. Costs decreased by $5.6 million or 54.5% primarily as a result of the Housing Authority s acquisition of thirty affordable housing units. FINANCIAL ANALYSIS OF THE GOVERNMENT S FUNDS As was noted earlier, the City uses fund accounting to ensure and demonstrate compliance with professional standards promulgated by oversight agencies and also due to finance-related legal requirements. Government Funds The focus of the City s governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing financing requirements. In particular, unassigned fund balance may serve as a useful measure of a government s net resources available for spending at the end of the fiscal year. As of the end of fiscal year 2016, the City s governmental funds reported combined ending fund balances of $107.4 million, an increase of $13.9 million in comparison with the prior fiscal year. Of this total amount: $2.5 million represents nonspendable fund balance which includes amounts that cannot be spent because they are either not spendable in form or legally or contractually required to maintain intact. $19.3 million represents restricted fund balance which includes amounts that can be spent only for specific purposes stipulated by external sources or through enabling legislation. $16.1 million represents committed fund balance which includes amounts that can be used only for specific purposes determined by formal action of the City Council. It includes legislation (City Council action) that can only be overturned by new legislation requiring the same voting consensus. 10

153 $37.6 million represents assigned fund balance which includes amounts that are designated or expressed by City Council but do not require formal actions like resolutions or ordinances. The remaining $31.9 million constitutes unassigned fund balance. The General Fund is the chief operating fund of the City. At the end of fiscal year 2016, fund balance of the City s General Fund increased by $10.7 million. While total fund balance amounted to $64.5 million, unassigned fund balance was $32.0 million. Key factors in this change are as follows: Sales tax revenues increased by $6.5 million or 12.7% over the prior fiscal year. As was noted above, this increase was due to a good local economy primarily related to retail and automobile sales and the City receiving the final Triple Flip payment from the State of California. Property tax revenues increased by $1.9 million or 8.1% from fiscal year This increase resulted primarily from increase in the taxable assessed value of property in the City, additions to the property tax base as a result of new construction activity. Overall, total revenues in the General Fund increased by $9.0 million or 8.0%. Protection of Person and property expenditures increased by $3.2 million or 5.4% from the prior fiscal year. This increase was mostly attributed to the hiring of open positions in the police and fire department. Overall, total expenditures in the General Fund increased by $4.3 million or 4.5%. Other financing uses decreased by net amount of $2.3 million or 15.9%. This decrease was primarily attributable to a reduction of funding for capital projects in the current fiscal year. 11

154 Major Funds Other Than the General Fund The Housing Authority Fund had $1.1 million in fund balance as of the end of the fiscal year which represents a net increase of $0.2 million or 25.9% from the prior fiscal year. This fund was created as of February 1, 2012 pursuant to dissolution of the Redevelopment Agency by the State of California as of January 31, The City approved the creation of a Housing Authority and it currently monitors housing rehabilitation loans previously reported in the Low and Moderate Income Housing Fund. The HOME Program Fund had $97,254 in fund balance at the end of the fiscal year which represents a net increase of $25,364 or 35.3% from the prior fiscal year. The increase in fund balance resulted from grant funding and the timing of the drawdown requests. The Park Development Fund had $1.6 million in fund balance at the end of the fiscal year which represents a net increase of $1.9 million or 563.3% from the deficit in the prior fiscal year. The fund balance increase resulted from a higher level of collection of park development fees and a reduction of project costs charged to this fund. The Capital Improvements Fund had $18.1 million in fund balance at the end of the fiscal year which represents a net increase of $4.2 million or 30.3% from the prior fiscal year. The General Fund is able to provide more funding for capital projects due to increased revenues as a result of the recovering economy. The Measure M2 Fund had $1.0 million in fund balance at the end of the fiscal year which represents a net decrease of $2.7 million or 72.9% from the prior fiscal year. The decrease is attributed to the timing of grant reimbursement from Orange County Transportation Authority (OCTA) on a variety of open projects. Proprietary Funds The City s proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. The City utilizes internal service funds which are a propriety fund type. Unrestricted net position of the Internal Service Funds at the end of the year had a deficit of $3,358,105. The decrease in total net position for the fiscal year amounted to $567,081. GENERAL FUND BUDGETARY HIGHLIGHTS During fiscal year 2016, actual revenues were $8.4 million or 7.4% more than originally estimated and $8.2 million or 7.2% more than the final adjusted budget. Major revenue line items in the General Fund are typically adjusted once during the fiscal year in the mid-year budget review while newly approved grants are budgeted once approved by City Council. Revenue estimates are typically not revised for unexpected activity occurring subsequent to the mid-year budget review. Therefore, the City recognized increases during the fiscal year and adjusted the budget as necessary. Actual expenditures were $3.2 million or 3.1% less than originally estimated and $4.5 million or 4.3% less than the final adjusted budget. Significant contributing factor to the variance related to the final adjusted budget was the lower costs incurred due to vacant positions in the Police Department. Any remaining difference consists of smaller fluctuations in a variety of departments and accounts. 12

155 CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets The City s investment in capital assets for its governmental activities (the City has no business-type activities or discretely presented component units) as of June 30, 2016, amounted to $234.3 million net of accumulated depreciation and amortization. The investment in capital assets includes land, building improvements and structures, landscaping and sprinklers, machinery and equipment, intangible assets, park system and facilities, and road and storm drain infrastructure. The City s investment in capital assets for the current fiscal year increased by $0.5 million. Major capital asset additions during fiscal year 2016 included a variety of street improvements projects citywide and vehicles for public safety. In addition, the Housing Authority acquired thirty low-income housing units. Some of the major projects this fiscal year included: Maintenance, construction, and rehabilitation of streets, walkways, curbs, gutters, and alleys Various traffic mitigation improvement projects Housing Authority acquired thirty low-income housing units During the fiscal year, capital assets not being depreciated decreased by $3.2 million and capital assets being depreciated increased by $3.7 million. Construction in progress as of the fiscal year end totaled $3.6 million and included the following projects with larger balances: Construction Project Remaining Total Budget Spent to Date Commitment Fire Station #1 Demo and New Construction $ 1,676, ,850 1,362,351 Red Hill Median-McCormick to Bristol 1,026, , ,970 Jack Hammett Field Upgrades 2,800, ,731 2,661,269 Neighborhood Community Center-Library Construction 4,273, ,826 3,447,668 Total $9,776,565 1,383,307 8,393,258 13

156 Capital Assets at Year-End (Net of Depreciation) Governmental Activities Land $34,213,106 $34,213,106 Land rights related to streets 29,821,224 29,821,224 Construction in progress 3,589,540 6,826,025 Building improvements and structures 26,989,381 24,248,418 Machinery and equipment 13,433,660 11,045,196 Intangibles 1,173,929 1,297,148 Park system and facilities 8,653,777 9,479,338 Infrastructure- roads 102,765, ,986,283 Infrastructure- storm drains 13,643,423 11,907,510 Totals $234,283,653 $233,824,248 Additional information on the City s capital assets can be found in note 6 on pages of this report. Long-Term Debt At year-end, the City had a number of Public Financing Authority bond issues outstanding, including 2003 Refunding Certificates of Participation ($3.5 million), 2006 Revenue Refunding Bonds ($1.1 million), and 2007 Certificates of Participation ($19.8 million). In addition, the City had $21.4 million of other liabilities (primarily related to claims and employee benefits) outstanding. Long-term liabilities had a net decrease of $2.7 million, primarily due to payment of normally scheduled principal maturities on bonds and lease obligations and a reduction in the outstanding claims payable liability. Outstanding Debt Governmental Activities * Bonds payable $ 24,375,000 $ 27,025,000 Other liabilities 21,414,403 21,435,508 * As restated and discussed in note 24 of this report. Totals $45,789,403 $48,460,508 Additional information on the City of Costa Mesa s long-term debt can be found in notes 7 through 10 on pages of this report. 14

157 ECONOMIC FACTORS AND NEXT YEAR S BUDGETS AND RATES During fiscal year 2016, the local economy continued its recovery after the previous recession that significantly impacted the City s revenues. While this recovery has been beneficial, the City continues to remain cautious about future economic conditions due to the potential volatility of the City s large sales tax base. Economic declines can affect the City more quickly than other cities which are less reliant on sales taxes. When adopting the fiscal year 2017 budget, the City remained conservative with revenue estimates, maintained control over budgeted appropriations, and provided funding for capital improvement projects. REQUEST FOR INFORMATION This financial report is designed to provide a general overview of the City s finances for all who have an interest in the government s finances. This report and other financial related information can be found on the City s website Questions concerning any information provided in this report or requests for additional financial information should contact:! by mail: Finance Department, City of Costa Mesa, P.O. Box 1200, Costa Mesa, California, ! by colleen.o donoghue@costamesaca.gov! by phone:

158 16

159 CITY OF COSTA MESA CALIFORNIA GOVERNMENT-WIDE FINANCIAL STATEMENTS

160 GOVERNMENT-WIDE FINANCIAL STATEMENTS The Statement of Net Position and the Statement of Activities report information about the City as a whole and its activities. These statements include all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position using the accrual basis of accounting, which is similar to accounting used by most private-sector companies. All current year revenues and expenses are taken into account regardless of when cash is received or paid. Statement of Net Position The statement of net position presents information on all of the City s assets, deferred outflows of resources, liabilities, and deferred inflows of resources, with the difference between assets/deferred outflows and liabilities/deferred inflows 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 is improving or deteriorating. Statement of Activities The statement of activities presents information to show 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). 17

161 Statement of Net Position June 30, 2016 (With Comparative Data for Prior Year) Assets: Cash and investments (note 2) $ 99,144,510 $ 95,917,557 Cash and investments with fiscal agent (note 2) 4,356,813 4,334,210 Due from other governments 21,827,516 10,837,893 Accounts receivable 572, ,081 Interest receivable 198, ,162 Loans receivable 7,012,380 7,339,775 Rent receivable 234, ,825 Inventories 154, ,042 Prepaid items 69,497 48,724 Capital assets (note 6): Land 34,213,106 34,213,106 Land rights related to streets 29,821,224 29,821,224 Construction in progress 3,589,540 6,826,025 Other capital assets, net of accumulated depreciation 166,659, ,963,893 Total assets 367,854, ,283,517 Deferred outflows of resources: Deferred outflows on pensions 17,587,718 15,466,821 Liabilities: Accounts payable 5,405,234 3,373,696 Accrued liabilities 1,772,194 1,755,860 Accrued interest payable 268, ,920 Retentions payable 584, ,674 Deposits payable 765, ,370 Long-term liabilities: Portion due within one year: Claims payable (notes 7, 9 and 19) 1,154,274 2,233,348 Bonds payable (notes 7 and 8) 2,755,000 2,650,000 Employee leave benefits payable (notes 7 and 9) 3,000,000 3,200,000 Portion due beyond one year: Claims payable (notes 7, 9 and 19) 9,439,466 8,646,136 Bonds payable (notes 7 and 8) 21,620,000 24,375,000 Employee leave benefits payable (notes 7 and 9) 1,107, ,221 Net OPEB obligation (notes 7, 9 and 16) 3,946,563 3,622,775 Police retirement 1% supplemental (notes 7, 9 and 14) 2,766,672 2,166,823 Net pension liability (note 13c) 231,897, ,555,366 Deferred inflows of resources: CITY OF COSTA MESA, CALIFORNIA Governmental Activities Total liabilities 286,483, ,333,189 Deferred inflows on pensions 12,809,260 32,014,338 Net position: Net investment in capital assets 216,195, ,133,458 Restricted for: Protection of persons and property 1,022, ,573 Community programs 12,793,475 8,892,751 Public services 15,495,090 17,660,289 Unrestricted (159,357,224) (170,836,260) Total net position $ 86,149,353 67,402,811 See accompanying notes to the basic financial statements. 18

162 CITY OF COSTA MESA, CALIFORNIA Statement of Activities For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Program Revenues Operating Capital Charges for Contributions Contributions Functions/Programs Expenses Services and Grants and Grants Net (Expense) Revenue and Changes in Net Position Governmental activities: General government $ 24,631, (24,631,010) (25,225,607) Protection of persons and property 63,956,413 2,707, ,820 - (60,488,774) (59,659,485) Community programs 4,639,743 8,232,995 1,642,686-5,235, ,682 Public services 22,498,495 3,721,366 2,505,309 3,370,260 (12,901,560) (10,019,233) Interest on long-term debt 1,081, (1,081,605) (1,210,723) Total governmental activities $ 116,807,266 14,662,180 4,907,815 3,370,260 (93,867,011) (95,765,366) General revenues: Taxes: Property taxes 26,168,612 24,139,297 Sales and use taxes 58,524,162 52,117,128 Transient occupancy tax 8,622,505 7,995,154 Franchise taxes 5,060,402 4,885,925 Business license tax 973, ,408 Other intergovernmental, unrestricted 11,209,989 5,660,305 Investment income 1,871,216 1,692,528 Miscellaneous 913, ,533 Total unrestricted general revenues 113,343,758 98,394,278 Change in net position 19,476,747 2,628,912 Net position - beginning of year 66,672,606 64,773,899 Restatement of net position (note 24) - (730,205) Net position - end of year $ 86,149,353 66,672,606 See accompanying notes to basic financial statements. 19

163 20

164 CITY OF COSTA MESA CALIFORNIA FUND FINANCIAL STATEMENTS

165 GOVERNMENTAL FUNDS Major Governmental Funds GENERAL FUND The General Fund must be classified as a major fund in the accompanying fund financial statements and is used to account for all general revenues of the City not specifically levied or collected for some special purpose, and for expenditures related to the rendering of general services by the City. The General Fund is used to account for all resources not required to be accounted for in another fund. SPECIAL REVENUE FUNDS Special revenue funds are used to account for revenues derived from specific sources which are required by law or administrative action to be accounted for in a separate fund. The following have been classified as major funds in the accompanying fund financial statements: Housing Authority Fund Established pursuant to the California Health and Safety Code, Section 34176(a). The primary purpose of the Housing Authority is to promote affordable housing for families of low and moderate income within the City. HOME Program Fund Established to account for the receipt and disbursement of funds received under the Federal Home Investment Partnership Program of the Department of Housing and Urban Development. These revenues must be expended for acquisition, rehabilitation, and new construction of rental housing. CAPITAL PROJECTS FUNDS Park Development Fund Established to account for the development and maintenance of the City s park system. Financing is provided by fees charged to residential and commercial developers. Capital Improvements Fund Established to account for the construction of capital facilities financed by the City s General Fund and various governmental grants. Measure M2 Fund Established to account for the expenditure of the 2006 voter-approved one-half percent sales tax for local transportation improvements. Measure M2 is a 30-year extension of the earlier Measure M program. Nonmajor Governmental Funds Nonmajor governmental funds constitute all other governmental funds whose assets, liabilities, revenues, or expenditures do not exceed 10% of the governmental funds total. These funds include nine Special Revenue Funds, one Debt Service Fund and seven Capital Projects Funds. 21

166 CITY OF COSTA MESA, CALIFORNIA Governmental Funds Balance Sheet June 30, 2016 (With Comparative Data for Prior Year) Special Revenue Assets Housing HOME General Authority Program Cash and investments (note 2) $ 47,748,867 1,205,578 59,027 Cash and investments with fiscal agent (note 2) Due from other governments 18,062,091-50,215 Accounts receivable (net) 550, Interest receivable 99,504 1, Loans receivable - 3,464,592 3,006,267 Rent receivable 217,902 16,903 - Due from other funds (note 3) 279, Advances to other funds (note 4) 2,375, Inventories 45, Prepaid items 64, Total assets $ 69,444,213 4,688,419 3,115,572 Liabilities Accounts payable $ 2,313,712 43,807 - Accrued liabilities 1,350,605 2,764 10,530 Retentions payable - - 1,521 Deposits payable 740,977 24,948 - Due to other funds (note 3) Advances from other funds (note 4) Total liabilities 4,405,294 71,519 12,051 Deferred Inflows of Resources Unavailable revenues 566,458 3,468,592 3,006,267 Fund Balances (Note 11) Nonspendable: Prepaid items 64, Inventories 45, Advances to other funds 2,375, Restricted for: Protection of persons and property Community programs - 1,148,308 97,254 Public services Debt service Committed 16,125, Assigned 13,820, Unassigned 32,040, Total fund balances (deficit) 64,472,461 1,148,308 97,254 Total liabilities, deferred inflows of resources, and fund balances $ 69,444,213 4,688,419 3,115,572 See accompanying notes to the basic financial statements. 22

167 Capital Projects Nonmajor Park Capital Governmental Totals Development Improvements Measure "M2" Funds ,927,079 19,343,144 1,790,939 17,573,047 91,647,681 85,925, ,356,813 4,356,813 4,334, ,684 3,093, ,272 21,827,516 10,837, , , ,853 7,255 35,759 9,587 30, , , ,521 7,012,380 7,339, , , ,539 40, ,375,720 4,081, ,480 36, ,885 48,724 3,934,334 19,584,587 4,893,780 22,940, ,600, ,457,728 1,839 1,147, , ,664 5,027,705 3,260, ,417 1,760,316 1,743, , ,588 67, , , , , , ,539 40,562 2,375, ,375,720 4,081,005 2,377,559 1,316,981 1,220,152 1,390,193 10,793,749 10,747, ,202 2,671, ,665 10,426,387 9,199, ,885 48, ,480 36, ,375,720 4,081, , ,187 1,947,243 1,556, ,286 2,949,623 1,090, ,002,425 9,244,035 10,246,460 12,427, ,321,813 5,321,813 5,449, ,125,000 16,125,000-18,135,404-5,602,976 37,559,043 32,043, (139,064) 31,901,649 20,261,047 1,556,775 18,135,404 1,002,425 20,968, ,380,860 93,510,444 3,934,334 19,584,587 4,893,780 22,940, ,600, ,457,728 23

168 24

169 CITY OF COSTA MESA, CALIFORNIA Governmental Funds Reconciliation of the Balance Sheet to the Statement of Net Position June 30, 2016 Fund balances of governmental funds $ 107,380,860 Amounts reported for governmental activities in the Statement of Net Position are different because: Capital Related Items When capital assets (property, plant, equipment) that are to be used in governmental activities are purchased or constructed, the cost of those assets are reported as expenditures in governmental funds. However, the Statement of Net Position includes those capital assets among the assets of the City as a whole: Cost of capital assets 561,023,837 Accumulated depreciation (333,230,539) Long-Term Debt Transactions Long-term liabilities applicable to the City's governmental activities are not due and payable in the current period and, accordingly, are not reported as fund liabilities. All liabilities (both current and long-term) are reported in the Statement of Net Position: Bonds payable (24,375,000) Employee benefits leave payable (4,107,428) OPEB (3,946,563) Accrued Interest Accrued liabilities in the Statement of Net Position differ from the amount reported in governmental funds due to accrued interest on outstanding debt payable. (268,488) Internal Service Funds Internal Service Funds are used by management to charge the costs of certain activities to individual City funds. The assets and liabilities of the Internal Service Funds are included in governmental activities in the Statement of Net Position because they primarily service governmental activities of the City. 3,132,105 Deferred Inflows of Resources Certain unavailable revenues that do not provide current financial resources are reported as deferred inflows of resources in the funds. 10,426,387 Pension Debt and Deferred Inflows/Outflows Related to Pensions Pension related debt applicable to the City governmental activites are not due and payable in the current period and accordingly are not reported as fund liabilities. Deferred outflows of resources and deferred inflows of resources related to pensions are only reported in the Statement of Net Position as the changes in these amounts effects only the government-wide statements for governmental activities Deferred outflows of resources 17,587,718 Deferred inlows of resources (12,809,260) CalPERS Pension liability (231,897,604) Police 1% Retirement Supplemental (2,766,672) Net position of governmental activities $ 86,149,353 See accompanying notes to the basic financial statements. 25

170 CITY OF COSTA MESA, CALIFORNIA Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Special Revenue Housing HOME General Authority Program Revenues: Taxes $ 98,248, ,275 - Licenses and permits 2,983, Fines and forfeitures 1,530, Intergovernmental 10,448, ,765 Charges for services 3,634, Rental 2,890, ,791 - Investment income 1,199,813 10,479 1,123 Miscellaneous 1,067, , ,205 Total revenues 122,002, , ,093 Expenditures: Current: General government 25,102, Protection of persons and property 61,698, Community programs 6,955, ,729 Public services 5,537, ,192 - Debt service: Principal Interest and fiscal charges Total expenditures 99,293, , ,729 Excess (deficiency) of revenues over (under) expenditures 22,708, ,068 25,364 Other financing sources (uses): Transfers in (note 5) 400, Transfers out (note 5) (12,452,435) - - Total other financing sources (uses) (12,051,930) - - Net change in fund balances 10,656, ,068 25,364 Fund balances (deficit) at beginning of year 53,815, ,240 71,890 Fund balances at end of year $ 64,472,461 1,148,308 97,254 See accompanying notes to the basic financial statements. 26

171 Capital Projects Nonmajor Park Capital Governmental Totals Development Improvements Measure "M2" Funds ,868 99,349,202 90,091, ,983,081 2,313, ,088 1,609,134 1,367, ,896 2,345,747 3,700,051 17,612,288 22,010,125 1,952, ,082,176 6,668,445 6,117, ,531 3,336,053 3,113,662 33, ,760 50, ,277 1,775,765 1,771, ,630 1,679,917 2,206,428 1,985,232 1,162,656 2,395,842 6,225, ,013, ,991, ,102,067 24,699, ,727,443 64,426,376 61,096,404 72, ,087 8,019,356 8,821,298-5,773,755 5,096,996 2,742,421 19,836,633 21,860, ,650,000 2,650,000 2,540,000 20, ,088,632 1,109,037 1,213,671 92,473 5,773,755 5,096,996 9,905, ,143, ,230,851 1,892,759 (4,611,099) (2,701,154) (3,679,962) 13,870,416 8,760,322-8,827,536-3,624,899 12,852,940 14,253, (400,505) (12,852,940) (14,253,945) - 8,827,536-3,224, ,892,759 4,216,437 (2,701,154) (455,568) 13,870,416 8,760,322 (335,984) 13,918,967 3,703,579 21,423,801 93,510,444 84,750,122 1,556,775 18,135,404 1,002,425 20,968, ,380,860 93,510,444 27

172 28

173 CITY OF COSTA MESA, CALIFORNIA Governmental Funds Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances to the Statement of Activities For the fiscal year ended June 30, 2016 Net changes in fund balances - total governmental funds $ 13,870,416 Amounts reported for governmental activities in the Statement of Activities are different because: Capital Related Items When capital assets that are to be used in governmental activities are purchased or constructed, the resources expended for those assets are reported as expenditures in governmental funds. However, in the Statement of Activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. As a result, fund balance decreases by the amount of financial resources expenses, whereas net position decrease by the amount of depreciation expense charged for the year. Capital outlay 9,992,289 Depreciation expense (11,442,448) Long-Term Debt Transactions Some expense reported in the Statement of Activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. Repayment of debt service is reported as an expenditure in governmental funds and, thus, has the effect of reducing fund balances because current financial resources have been used. For the City as a whole, however, the principal payments reduce the liabilities in the Statement of Net Position and do not result in an expense in the Statement of Activities. Net changes in employee benefits leave payable (70,843) Principal payments - bonds 2,650,000 OPEB (324,252) Police Retirement 1% Supplemental 130,456 Pension Pension expense reported in the governmental funds includes the annual required contributions. In the Statement of Activities, pension expense includes the change in the net pension liability, and related change in pension amounts for deferred outflows of resources and deferred inflows of 3,983,737 Accrued Interest Recording of the current year change of accrued interest on outstanding debt payable. Internal Service Funds Internal Service Funds are used by management to charge the costs of certain activities to individual City funds. The adjustments for Internal Service Funds close those funds by charging additional amounts to participating governmental activities to completely cover the Internal Service Funds costs for the year. Deferred Inflows of Resources Certain unavailable revenues that do not provide current financial resources are reported as deferred inflows of resources in the funds. 27,432 (567,081) 1,227,041 Change in net position of governmental activities $ 19,476,747 See accompanying notes to the basic financial statements. 29

174 CITY OF COSTA MESA, CALIFORNIA Proprietary Funds Statement of Net Position June 30, 2016 Governmental Activities - Internal Service Funds Assets Current assets: Cash and investments (note 2) $ 7,496,829 9,992,383 Accounts receivable ,228 Interest receivable 13,856 14,521 Prepaid expenses 4,612 - Inventories 108,705 97,976 Total current assets 7,624,897 10,123,108 Capital assets: Motorized equipment 12,518,827 11,908,702 Other equipment 1,895, ,758 Accumulated depreciation (7,924,282) (7,552,669) Net capital assets 6,490,355 4,580,791 Total assets 14,115,252 14,703,899 Liabilities Current liabilities: Accounts payable 377, ,219 Accrued liabilities 11,878 12,010 Claims payable (note 8) 1,154,274 2,233,348 Total current liabilities 1,543,681 2,358,577 Long-term liabilities: Claims payable (note 8) 9,439,466 8,646,136 Total long-term liabilities 9,439,466 8,646,136 Total liabilities 10,983,147 11,004,713 Net Position (With Comparative Data for Prior Year) Net investment in capital assets 6,490,355 4,580,791 Unrestricted (3,358,250) (881,605) Total net position $ 3,132,105 3,699,186 See accompanying notes to the basic financial statements. 30

175 CITY OF COSTA MESA, CALIFORNIA Proprietary Funds Statement of Revenues, Expenses, and Changes in Net Position For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Governmental Activities - Internal Service Funds Operating revenues: Charges for services $ 6,372,792 5,786,463 Total operating revenues 6,372,792 5,786,463 Operating expenses: Allocated administrative costs 1,425,942 1,409,157 Depreciation 616, ,723 Fuel and repair parts 1,002,713 1,026,390 Claims and premiums 4,002,807 4,699,381 Total operating expenses 7,048,425 7,796,651 Operating income (loss) (675,633) (2,010,188) Nonoperating revenues (expenses): Investment income 95,452 53,787 Interest expense - (23,889) Gain/(loss) on sale of equipment 13,100 (123,878) Total nonoperating revenues (expenses) 108,552 (93,980) Change in net position (567,081) (2,104,168) Net position at beginning of year 3,699,186 5,803,354 Net position at end of year $ 3,132,105 3,699,186 See accompanying notes to the basic financial statements. 31

176 CITY OF COSTA MESA, CALIFORNIA Proprietary Funds Statement of Cash Flows For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Governmental Activities - Internal Service Funds Cash flows from operating activities: Cash received from customers and user departments $ 6,390,125 5,786,821 Cash payments to suppliers for goods and services (5,793,218) (6,602,611) Cash payments to employees for services (675,151) (625,920) Net cash used for perating activities (78,244) (1,441,710) Cash flows from capital and related financing activities: Cash received from disposal of assets 42,633 99,002 Acquisition of capital assets (2,556,060) (232,950) Cash paid for capital related financing - (439,284) Net cash used for capital and related financing activities (2,513,427) (573,232) Cash flows from investing activities: Investment income received 96,117 55,666 Net cash provided by investing activities 96,117 55,666 Net decrease in cash and cash equivalents (2,495,554) (1,959,276) Cash and cash equivalents at beginning of year 9,992,383 11,951,659 Cash and cash equivalents at end of year $ 7,496,829 9,992,383 Reconciliation of operating income (loss) to net cash provided by (used for) operating activities: Operating income (loss) $ (675,633) (2,010,188) Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Depreciation 616, ,723 (Increase) decrease in inventories (10,729) 6,981 (Increase) decrease in accounts receivable 17,333 - (Increase) decrease in prepaid items (4,612) 48,336 Increase (decrease) in accounts payable 264,310 (90,035) Increase (decrease) in accrued liabilities (132) 355 Increase (decrease) in claims payable (285,744) (58,882) Net cash used for operating activities $ (78,244) (1,441,710) Non-cash investing, capital and financing activities: There were no non-cash investing, capital or financing activities during the year. See accompanying notes to the basic financial statements. 32

177 CITY OF COSTA MESA, CALIFORNIA Fiduciary Funds Statement of Net Position June 30, 2016 Successor Agency to the City of Costa Mesa Redevelopment Agency Private Purpose Trust Fund Agency Funds Assets Cash and investments (note 2) $ 1,445,584 3,475,707 Cash and investments with fiscal agent (note 2) 704,405 - Accounts receivable - 16,238 Interest receivable Prepaid items - 1,471 Total assets $ 2,149,989 3,493,633 Liabilities Accounts payable $ ,745 Deposits payable - 2,648,888 Long-term liabilities (note 23) Due within one year 635,000 - Due in more than one year 670,000 - Total liabilities 1,305,235 3,493,633 Net Position Net position $ 844,754 See accompanying notes to the basic financial statements. 33

178 CITY OF COSTA MESA, CALIFORNIA Fiduciary Funds Statement of Changes in Net Position For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Successor Agency to the City of Costa Mesa Redevelopment Agency Private Purpose Trust Fund Additions: Property taxes $ 1,535,081 $ 1,148,260 Repayments from City - 111,595 Investment earnings Total revenues 1,535,166 1,259,954 Deductions: Program expenses of former redevelopment agency 102,155 64,248 Administrative expenses 223, ,953 Interest and fiscal agent expenses of former redevelopment agency 79, ,712 Principal 287, ,386 Total expenses 693,206 1,005,299 Change in net position 841, ,655 Net position at beginning of year 2,794 (251,861) Net position at end of year $ 844,754 $ 2,794 See accompanying notes to the financial statements 34

179 CITY OF COSTA MESA CALIFORNIA NOTES TO THE FINANCIAL STATEMENTS

180 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies The following is a summary of the significant accounting policies of the City of Costa Mesa, California (City): (a) Description of Reporting Entity The City of Costa Mesa was incorporated on June 29, 1953 as a general law city under the Government Code of the State of California. The City operates under a Council-Manager form of government and the City Council is composed of five members. Among services provided by the City are the following: public works, parks and recreation, planning, community development, fire, and law enforcement services. As required by generally accepted accounting principles, these financial statements present the City and its component units, entities for which the City is considered to be financially accountable. The City is considered to be financially accountable for an organization if the City appoints a voting majority of that organization s governing body and the City is either able to impose its will on that organization, or there is a potential for that organization to provide specific financial benefits to or impose specific financial burdens on the City. The City is also considered to be financially accountable if an organization is fiscally dependent upon the City (i.e., it is unable to adopt its budget, levy taxes, set rates or charges, or issue bonded debt without approval from the City). In certain cases, other organizations are included as component units if the nature and significance of their relationship with the City are such that their exclusion would cause the City s financial statements to be misleading or incomplete. All of the City s component units are considered to be blended component units. Blended component units, although legally separate entities, are, in substance, part of the City s operations and so data from these units are reported with the interfold data of the City. The following organizations are considered to be component units of the City: Costa Mesa Public Financing Authority The Costa Mesa Public Financing Authority (Authority) was established on August 20, 1990 for the purpose of financing public capital improvements. Even though it is legally separate, it is reported as if it were part of the City because the City Council also serves as the governing board of the Authority. Transactions of the Authority are reported in the Debt Service Fund. Upon completion, separate financial statements of the Authority can be obtained at City Hall. Costa Mesa Community Facilities District No The Costa Mesa Community Facilities District No (District) was incorporated for the purpose of acquiring certain public facilities. Even though it is legally separate, it is reported as if it were part of the City because the City Council also serves as the governing board of the District. Transactions are reported in the Debt Service Fund. Separate financial statements for the District are not prepared. 35

181 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (a) Description of Reporting Entity, (Continued) Costa Mesa Housing Authority The Costa Mesa Housing Authority (Housing Authority) was created pursuant to the State of California Health and Safety Code, Section 34176(a). The primary purpose of the Housing Authority is to promote affordable housing for families of low and moderate income within the City. The Housing Authority is a separate entity primarily funded by housing loan repayments. City Council members, in separate session, serve as the governing board of the Housing Authority, and all accounting and administrative functions are performed by the City. Financial activity of the Housing Authority has been reported as if it were part of the City in the Housing Authority Special Revenue Fund. Upon completion, separate financial statements of the Housing Authority can be obtained at City Hall. (b) Basis of Accounting and Measurement Focus The basic financial statements of the City are composed of the following:! Government-wide financial statements! Fund financial statements! Notes to the basic financial statements Government-wide Financial Statements Government-wide financial statements display information about the reporting government as a whole, except for its fiduciary activities. These statements include separate columns for the governmental and business-type activities of the primary government (including its blended component units), as well as its discretely presented component units. The City has no business-type activities or discretely presented component units. Eliminations have been made in the Statement of Activities so that certain allocated expenses are recorded only once (by the function to which they were allocated). However, general government expenses have not been allocated as indirect expenses to the various functions of the City. Government-wide financial statements are presented using the economic resources measurement focus and the accrual basis of accounting. Under the economic resources measurement focus, all (both current and long-term) economic resources and obligations of the reporting government are reported in the government-wide financial statements. Basis of accounting refers to when revenues and expenses are recognized in the accounts and reported in the financial statements. Under the accrual basis of accounting, revenues, expenses, gains, losses, assets, deferred outflows of resources, liabilities and deferred inflows of resources resulting from exchange and exchange-like transactions are recognized when the exchange takes place. Revenues, expenses, gains, losses, assets, deferred outflows of resources, liabilities and deferred inflows of resources resulting from nonexchange transactions are recognized in accordance with the requirements of GASB Statement No

182 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (b) Basis of Accounting and Measurement Focus, (Continued) Program revenues include charges for services, special assessments, and payments made by parties outside of the reporting government s citizenry if that money is restricted to a particular program. Program revenues are netted with program expenses in the Statement of Activities to present the net cost of each program. Amounts paid to acquire capital assets are capitalized as assets in the government-wide financial statements, rather than reported as expenditures. Proceeds of long-term debt are recorded as a liability in the government-wide financial statements, rather than as other financing sources. Amounts paid to reduce long-term indebtedness of the reporting government are reported as a reduction of the related liability, rather than as expenditures. Franchise fees and business license charges have been reported as general revenues because the fees are based on gross receipts, not charges for services. Fund Financial Statements The underlying account system of the City is organized and operated on the basis of separate funds. A fund is defined as an independent fiscal and accounting entity with a self-balancing set of accounts, recording resources, related liabilities, obligations, reserves, and equities segregated for the purpose of carrying out specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations. Fund financial statements for the primary government s governmental, proprietary, and fiduciary funds are presented after the government-wide financial statements. These statements display information about major funds individually and nonmajor funds in the aggregate for governmental funds. Proprietary statements include financial information for internal service funds. Fiduciary statements include financial information for Agency and Private Purpose Trust funds. Fiduciary funds of the City represent assets held by the City in a custodial capacity for other individuals or organizations. Governmental Funds In the fund financial statements, governmental funds are presented using the modified accrual basis of accounting. Revenues are recognized when they become measurable and available as net current assets. Measurable means that the amounts can be estimated or otherwise determined. Available means that the amounts were collected during the reporting period or soon enough thereafter to be available to finance the expenditures accrued for the reporting period. The City uses an availability period of 60 days. 37

183 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (b) Basis of Accounting and Measurement Focus, (Continued) Sales taxes, property taxes, franchise taxes, motor vehicle in lieu, transient occupancy taxes, grants, and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period to the extent normally collected within the availability period. Other revenue items are considered to be measurable and available where cash is received by the government. Revenue recognition is subject to the measurable and availability criteria for the governmental funds in the fund financial statements. Exchange transactions are recognized as revenues in the period in which they are earned (i.e., the related goods or services are provided). Locally imposed derived tax revenues are recognized as revenues in the period in which the underlying exchange transaction upon which they are based takes place. Imposed nonexchange transactions are recognized as revenues in the period for which they were imposed. If the period of use is not specified, they are recognized as revenues when an enforceable legal claim to the revenues arises or when they are received, whichever occurs first. Government-mandated and voluntary nonexchange transactions are recognized as revenues when all applicable eligibility requirements have been met. In the fund financial statements, governmental funds are presented using the current financial resources measurement focus. This means that generally only current assets, current liabilities and deferred inflows of resources are included on their balance sheets. The reported fund balance is considered to be a measure of available spendable resources. Governmental fund operating statements present increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in fund balance. Accordingly, they are said to present a summary of sources and uses of available spendable resources during a period. Noncurrent portions of long-term receivables due to governmental funds are reported on the balance sheet in spite of their spending measurement focus. Special reporting treatments are used to indicate, however, that they should not be considered available spendable resources, since they do not represent fund balance. Recognition of governmental fund type revenues represented by unavailable revenues are reported as deferred inflows of revenues. Due to the nature of their spending measurement focus, expenditure recognition for governmental fund types excludes amounts represented by noncurrent liabilities. Since they do not affect net current assets, such long-term amounts are not recognized as governmental fund type expenditures or fund liabilities. Amounts expended to acquire capital assets are recorded as expenditures in the year that resources were expended, rather than as fund assets. Proceeds of long-term debt are recorded as other financing sources rather than a fund liability. Amounts paid to reduce long-term indebtedness are reported as fund expenditures. 38

184 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (b) Basis of Accounting and Measurement Focus, (Continued) When both restricted and unrestricted resources are combined in a fund, expenses are considered to be paid first from restricted resources, and then from unrestricted resources. Proprietary and Fiduciary Funds The City s internal service funds are proprietary funds. In the fund financial statements, proprietary and private-purpose trust funds are presented using the accrual basis of accounting. Revenues are recognized when they are earned and expenses are recognized when related goods or services are delivered. In the fund financial statements, proprietary and private-purpose trust funds are presented using the economic resources measurement focus. This means that all assets and all liabilities (whether current or noncurrent) associated with their activity are included on the statement of net position. Proprietary fund type operating statements present increases (revenues) and decreases (expenses) in total net position. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with principal activity of the fund. Exchange transactions are those in which each party receives and gives us essentially equal values. Nonoperating revenues, such as investment income, gain or loss on sale of equipment and miscellaneous revenues result from nonexchange transactions or ancillary activities. Operating expenses for internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All expenses not meeting this definition are reported as nonoperating expenses. Amounts paid to acquire capital assets are capitalized as assets in the internal service fund financial statements, rather than being reported as expenses. Proceeds of long-term debt are recorded as liabilities in the internal service fund financial statements, rather than being reported as other financing sources. Amounts paid to reduce long-term indebtedness of the internal service fund are reported as reductions of the related liability, rather than as expenses. The City s agency funds are fiduciary funds. Agency funds are custodial in nature (assets equal liabilities) and have no measurement focus but utilize the accrual basis of accounting for reporting its assets and liabilities. 39

185 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (c) Fund Classifications The funds designated as major funds in the fund financial statements are determined by a mathematical calculation consistent with GASB Statement No. 34. The City reports the following major governmental funds: General Fund The General Fund is the general operating fund of the City. All general tax revenues and other receipts that are not restricted by law or contractual agreement to some other fund are accounted for in this fund. Expenditures of this fund include the general operating expenditures and other costs, which are not paid through other funds. Special Revenue Funds Housing Authority Fund This special revenue fund was established per Section 34176(a) of the Health and Safety Code. The primary purpose of this Fund is to promote and preserve affordable housing for families of low and moderate income within the City. Financing is primarily provided by housing rehabilitation loan payments. HOME Program Fund This special revenue fund was established to account for the receipt and disbursement of funds received under the Federal Home Investment Partnership Program of the Department of Housing and Urban Development. These revenues must be expended for acquisition, rehabilitation, and new construction of rental housing. Capital Projects Funds Park Development Fund This capital projects fund was established to account for development and maintenance of the City s park system. Financing is provided by fees charged to residential and commercial developers. Capital Improvements Fund This capital projects fund was established to account for construction of capital facilities financed by the City s General Fund and various governmental grants. Measure M2 Fund This capital projects fund was established to account for construction of the 2006 voter-approved one-half percent sales tax for local transportation improvements. Measure M2 is a 30-year extension of the earlier Measure M program. The City s fund structure also includes the following fund types: Special Revenue Funds are used to account for the proceeds of specific revenue sources that are restricted by law or administrative action for a specified purpose. Debt Service Funds are used to account for the accumulation of resources for, and the payment of, long-term liabilities, interest, and related fiscal agent costs. 40

186 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (c) Fund Classifications, (Continued) Capital Projects Funds The capital projects funds are used to account for financial resources segregated for the acquisition of major capital facilities (other than those financed by the proprietary funds). Internal Service Funds Internal service funds are used to finance and account for activities involved in rendering equipment replacement, self-insurance services, and information technology replacement to departments within the City. Costs of materials and services used are accumulated in these funds and charged to the user departments as such goods are delivered or services rendered. Private Purpose Trust Fund The private-purpose trust fund accounts for the assets, liabilities, additions, and deductions made on behalf of the former Costa Mesa Redevelopment Agency. Agency Funds Agency funds are used to account for assets held by the City in a fiduciary capacity for individuals, government entities, and others. Such funds are operated by carrying out the specifications of trust indentures, statutes, ordinances, or other governing regulations. (d) Cash and Investments Investments are reported in the accompanying financial statements at fair market value except for the following: investment contracts that are reported at cost because the contracts are not transferable and have terms that are not affected by changes in interest rates; and Lehman Brother s Holding, Inc., which consists of the City s estimated investment balance being held in an escrow account as part of ongoing bankruptcy proceedings. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Changes in fair value that occur during a fiscal year are recognized as investment income reported for that fiscal year. Investment income includes interest earnings, changes in fair value, and any gains or losses realized upon the liquidation, maturity, or sale of investments. The City pools cash and investments of all funds except for assets held by fiscal agents. Each fund s share in this pool is displayed in the accompanying financial statements as cash and investments. Investment income earned by the pooled investments is allocated to the various funds based on each fund s average cash and investment balance. 41

187 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (e) Cash Equivalents For purposes of the statement of cash flows, cash equivalents are defined as short-term, highly liquid investments that are both readily convertible to known amounts of cash or so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Cash equivalents also represent the proprietary funds share in the cash and investment pool of the City. (f) Advances to Other Funds Long-term interfund advances are recorded as receivables by the advancing governmental funds and as liabilities in the receiving funds. (g) Inventories Inventories of materials and supplies are carried at cost on an average cost basis. The City uses the consumption method of accounting for inventories. (h) Prepaids The City uses the consumption method to record prepaid items. (i) New Accounting Pronouncements Current Year Standards In fiscal year , the City implemented Governmental Accounting Standards Board (GASB) Statement No. 72, Fair Value Measurement and Application. GASB Statement No. 72 requires the City to use valuation techniques, which are appropriate under the circumstances and are either a market approach, a cost approach or income approach. GASB Statement No. 72 establishes a hierarchy of inputs used to measure fair value consisting of three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs, and typically reflect management s estimates of assumptions that market participants would use in pricing the asset or liability. GASB Statement No. 72 also contains note disclosure requirements regarding the hierarchy of valuation inputs and valuation techniques that were used for the fair value measurements. There was no material impact on the City s financial statements as a result of the implementation of GASB Statement No. 72. GASB Statement No Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, contains provisions that address employer and governmental nonemployer contributing entities for pensions that are not within the scope of GASB Statement No. 68 and has been early implemented. 42

188 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (i) New Accounting Pronouncements, (Continued) Current Year Standards, (Continued) GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, was required to be implemented in the current fiscal year, and did not impact the City. GASB Statement No. 79, Certain External Investment Pools and Pool Participants, was required to be implemented in the current fiscal year, except for certain provisions on portfolio quality, custodial credit risk, and shadow pricing, which are effective for periods beginning after December 15, 2015, and did not impact the City. GASB Statement No. 82, Pension Issues an Amendment of GASB Statement No. 67, No. 68 and No. 73, changed the measurement of covered payroll reported in required supplementary information and has been early implemented. Pending Accounting Standards GASB has issued the following statements, which may impact the City s financial reporting requirements in the future:! GASB 74 - Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, effective for periods beginning after June 15, 2016.! GASB 75 - Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, effective for periods beginning after June 15, 2017.! GASB 77 - Tax Abatement Disclosure, effective for periods beginning after December 15, 2015.! GASB 78 - Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans, effective for periods beginning after December 15, 2015.! GASB 79 - Certain External Investment Pools and Pool Participants, contains certain provisions on portfolio quality, custodial credit risk, and shadow pricing, effective for periods beginning after December 15, 2015.! GASB 80 - Blending Requirements for Certain Component Units, effective for periods beginning after June 15, 2016.! GASB 81 - Irrevocable Split-Interest Agreements, effective for periods beginning after December 15,

189 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (i) New Accounting Pronouncements, (Continued) Pending Accounting Standards, (Continued)! GASB 82 - Pension Issues, effective for periods beginning after June 15, 2016, except for certain provisions on selection of assumptions, which are effective in the first reporting period in which the measurement date of the pension liability is on or after June 15, (j) Capital Assets Capital assets (including infrastructure) are recorded at historical cost at the time of purchase. Assets acquired from gifts or contributions are recorded at fair market value on the date received. Generally, capital asset purchases in excess of $5,000 are capitalized if they have an expected useful life of two years or more. Capital assets include public domain (infrastructure) capital assets consisting of certain improvements including roads, streets, sidewalks, medians, sewers, and storm drains. Public domain assets acquired prior to 1980 have been included in the accompanying financial statements. Capital assets used in operations are depreciated or amortized over their estimated useful lives using the straight-line method in the government-wide financial statements and in the fund financial statements of proprietary funds. It is the City s policy not to depreciate or amortize assets in its first year of service. A full year of depreciation or amortization is charged at final year of asset life or upon disposal. Depreciation and amortization are charged as expenses against operations and accumulated depreciation and amortization are reported on the respective statement of net position. The ranges of lives used for computing depreciation and amortization for each capital asset class are as follows: Building improvements and structures years Landscaping and sprinklers Automotive equipment years years Office furniture Office machines 5-20 years 3-20 years Other equipment 5-60 years Intangible assets 7-10 years Park system and facilities years Infrastructure roads Infrastructure storm drains 5-50 years years 44

190 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (k) Deferred Outflows/Inflows of Resources The statement of net position and the governmental funds balance sheet will sometimes report a separate section for deferred outflows of resources. This financial statement element, deferred outflows of resources, represents a consumption of net position that applies to future periods and so will not be recognized as an outflow of resources (expenditure) until that time. The City has two items that qualify for reporting in this category. The first item is a deferred outflow related to pensions. This amount is equal to employer contributions made after the measurement date of the net pension liability. The second item is a deferred outflow related to pensions for the changes in proportion and differences between employer contributions and employer s proportionate share of contributions. These amounts are amortized over a closed period equal to the average of the expected remaining services lives of all employees that are provided with pensions through the plans, which are which are 2.1 years for the miscellaneous plan, 3.3 years for the police safety plan, and 3.8 years for the fire safety plan. The statement of net position and the governmental funds balance sheet will sometimes report a separate section for deferred inflows of resources. This financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to future periods and so will not be recognized as an inflow of resources (revenue) until that time. The City has four items that qualify for reporting in this category. The first item, unavailable revenues, which arises only under the modified accrual basis of accounting that qualifies for reporting in this category. Governmental fund balance sheets report unavailable revenues from three sources: long-term loans receivable, grants not collected within the availability period, and accumulated interest on a long-term receivable. These amounts are deferred and will be recognized as inflows of resources in periods that the amounts become available. The second item is deferred inflows related to pensions for differences between expected and actual experience. This amount is amortized over a closed period equal to the average of the expected remaining service lives of all employees that are provided with pensions through the plans, which are 2.1 years for the miscellaneous plan, 3.3 years for the police safety plan, and 3.8 years for the fire safety plan. The third item is deferred inflows from pensions resulting from changes in assumptions. There amounts are amortized over a closed period equal to the average expecting remaining service lives of all employees that are provided with pensions through the plans, which are 2.1 years for the miscellaneous plan, 3.3 years for the police safety plan, and 3.8 years for the fire safety plan. The fourth item is deferred inflows related to pensions resulting from the difference in projected and actual earnings on investments of the pension plans fiduciary net position. This amount is amortized over five years. (l) Fund Balances Fund balances are reported in the fund statements in the following classifications: Nonspendable Fund Balance this includes amounts that cannot be spent because they are either not spendable in form (such as inventory) or legally or contractually required to be maintained intact (such as endowments). 45

191 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (l) Fund Balances, (Continued) Restricted Fund Balance this includes amounts that can be spent only for specific purposes stipulated by constitution, external resource providers, or through enabling legislation. If Council action limiting the use of funds is included in the same action (legislation) that created (enables) the funding source, then it is restricted. Committed Fund Balance this includes amounts that can be used only for specific purposes determined by formal action of a city ordinance by the Council. It includes legislation (Council action) that can only be overturned by new legislation requiring the same type of voting consensus that created the original action. Therefore, if Council action limiting the use of funds is separate from the action (legislation) that created (enables) the funding source, then it is committed, not restricted. For the purposes of establishing, modifying, and rescinding a committed fund balance, the City considers an ordinance more binding than a resolution or a minute action by City Council. Assigned Fund Balance this includes amounts that are designated or expressed by the Council, but does not require a formal action like a resolution or ordinance. The Council may delegate the ability of an employee or committee to assign uses of specific funds for specific purposes. In June 2011, the City Council passed Resolution 11-27, delegating authority to establish, modify, or rescind a fund balance assignment to the Finance Director. Unassigned Fund Balance this includes remaining spendable amounts, which are not included in one of the other classifications. In order to calculate the amounts to report as restricted, committed, assigned, and unassigned fund balance in the governmental fund financial statements, a flow assumption must be made about the order in which the resources are considered to be applied. It is the government s policy to consider restricted fund balance to have been depleted before using any components of unrestricted fund balance. Further, when components of the unrestricted fund balance can be used for the same purpose, committed fund balance is depleted first, followed by assigned fund balance. Unassigned fund balance is applied last. (m) Employee Leave Benefits Regular full-time City employees earn from 40 to hours of vacation a year, depending upon the length of employment and bargaining unit. All employees except for the miscellaneous and confidential groups, can carry forward vacation hours in excess of twice that earned in a calendar year. Miscellaneous and confidential groups can accumulate up to a maximum of 320 hours. If an employee s vacation hours reach the maximum, vacation accruals will freeze until such time the accrual drops below the maximum. Upon termination, permanent employees are entitled to receive compensation at their current rate for all unused vacation up to and including the date of termination. 46

192 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (m) Employee Leave Benefits, (Continued) Sick leave credit is accrued for all employees except the miscellaneous and confidential groups, at bi-weekly rates of 3.69 hours for executives and sworn police officers, 4 hours for police management, and up to 6.72 hours for sworn fire employees. Balances in primary sick leave banks may accumulate up to a maximum of 480 hours for miscellaneous employees and sworn police officers, and 672 hours for sworn fire employees. Upon reaching maximum hours, bi-weekly accruals are distributed as follows at the employee s option: 1/2 of the benefit is a) paid at employee s current hourly base rate of pay; or b) converted into vacation hours. The remaining 1/2 of the benefit is placed into a secondary sick leave bank. Secondary banks may be used in the event of verified non-industrial disabilities, which result in absences of 60 consecutive calendar days. Sick leave hours equal to hours used from the primary bank for eligible disabilities may be transferred from the secondary bank to the primary bank, provided the transfer does not result in the primary bank having in excess hours over stated limits. Upon separation from the City with a minimum of 20 years continuous service or eligibility for retirement benefits, employees receive pay at their current hourly rate for 1/2 of the balance in their primary bank, except for police management who receive 50% of both primary and secondary leave banks. Effective July 1, 2014, miscellaneous and confidential employees receive 192 hours of sick leave at the time of hiring and up to 96 hours annually on July 1 st not to exceed 192 hours in the sick leave bank. Upon separation from the City, sick leave is not paid off. Unused sick leave hours can be used for service credit if the employee retires from the City. A liability is recorded for unused vacation and similar compensatory leave balances since the employees entitlement to these balances are attributable to services already rendered and it is probable that virtually all of these balances will be liquidated by either paid time off or payments upon termination or retirement. A liability is recorded for unused sick leave balances except for miscellaneous and confidential groups and only to the extent that it is probable that the unused balances will result in termination payments. Other amounts of unused sick leave are excluded from the liability since their payment is contingent solely upon the occurrence of a future event (illness) which is outside the control of the City and the employee. A current liability is accrued in the governmental funds for material leave benefits due on demand to governmental fund employees that have terminated prior to year end. All other amounts are only recorded in the government-wide financial statements. These non-current amounts will be recorded as fund expenditures in the year in which they are paid or become due on demand to terminated employees. 47

193 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (1) Summary of Significant Accounting Policies, (Continued) (n) Claims and Judgments The City records a liability for litigation, judgments, and claims when it is probable that an asset has been impaired or a liability has been incurred prior to year-end and the probable amount of loss (net of any insurance coverage) can be reasonably estimated. This liability is recorded in an internal service fund, which accounts for the City s self-insurance activities. (o) Prior Year Data The information included in the accompanying financial statements for the prior year has been presented for comparison purposes only and does not represent a complete presentation in accordance with generally accepted accounting principles. Certain minor reclassifications of prior year data have been made in order to enhance their comparability with current year figures. (p) Pensions For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the City s California Public Employees Retirement System (CalPERS) plans (Plans) and additions to/deductions from the Plans fiduciary net position have been determined on the same basis as they are reported by CalPERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. (q) Estimations The preparation of financial statements in accordance with generally accepted accounting principals requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 48

194 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (2) Cash and Investments Cash and investments are reported as follows: Statement of Net Position: Cash and investments $ 99,144,510 Cash and investments with fiscal agent 4,356,813 Statement of Fiduciary Net Position: Cash and investments 4,921,291 Cash and investments with fiscal agent 704,405 Total cash and investments $ 109,127,019 Cash and investments at June 30, 2016 consisted of the following: Cash and deposits: Petty cash on hand Demand deposits $ 10,185 7,301,791 Total cash and deposits 7,311,976 Investments: Costa Mesa Community Facilities District Bonds 965,000 Medium-term corporate notes 11,141,895 Federal agency securities Money market mutual funds 27,238,761 5,285,950 Local Agency Investment Fund 40,822,238 U.S. Treasury securities Lehman Brothers Holdings, Inc.-bankruptcy 15,973, ,500 Total investments 101,815,043 Total cash and investments $ 109,127,019 49

195 (2) Cash and Investments, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 Investments Authorized by the California Government Code and the City of Costa Mesa s Investment Policy The table below identifies investment types that are authorized for the City by the California Government Code and investment policies of the City and Successor Agency of the Costa Mesa Redevelopment Agency. The table also identifies certain provisions of the California Government Code (or the City s investment policy, where more restrictive) that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustee that are governed by the provisions of debt agreements of the City, rather than the general provisions of the California Government Code or the City s investment policy. Authorized by Investment Types Investment Maximum Percentage Investment In Authorized by State Law Policy Maturity* of Portfolio* One Issuer* U.S. Treasury Securities Yes 5 years None None Federal Agency Securities Yes 5 years None 35% Municipal Securities Yes 5 years None 5% Banker s Acceptances Yes 180 days 40% 5% Commercial Paper Yes 270 days 25% 5% Federally Insured Time Deposit Yes 5 Years None None Non-Negotiable Certificates of Deposit Yes 5 years 20% None Certificate of Deposit Placement Service Yes 5 years 30% None Negotiable Certificates of Deposit Yes 5 years 30% None Repurchase Agreements Yes 1 year 30% None Medium-Term Corporate Notes Yes 5 years 30% 5% Money Market Mutual Funds Yes N/A 20% None Mortgage Backed Securities Yes 5 years 20% None County Pooled Investment Funds Yes N/A 35% None Local Agency Investment Fund Yes N/A $50 Million $50 Million * Based on state law requirements or investment policy requirements, whichever is more restrictive. 50

196 (2) Cash and Investments, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 Investments Authorized by Debt Agreements Investment of debt proceeds held by bond trustees are governed by provisions of the debt agreements, rather than the general provisions of the California Government code or the City s investment policy. The table below identifies the investment types that are authorized for investments held by bond trustees. The table also identifies certain provisions of these debt agreements that address interest rate risk, credit risk, and concentration of credit risk. Generally, the following investment types are authorized by City debt agreements: Authorized Investment Type Maximum Maturity Maximum Percentage Allowed Maximum Investment in One Issuer U.S. Treasury Securities None None None Federal Agency Securities 5 years None None Banker s Acceptances 270 days None None Commercial Paper 365 days None None Money Market Mutual Funds 5 years 20% 10% Investment Agreements None None None Interest-Bearing Time Deposits 30 days None None Repurchase Agreements 270 days None None Local Agency Investment Fund None None None State Obligations None None None Pre-refunded Municipal Obligations None None None 51

197 (2) Cash and Investments, (Continued) Disclosures Relating to Interest Rate Risk CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the City manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments, and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. Information about the sensitivity of the fair values of the City s investments (including investments held by bond trustee) to market interest rate fluctuations is provided by the following table that shows the distribution of the City s investments by maturity: Remaining Maturity (in Months) Investment Type Total 12 Months Or Less 13 to 24 Months 25 to 60 Months More than 60 Months Federal Agency Securities $27,238,761 5,010,346 13,058,763 9,169,652 - State Investment Pool (LAIF) 40,822,238 40,822, U.S. Treasury Securities 15,973, ,885 2,408,203 12,579,611 - Medium-Term Corporate Notes 11,141,895-3,318,897 7,822,998 - Money Market Mutual Funds 224, , Held by Trustee: Costa Mesa Community Facilities District Bonds 965, , , , ,000 Money Market Mutual Funds 5,061,218 5,061, Lehman Brothers Holdings, Inc., Bankruptcy 387, , , Total $101,815,043 52,469,419 19,148,363 29,972, ,000 Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations The City (including investments held by bond trustees) held no investments, which were highly sensitive to interest rate fluctuations (to a greater degree than already indicated in the information provided above). 52

198 (2) Cash and Investments, (Continued) Disclosures Relating to Credit Risk CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the California Government Code, the City s investment policy, or debt agreements, and the actual rating as of year end for each investment type: Ratings at 6/30/16 Minimum Legal Standard & Investment Type Value Rating Moody s Poors Federal Agency Securities $27,238,761 N/A Aaa AA+ U.S. Treasury Securities 15,973,699 N/A Not Required to be Rated Not Required to be Rated Medium-Term Corporate Notes: Oracle Corporation 1,003,541 A A1 AA- Wells Fargo Corporation 661,027 A A2 A General Electric Capital Corporation 1,008,921 A A1 AA+ HSBC USA Incorporate 648,842 A A2 A Chevron Corporation 657,593 A Aa2 AA- Eli Lilly & Company 665,248 A A2 AA- Exxon Mobil Corporation 713,286 A Aaa AA+ US Bancorp 666,639 A A1 A+ Toyota Motor Credit Corporation 718,721 A Aa3 AA- American Honda Finance 1,032,550 A A1 A+ Bank of New York 1,020,391 A A1 A JP Morgan Chase 506,876 A A3 A- John Deere Capital Corporation 510,697 A A2 A PepsiCo Incorporate 659,482 A A1 A Qualcomm Incorporate 668,081 A A1 A+ State Investment Pool (LAIF) 40,822,238 N/A Not Rated Not Rated Money Market Mutual Funds 224,732 AAA Aaa AAA Held by Trustee: Costa Mesa Community Facilities District Bond 965,000 N/A Not Rated Not Rated Money Market Mutual Funds 5,061,218 AAA Aaa AAA Lehman Brothers Holdings Inc., Bankruptcy 387,500 N/A Not Rated Not Rated Total $101,815,043 53

199 (2) Cash and Investments, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 Disclosures Relating to Credit Risk, (Continued) Governmental Accounting, Auditing and Financial Reporting (GAAFR) requires the disclosure of more than 5% total investments with a single issuer. At June 30, 2016, the City s investment in the following single issuers that exceeded 5%: Issuer Investment Type Reported Amount Percentage FHLB Federal Agency Securities $ 9,387, % FNMA Federal Agency Securities 12,310, % Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the City s investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secure deposits made by the state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure City deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. Investment in State Investment Pool The City is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section under the oversight of the Treasurer of the State of California. The fair value of the City s investment in this pool is reported in the accompanying financial statements at amounts based upon the City s pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. 54

200 (2) Cash and Investments, (Continued) Fair Value Measurements CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 The City categorizes its fair value measurement within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the relative inputs used to measure the fair value of the investments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows: Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets in active markets that the City has the ability to access. Level 2: Inputs to the valuation methodology include:! Quoted prices for similar assets in active markets;! Quoted prices for identical or similar assets in inactive markets;! Inputs other than quoted prices that are observable for the asset;! Inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs reflect the City s own assumptions about the inputs market participants would use in pricing the asset (including assumptions about risk). Unobservable inputs are developed based on the best information available in the circumstances and may include the City s own data. The asset s level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The determination of what constitutes observable requires judgment by the City s management. City management considers observable data to be that market data, which is readily available, regularly distributed or updated, reliable, and verifiable, not proprietary, and provided by multiple independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the relative observability of the inputs to its fair value measurement and does not necessarily correspond to City management s perceived risk of that investment. The methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. 55

201 (2) Cash and Investments, (Continued) Fair Value Measurements CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 When available, quoted prices are used to determine fair value. When quoted prices in active markets are available, investments are classified within Level 1 of the fair value hierarchy. When quoted prices in active markets are not available, fair values are based on evaluated prices received by City s asset manager from third party service provider. The following is a description of the recurring valuation methods and assumptions used by the City to estimate the fair value of its investments. For a large portion of the City s portfolio, the City s asset manager applies their leveling methodology across all securities in a specific sector (i.e. Federal Agency Securities). Inputs to their pricing models are based on observable market inputs in active markets. The City s investments in the Costa Mesa Community Facilities District Bonds and Lehman Brothers Holdings, Inc. Bankruptcy are valued based on cost as these investments are not traded on, and therefore, are categorized in Level 3. When valuing Level 3 securities, the inputs or methodology are not necessarily an indication of the risks associated with investing in those securities. Changes in valuation techniques may result in transfers into or out of an assigned level within the disclosure hierarchy. Quoted Observable Unobservable Prices Inputs Inputs Level 1 Level 2 Level 3 Total Federal Agency Securities $ - $ 27,238,761 $ - $ 27,238,761 U.S. Treasury Securities - 15,973,699-15,973,699 Medium Term Corporate Notes - 11,141,895-11,141,895 Held by Trustee: Costa Mesa Community Facilities District Bonds , ,000 Lehman Brothers Holdings, Inc. Bankruptcy , ,500 Total Leveled Investments $ - $ 54,354,355 $ 1,352,500 55,706,855 State Investment Pool (LAIF)* 40,822,238 Money Market Mutual Funds* 224,732 Held by Trustee: Money Market Mutual Funds* 5,061,218 Total Investment Portfolio $ 101,815,043 * Not subject to fair value measurements. 56

202 (3) Due From and To Other Funds CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 Interfund receivable and payable balances at June 30, 2016 are as follows: Receivable Fund Payable Fund Amount General Fund Nonmajor Governmental Funds $ 279,539 All receivables resulted from the recording of reimbursement of miscellaneous costs, which are expected to be reimbursed next year. (4) Advances To and From Other Funds Advances to and from other funds at June 30, 2016 are as follows: Receivable Fund Payable Fund Amount General Fund Park Development Capital Projects Fund $2,375,720 The terms for the significant advances reflected above are as follows: The outstanding advance from the General Fund to the Park Development Capital Projects Fund was for the purchase of park land. In June 2014, the City Council approved a restructuring of the original terms of the advance, which included an interest rate of 0.50% with an annual payment of $225,690. The advance is expected to be repaid in eleven years with future park development fees. (5) Transfers In and Out Transfers in and out for the year ended June 30, 2016 are as follows: Transfers out Transfers in Total General Fund Major Capital Projects Fund $ 8,827,536 (a1) General Fund Nonmajor Governmental Funds 3,624,899 (a2 and 3) Nonmajor Governmental Funds General Fund 400,505 (b)(c) $12,852,940 (a) The General Fund transferred the following to: 1. $8,827,536 to the Capital Improvements Capital Projects Fund for capital improvement projects. 2. $106,583 to the Supplemental Law Enforcement Services Special Revenue Fund for public safety expenditures; 3. $3,518,316 to the Financing Authority Debt Service Fund for debt service payments; (b) The Park Districts Capital Projects Fund transferred $505 in investment earnings back to the General Fund. (c) The Fire System Development Fees Capital Projects Fund transferred $400,000 to the General Fund for reimbursement of fire emergency vehicle and emergency traffic signal pre-emption system. 57

203 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (6) Capital Asset A summary of changes in capital assets follows: Balance at Balance at July 1, 2015 Additions Deletions June 30, 2016 Capital assets not being depreciated: Land $ 34,213, ,213,106 Land rights related to streets 29,821, ,821,224 Construction in progress 6,826,025 2,381,505 (5,617,990) 3,589,540 Total capital assets not being depreciated 70,860,355 2,381,505 (5,617,990) 67,623,870 Capital assets being depreciated/amortized: Building improvements and structures 60,460,129 4,605,001-65,065,130 Landscaping and sprinklers 10,298, ,298,694 Automotive equipment 12,531, ,008 (305,493) 13,111,395 Office furniture 595, , ,170 Office machines 9,188, ,830-9,427,550 Other equipment 10,627,227 3,004,805 (3,825,267) 9,806,765 Intangible assets 1,454,048 23,053-1,477,101 Park system and facilities 16,949, ,949,431 Infrastructure roads 282,481,752 3,692, ,174,713 Infrastructure storm drains 91,572,982 3,085,673-94,658,655 Total capital assets being depreciated/amortized 496,160,530 15,784,834 (4,130,760) 507,814,604 Less accumulated depreciation/amortization for: Building improvements and structures (36,211,711) (1,864,038) - (38,075,749) Landscaping and sprinklers (9,607,527) (60,016) - (9,667,543) Automotive equipment (7,854,790) (662,127) 275,960 (8,240,957) Office furniture (431,579) (29,903) - (461,482) Office machines (5,824,430) (613,451) - (6,437,881) Other equipment (8,478,666) (529,186) 3,759,801 (5,248,051) Park system and facilities (7,470,093) (825,561) - (8,295,654) Intangible assets (156,900) (146,272) - (303,172) Infrastructure roads (177,495,469) (5,913,631) - (183,409,100) Infrastructure storm drain (79,665,472) (1,349,760) - (81,015,232) Total accumulated depreciation/amortization (333,196,637) (11,993,945) 4,035,761 (341,154,821) Total capital assets being depreciated/amortized, net 162,963,893 3,790,889 (94,999) 166,659,783 Capital assets, net $233,824,248 6,172,394 (5,712,989) 234,283,653 58

204 (6) Capital Assets, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 Depreciation expense is charged to the following functions for the year ended June 30, 2016: Governmental activities: General government $ 1,335,508 Protection of persons and property 2,172,846 Community programs 1,165,032 Public services 7,320,559 Total depreciation expense-governmental activities $11,993,945 The City has active construction projects as of June 30, The significant projects include the following: Remaining Construction Project Project # Total Budget Spent to Date Commitment Fire Station #1 Demo and New Construction $ 1,676, ,850 1,362,351 Redhill Medians-McCormick to Bristol ,026, , ,970 Jack Hammett Field Upgrades ,800, ,731 2,661,269 Neighborhood Community Center-Library Construction ,273, ,826 3,447,668 Total $9,776,565 1,383,307 8,393,258 59

205 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (7) Long-Term Liabilities A summary of changes in long-term liabilities for the year ended June 30, 2016 is as follows: Portion Portion Due Due Balance at Within Beyond July 1, 2015 Balance at One One As Restated Additions Reductions June 30, 2016 Year Year Bonds payable (Note 8): Public Financing Authority 2003 Refunding Certificates of Participation $4,545,000 - (1,070,000) 3,475,000 1,110,000 2,365,000 Public Financing Authority 2006 Revenue Refunding Bonds 1,285,000 - (160,000) 1,125, , ,000 Public Financing Authority 2007 Certificates of Participation 21,195,000 - (1,420,000) 19,775,000 1,480,000 18,295,000 Total bonds payable 27,025,000 - (2,650,000) 24,375,000 2,755,000 21,620,000 Other liabilities (Note 9): Claims payable 10,879, ,530 (1,154,274) 10,593,740 1,154,274 9,439,466 Employee leave benefits payable 4,036,221 3,567,170 (3,495,963) 4,107,428 3,000,000 1,107,428 Net OPEB obligation 3,622,775 2,721,185 (2,397,397) 3,946,563-3,946,563 Police Retirement 1% Supplemental 2,897,028 80,931 (211,287) 2,766,672-2,766,672 Total other liabilities 21,435,508 7,237,816 (7,258,921) 21,414,403 4,154,274 17,260,129 Total $48,460,508 7,237,816 (9,908,921) 45,789,403 6,909,274 38,880,129 60

206 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (8) Bonds Payable Costa Mesa Public Financing Authority Bonds 2007 Certificates of Participation On January 18, 2007, the Costa Mesa Public Financing Authority issued $29,960,000 of 2007 Certificates of Participation. The Certificates are to provide funding for the construction and equipping of certain improvements to the Civic Center complex particularly the expansion of the police facility. The Certificates mature from October 1, 2007 through October 1, 2026 in annual installments ranging from $745,000 to $2,180,000. Interest is payable semi-annually on April 1 and October 1 of each year, commencing on April 1, 2007 at a rate ranging from 3.75% to 4.30%. There is a reserve requirement of $2,297,204 on the 2007 Certificate of Participation. The City has $2,297,551 on reserve with the fiscal agent at June 30, The principal balance outstanding at June 30, 2016 is $19,775, Revenue Refunding Bonds On June 1, 2006, Costa Mesa Public Financing Authority issued $2,365,000 of Revenue Refunding Bonds, Series 2006A, to advance refund the outstanding portion of the $3,225,000 of the 1991 Lease Revenue Bonds issued on November 1, The bonds were issued to provide monies to enable the Authority to acquire the City of Costa Mesa Community Facilities District 91-1 (Plaza Tower Public Improvements) 1991 Special Tax Bonds, issued under the Mello-Roos Community Facilities Act of The $2,365,000 Revenue Refunding Bonds, which consists of $1,955,000 of serial bonds and $410,000 of term bonds. The serial bonds mature from August 1, 2007 through August 1, 2019 in annual installments ranging from $120,000 to $190,000. The term bonds mature from August 1, 2020 through August 1, 2021 in annual installments ranging from $200,000 to $210,000. Interest is payable semi-annually on February 1 and August 1 of each year, commencing on February 1, 2007 at rates ranging from 3.85% to 5.10%. There is a reserve requirement of $224,755 on the 2006 Revenue Refunding Bonds. The City has $224,755 on reserve with the fiscal agent at June 30, The principal balance outstanding at June 30, 2016 is $1,125,000. The bonds are secured by special tax levied within CFD 91-1 Plaza Tower Public Improvements. The special taxes are levied and collected for debt service on the bonds are required to be remitted to the fiscal agent for the bonds within ten days of receipt. The County remitted taxes on December 21, 2015 and April 22, 2016; the City remitted payment 18 and 7 days later, respectively. 61

207 (8) Bonds Payable, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 Costa Mesa Public Financing Authority Bonds, (Continued) 2003 Refunding Certificates of Participation On October 1, 2003, the Costa Mesa Public Financing Authority issued a $14,340,000 refunding Certificates of Participation (COP), Series 2003 to refund the $18,970,000 Refunding Revenue Bonds, Series 1993A, to advance refund $640,000 of outstanding 1966 Bonds and $16,430,000 of outstanding 1988 Lease Revenue Bonds. The 1966 Bonds were issued to finance construction of the Municipal Center and the 1988 Lease Revenue Bonds were issued to finance the acquisition of right-of-way property on Victoria Street. The certificates issued start maturing on 2004 to 2018 in semi-annual installments ranging from $805,000 to $1,210,000. Interest is payable on April 1 and October 1, commencing on April 1, 2004 at rates ranging from 2.0% to 4.2%. Certificates maturing on or after October 1, 2014 are subject to optional redemption, in whole or in part from among maturities as selected by the Authority on October 1, The certificates are subject to mandatory redemption on any date from the net proceeds deposited in the prepayment fund. The amount required for the bond reserve for the 2003 Refunding Certificate of Participation is $1,273,442. The City has $1,273,442 on reserve with the fiscal agent at June 30, The principal balance outstanding at June 30, 2016 is $3,475,

208 (8) Bonds Payable, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 Costa Mesa Public Financing Authority Bonds, (Continued) The annual debt service requirements for the Public Financing Authority Bonds as of June 30, 2016 are as follows: Year Ending June Refunding Revenue 2003 Refunding Certificates Of Participation 2007 Certificates of Participation Principal Interest Principal Interest Principal Interest 2017 $ 165,000 52,439 1,110, ,450 1,480, , ,000 44,086 1,155,000 89,375 1,530, , ,000 35,130 1,210,000 30,250 1,590, , ,000 25, ,640, , ,000 15, ,710, , ,000 5, ,775, , ,850, , ,925, , ,005, , ,090, , ,180,000 46,870 Total $1,125, ,528 3,475, ,075 19,775,000 4,885,252 63

209 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (9) Other Liabilities Claims and Judgments The City retains the risk of loss for general liability and workers compensation claims as described in note 19. These amounts represent estimates of amounts to be paid for reported general liability and workers compensation claims including incurred-but-not-reported claims based upon past experience, modified for current trends and information. While the ultimate amount of losses incurred through June 30, 2016, is dependent on future developments, based upon information from the City s attorneys, the City s claims administrators and others involved with the administration of the programs, City management believes the accrual is adequate to cover such losses. The estimated liability at June 30, 2016 for general liability amounted to $1,226,461 and workers compensation was $9,367,279. $ 10,593,740 Employee Leave Balances Payable The City s policies relating to compensated absences are described in note 1. The following liability at June 30, 2016 is expected to be paid primarily by the general fund in future years, consistent with prior year treatment. 4,107,428 OPEB The City administers a single-employer defined benefit plan, which provides medical insurance benefits to eligible retirees and their spouses as described in note 16. The plan covers employees hired before January 1, 2004 who retire directly from the City with 10 years of City service. The City provides a contribution up to a percentage of the lesser of $500 per month or the premium for the most popular medical plan elected by the employees. The net OPEB obligation at June 30, 2016 was $3,946,563. This amount is expected to be paid primarily by the general fund in future years, consistent with prior year treatment. 3,946,563 Police Retirement 1% Supplemental The City of Costa Mesa joined the CalPERS 3%@age 50 plan for police employees on December 31, Prior to that date, the City sponsored the retirement plan providing a 2%@age 50 benefit and the Police Officer Separation Incentive Plan providing an additional 1%@age 50 benefit as described in note 14. This Plan currently has only retired participants as all active employees were transferred to the CalPERS 3%@age 50 plan. The net pension obligation at June 30, 2016 for the 1% enhancement was $2,766,672, consistent with prior year treatment. 2,766,672 Total other liabilities $ 21,414,403 64

210 (10) Debt Without Government Commitment CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 The following issues of bonds are not reflected in the Statement of Net Position since they are obligations of private parties (with no government commitment) payable entirely from and secured by non-city resources as described in the bond resolutions and statements of the various issues: The City of Costa Mesa Community Facilities District No. 91-1, issued $2,965,000 of District 91-1 Special Tax Bonds on November 1, All of the bonds were acquired by the Costa Mesa Public Financing Authority. The bonds mature from August 1, 1992 through August 1, 2021 in annual principal payments ranging from $25,000 to $265,000 and bear an interest rate of 8.30%. The bonds were issued to acquire certain improvements to the Anton/Bristol intersection, street improvements to Anton Boulevard and repay certain costs incurred by third parties with respect to the construction of the Metro Fire Station and the I-405 Access Study. The City is not liable for repayment of these bonds, but is only acting as an agent for the property owners in collecting the assessments, forwarding the collections to the bondholders, and initiating foreclosure proceedings. The outstanding balance at June 30, 2016 was $965,

211 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (11) Fund Balances Fund balance consisted of the following at June 30, 2016: Major Special Revenue Funds Major Capital Projects Funds Non- Housing HOME Park Capital Measure Major General Authority Program Development Improvements M2 Funds Nonspendable: Prepaid items $ 64, Inventories 45, Advance to other funds 2,375, Restricted for: Protection of persons and property ,187 Community programs - 1,148,308 97,254 1,556, ,286 Public services (1) ,002,425 9,244,035 Debt service ,321,813 Committed for: - - Declared disasters (2) 14,125, Self insurance (3) 2,000, Assigned for: Compensated absences 4,107, Police Retirement 1% Supplemental 2,766, OPEB 3,946, Economics reserves 3,000, Protection of persons and property ,346 Public services ,135,404 5,248,630 Unassigned 32,040, (139,064) Total Fund Balance $64,472,461 1,148,308 97,254 1,556,775 18,135,404 1,002,425 20,968, Restricted fund balances in the Public Services category consist of fund balances in the Special Gas Tax, Air Quality Improvement, and Measure M2 Construction funds. Revenues received in these funds are legally restricted for specific purposes, such as transportation related capital projects. 2. The fund balance committed for declared disasters was approved through Ordinance No to provide required funding as a result of a declared emergency by the City Council for an unanticipated but urgent event threatening the pubic health, safety and welfare of the City. Any fund balance utilized has to be replenished. 3. The fund balance committed for self insurance was codified in the Ordinance No to provide a self-insurance reserve to be used to pay actual losses not covered by insurance policies or insurance pools. Any fund balance utilized has to be replenished. The following governmental fund had a deficit at June 30, 2016: Nonmajor Fund: Special Revenue Fund: Proposition 172 Fund (139,064) 66

212 (12) Property Tax Calendar CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 Property tax revenues are reported on a modified accrual basis. Accordingly, they are recognized in the fiscal year for which the taxes have been levied, provided this accrual meets the available criteria. Available means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. The County of Orange collects property taxes for the City tax liens attached annually as of 12:01 a.m. on the first day in January preceding the fiscal year for which the taxes are levied. The tax levy covers the fiscal period July 1st to June 30th. All secured personal property taxes and one-half of the taxes on real property are due November 1st. The second installment is due February 1st. All taxes are delinquent if not paid as of December 10th and April 10th, respectively. Unsecured personal property taxes become due on the first of March each year and are delinquent if not paid as of August 31st. (13) Defined Benefit Pension Plans (a) General Information about the Pension Plans Plan Descriptions All qualified permanent and probationary employees are eligible to participate in the City s separate Miscellaneous and Police Safety Plans, agent multiple-employer defined benefit pension plans and the Fire Safety cost sharing plans, administered by the California Public Employees Retirement System (CalPERS), which acts as a common investment and administrative agent for its participating member employers. Benefit provisions under the Plans are established by State statute and City resolution. CalPERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership information that can be found on the CalPERS website. Benefits Provided CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of credited service, equal to one year of full time employment. Members with five years of total service are eligible to retire at age 50 to 62 with statutorily reduced benefits. For employees hired into a plan with the 1.5% at 65 formula, eligibility for service retirement is age 55 with at least 5 years of services. PEPRA miscellaneous members become eligible for service retirement upon attainment of age 52 with at least 5 years of service. All members are eligible for non-duty disability benefits after 5 years of service. The death benefit is one of the following: the Basic Death Benefit, the 1957 Survivor Benefit, or the Optional Settlement 2W Death Benefit. Safety members can receive a special death benefit if the member dies while actively employed and the death is job-related. Fire members may receive the alternate death benefit in lieu of the Basic Death Benefit or the 1957 Survivor Benefit if the member dies while actively employed and has at least 20 years of total CalPERS service. The cost of living adjustments for each plan are applied as specified by the Public Employees Retirement Law. 67

213 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (13) Defined Benefit Pension Plans, (Continued) (a) General Information about the Pension Plans, (Continued) Benefits Provided, (Continued) The Plans provisions and benefits in effect at June 30, 2016, are summarized as follows: Miscellaneous (Agent Multiple-Employer) Prior to On or After On or After Hire date March 11, 2012 March 11, 2012 January 1, 2013 Benefit formula Benefit vesting schedule 5 years of service 5 years of service 5 years of service Benefit payments monthly for life monthly for life monthly for life Retirement age Monthly benefits, as a % of eligible compensation 2.0% to 2.5% 1.092% to 2.418% 1.0% to 2.5% Required employee contribution rates 8% 7% 6.75% Required employer contribution rates % % 6.75% Police Safety (Agent Multiple-Employer) Prior to On or After Hire date March 11, January 1, 2013 Benefit formula 3%@50 2.7%@57 Benefit vesting schedule 5 years of service 5 years of service Benefit payments monthly for life monthly for life Retirement age Monthly benefits, as a % of eligible compensation 3% 2.0% to 2.7% Required employee contribution rates 9% 12.75% Required employer contribution rates % 12.75% Fire Safety (Cost Sharing Multiple-Employer) Prior to On or After On or After Hire date December 30, 2012 December 30, 2012 January 1, 2013 Benefit formula 3.0%@50 2.0%@50 2.7%@57 Benefit vesting schedule 5 years of service 5 years of service 5 years of service Benefit payments monthly for life monthly for life monthly for life Retirement age Monthly benefits, as a % of eligible compensation 3% 2.0% to 2.7% 2.0% to 2.7% Required employee contribution rates 9% 9% 11.50% Required employer contribution rates % % 11.50% 68

214 (13) Defined Benefit Pension Plans, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (a) General Information about the Pension Plans, (Continued) Employees Covered At June 30, 2016, the following employees were covered by the benefit terms for the agent multiple-employer Plans: Miscellaneous Police Safety Inactive employees or beneficiaries currently receiving benefits Inactive employees entitled to but not yet receiving benefits Active employees Total 1, Contributions Section 20814(c) of the California Public Employees Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Funding contributions for both Plans are determined annually on an actuarial basis as of June 30 by CalPERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The City is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. (b) Net Pension Liability The City s net pension liability for each Plan is measured as the total pension liability, less the pension plan s fiduciary net position. The net pension liability of each of the Plans is measured as of June 30, 2015, using an annual actuarial valuation as of June 30, 2014 rolled forward to June 30, 2015 using standard update procedures. A summary of principal assumptions and methods used to determine the net pension liability is shown below. 69

215 (13) Defined Benefit Pension Plans, (Continued) (b) Net Pension Liability, (Continued) Actuarial Assumptions CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 The total pension liabilities in the June 30, 2014 actuarial valuations were determined using the following actuarial assumptions: Police & Fire Miscellaneous Safety Valuation Date June 30, 2014 June 30, 2014 Measurement Date June 30, 2015 June 30, 2015 Actuarial Cost Method Entry-Age Normal Entry-Age Normal Cost Method Cost Method Actuarial Assumptions: Discount Rate 7.65% 7.65% Inflation 2.75% 2.75% Payroll Growth 3.00% 3.00% Projected Salary Increase (1) (1) Investment Rate of Return 7.5% (2) 7.5% (2) Mortality (3) (3) (1) Depending on age, service and type of employment (2) Net of pension plan investment expenses, including inflation (3) The probabilities of mortality are derived using CalPERS' membership data for all funds. The mortality table used was developed based on CalPERS' specific data. The table includes 20 years of mortality improvements using Society of Actuaries Scale BB. for more details on this table, please refer to the 2014 experience study report. All other actuarial assumptions used in the June 30, 2014 valuation were based on the results of an actuarial experience study for the period from 1997 to 2011, including updates to salary increase, mortality and retirement rates. The Experience Study report can be obtained at the CalPERS website under Forms and Publications. Change of Assumptions GASB 68, paragraph 68 states that the long-term expected rate of return should be determined net of pension plan investment expense but without reduction for pension plan administrative expense. The discount rate of 7.50% used for the June 30, 2014 measurement date was net of administrative expenses. The discount rate of 7.65% used for the June 30, 2015 measurement date is without reduction of pension plan administrative expense. 70

216 (13) Defined Benefit Pension Plans, (Continued) (b) Net Pension Liability, (Continued) Discount Rate CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 The discount rate used to measure the total pension liability was 7.65% for each Plan. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing of the Plans, the tests revealed the assets would not run out. Therefore, the current 7.65% discount rate is appropriate and the use of the municipal bond rate calculation is not deemed necessary. The long term expected discount rate of 7.65% is applied to all plans in the Public Employees Retirement Fund (PERF). The stress test results are presented in a detailed report called GASB Crossover Testing Report that can be obtained from the CalPERS website under the GASB 68 section. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Such cash flows were developed assuming that both members and employers will make their required contributions on time and as scheduled in all future years. Using historical returns of all the funds asset classes, expected compound (geometric) returns were calculated over the short-term (first 10 years) and the long-term (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. 71

217 (13) Defined Benefit Pension Plans, (Continued) (b) Net Pension Liability, (Continued) Discount Rate, Continued CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 The table below reflects the long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. The target allocation shown was adopted by the CalPERS Board effective on July 1, New Real Return Real Return Strategic Years Years Asset Class Allocation 1-10 (a) 11+ (b) Global Equity 51.00% 5.25% 5.71% Global Fixed Income 19.00% 0.99% 2.43% Inflation Sensitive 6.00% 0.45% 3.36% Private Equity 10.00% 6.83% 6.95% Real Estate 10.00% 4.50% 5.13% Infrastructure and Forestland 2.00% 4.50% 5.09% Liquidity 2.00% -0.55% -1.05% Total % (a) An expected inflation of 2.5% used for this period (b) An expected inflation of 3.0% used for this period 72

218 (13) Defined Benefit Pension Plans, (Continued) (c) Changes in the Net Pension Liability CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 The changes in the net pension liability for the Miscellaneous (Agent Multiple-Employer) Plan, using the measurement date of June 30, 2015, are as follows: Increase (Decrease) Total Plan Net Pension Pension Fiduciary Liability Liability Net Position (Asset) Balance at June 30, 2014 $ 250,280,650 $ 173,929,934 $ 76,350,716 Changes in the Year: Service cost 3,187,235-3,187,235 Interest on the total pension liability 18,262,096-18,262,096 Differences between actual and expected experience (2,016,112) - (2,016,112) Changes in assumptions (4,399,842) - (4,399,842) Changes in benefit terms Plan to Pan resource movement - 13,634 (13,634) Contributions - employer - 5,768,827 (5,768,827) Contributions - employees - 1,978,052 (1,978,052) Net investment income - 3,881,685 (3,881,685) Administrative expenses - (193,607) 193,607 Benefit payments, including refunds of employee contributions (13,476,175) (13,476,175) - Net Changes 1,557,202 (2,027,584) 3,584,786 Balance at June 30, 2015 (Measurement Date) $ 251,837,852 $ 171,902,350 $ 79,935,502 73

219 (13) Defined Benefit Pension Plans, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (c) Changes in the Net Pension Liability, (Continued) The changes in the net pension liability for the Police Safety (Agent Multiple-Employer) Plan, using the measurement date of June 30, 2015, are as follows: Increase (Decrease) Total Plan Net Pension Pension Fiduciary Liability Liability Net Position (Asset) Balance at June 30, 2014 $ 248,499,258 $ 164,200,853 $ 84,298,405 Changes in the Year: Service cost 4,048,034-4,048,034 Interest on the total pension liability 18,452,568-18,452,568 Differences between actual and expected experience 1,744,508-1,744,508 Changes in assumptions (4,744,823) - (4,744,823) Changes in benefit terms Plan to Pan resource movement Contributions - employer - 5,228,944 (5,228,944) Contributions - employees - 2,191,295 (2,191,295) Net investment income - 3,618,253 (3,618,253) Administrative expenses - (182,933) 182,933 Benefit payments, including refunds of employee contributions (12,625,831) (12,625,831) - Net Changes 6,874,456 (1,770,272) 8,644,728 Balance at June 30, 2015 (Measurement Date) $ 255,373,714 $ 162,430,581 $ 92,943,133 74

220 (13) Defined Benefit Pension Plans, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (c) Changes in the Net Pension Liability, (Continued) Proportionate Share of the Net Pension Liability for the Fire Safety Plan As of June 30, 2016, the City reported net pension liabilities for its proportionate shares of the net pension liability of the Fire Safety Plan as follows: Proportionate Share of Net Pension Liability Fire Safety $ 59,018,969 The City s net pension liability for each Plan is measured as the proportionate share of the net pension liability. The net pension liability of each of the Plans is measured as of June 30, 2015, and the total pension liability for each Plan used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2014 rolled forward to June 30, 2015 using standard update procedures. The City s proportionate share of the net pension liability was based on a projection of the City s long-term share of contributions to the pension plans relative to the projected contributions of all participating employers, actuarially determined. The City s proportionate share of the net pension liability for each Plan as of June 30, 2014 and 2015 was as follows: Fire Safety Proportion - June 30, % Proportion - June 30, % Change - Increase (Decrease) % 75

221 (13) Defined Benefit Pension Plans, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (c) Changes in the Net Pension Liability, (Continued) Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability of the City for each Plan, calculated using the discount rate for each Plan, as well as what the City s net pension liability would be if it were calculated using a discount rate that is 1-percentage point lower or 1-percentage point higher than the current rate: Miscellaneous Police Safety Fire Safety 1% Decrease 6.65% 6.65% 6.65% Net Pension Liability $ 112,960,568 $ 128,991,646 $ 84,029,979 Current Discount Rate 7.65% 7.65% 7.65% Net Pension Liability $ 79,935,502 $ 92,943,133 $ 59,018,969 1% Increase 8.65% 8.65% 8.65% Net Pension Liability $ 52,784,795 $ 63,608,681 $ 38,510,400 Pension Plans Fiduciary Net Position Detailed information about each pension plan s fiduciary net position is available in the separately issued CalPERS financial reports. (d) Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions For the year ended June 30, 2016, the City recognized pension expense of $12,392,037. At June 30, 2016, the City reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Pension contributions subsequent to measurement date $ 15,836,680 $ - Differences between actual and expected experience - (349,780) Change in assumptions - (7,955,466) Change in employer's proportion and differences between the employer's contributions and the employer's proportionate share of contributions 1,751,038 - Net differences between projected and actual earnings on plan investments - (4,504,014) Total $ 17,587,718 $ (12,809,260) 76

222 (13) Defined Benefit Pension Plans, (Continued) CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (d) Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions, (Continued) $15,836,680 reported as deferred outflows of resources related to contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ending June 30, Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized as pension expense as follows: (e) Payable to the Pension Plans Year Ending June 30, Amount 2017 $ (7,475,825) 2018 (4,755,018) 2019 (3,831,309) ,003, Thereafter - At June 30, 2016, the City had no outstanding amount of contributions to the pension plans required for the year ended June 30, (14) Police 1% Supplemental Retirement Plan (a) General Information about the Pension Plan Plan Description The plan was effective on July 1, 1993 for sworn members of the City of Costa Mesa Police Department. The plan was originally a 1% supplemental plan to the City s 2%@50 benefit. Under the Retirement Plan for Safety Employees of the City of Costa Mesa, the City joined CalPERS with 3%@50 Safety benefit as of December 31, 2000 and transferred active members to CalPERS. Employees who retired prior to July 1, 1999 were not transferred to CalPERS. The Police 1% Supplemental Retirement Plan is a single employer defined benefit plan. This Plan currently has only retired participants as all active employees were transferred to the CalPERS 3%@age 50 benefit plan. The number of participants at June 30, 2016 was 19. The average monthly benefit being paid is $ The retirement benefit is 1% of the highest 12-month earnings for credited services up to 25 years. Maximum benefit is 75% of the highest 12-month earnings for service retirement including all public plan pension benefits but not including Social Security. The 75% is proportionately reduced for less than 25 years of Costa Mesa Police Department service. 77

223 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (14) Police 1% Supplemental Retirement Plan, (Continued) (a) General Information about the Pension Plan, (Continued) Contributions The City has not adopted a funding policy for this supplemental retirement plan and accordingly plan benefits impact financial resources as benefits are paid. (b) Net Pension Liability The City s net pension liability for the Plan is measured as the total pension liability, less the pension plan s fiduciary net position. The net pension liability of the Plan is measured as of June 30, 2016, using an annual actuarial valuation as of June 30, A summary of principal assumptions and methods used to determine the net pension liability is shown below. Actuarial Methods and Assumptions The total pension liabilities in the June 30, 2016 actuarial valuations were determined using the following actuarial assumptions: Measurement Date June 30, 2016 Actuarial Assumptions: Discount Rate 2.90% Payroll Growth Inflation Rate N/A; all participants have retired 2.75% per year Cost Method Entry Age Normal as a level percentage of payroll Employer Funding Policy Census Data Mortality Pay-as-you-go Census information was provided by the Plan Sponsor as of June Rates are based on CalPERS Safety Police Plan of the City of Costa Mesa annual valuation report as of June 30, Annual sample rate are as shown below: Healthy Retirees Non-Duty Disabled Retirees Age Male Female Male Female % 0.47% 1.68% 1.16% % 0.44% 2.29% 1.24% % 0.99% 2.88% 2.21% % 2.90% 6.08% 4.73% % 9.88% 14.80% 9.89% % 30.02% 32.54% 30.02% % % % % Retirement Disability/Turnover Rate N/A; all participants have retired 78

224 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (14) Police 1% Supplemental Retirement Plan, (Continued) (b) Net Pension Liability, (Continued) Discount Rate The discount rate used to measure the total pension liability wat 2.90%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that contributions will be made at rates equal to the differences between actuarially determined contribution rates and the member rate. Based on those assumptions, the pension plan s fiduciary net position was projected to be depleted for current members during the fiscal year. (c) Changes in the Net Pension Liability Balance at June 30, 2015 $ 2,897,028 Changes in the Year: Service cost - Interest on the total pension liability 80,931 Differences between actual and expected experience - Changes in assumptions - Changes in benefit terms - Plan to Pan resource movement - Contributions - employer - Contributions - employees - Net investment income - Administrative expenses - Benefit payments, including refunds of employee contributions (211,287) Net Changes (130,356) Balance at June 30, 2016 $ 2,766,672 79

225 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (14) Police 1% Supplemental Retirement Plan, (Continued) (c) Changes in the Net Pension Liability, (Continued) Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability, calculated using the discount rate of 2.90%, as well as what the net pension liability would be if it were calculated using a discount rate that is 1-percentage point lower or 1-percentage point higher than the current rate: 1% Decrease 1.90% Net Pension Liability $ 3,028,779 Current Discount Rate 2.90% Net Pension Liability $ 2,766,672 1% Increase 3.90% Net Pension Liability $ 2,540,355 (d) Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions For the year ended June 30, 2016, the City recognized pension expense of $211,287. At June 30, 2016, the City did not report any deferred outflows/inflows of resources related to the Police 1% Supplemental Retirement Plan. (15) Defined Contribution Plan On January 1, 2000, the City adopted a Defined Contribution Plan (Plan) for part-time employees that work under 1,000 hours during the fiscal year and do not meet the eligibility requirements to be enrolled in the California Public Employee Retirement System (CalPERS). The Plan is administered by the Public Agency Retirement Services (PARS). As of June 30, 2016, there were 201 active participants in the Plan. Both the City and employees are required to each contribute 3.75% of gross wages. The City s contribution to the defined contribution plan for the year ended June 30, 2016 was $47,313. (16) Other Post Employment Benefits Plan (Defined Benefit) Plan Description: The City administers a single-employer defined benefit plan, which provides medical insurance benefits to eligible retirees and their spouses in accordance with various labor agreements. The plan covers employees hired before January 1, 2004 who retire directly from the City with 10 years of City service. The City provides a contribution up to a percentage of the lesser of $500 per month or the premium for the most popular medical plan elected by the employees. The percentage varies by retirement date and years of City service. For employees hired on or after January 1, 2004, the City will only pay for the PEMHCA subsidy once they meet the definition of a retiree under CalPERS. The City provides retiree life insurance of $1,000 for the retiree and $500 for the retiree s spouse. As of June 30, 2016, the plan covered 326 active participants and 380 retiree participants. 80

226 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (16) Other Post Employment Benefits Plan (Defined Benefit), (Continued) City s Funding Policy: The contribution requirements of plan members and the City are established and may be amended by City Council. The contribution required to be made under City Council and labor agreement requirements is based on a pay-as-you-go basis (i.e., as medical insurance premiums become due). For fiscal year ended June 30, 2016, the City contributed $2,397,397 to the plan. The City has not established a trust that is administered by the City for the purpose of holding assets accumulated for plan benefits. There are no trust financial statements applicable to this plan. Annual OPEB Cost and Net OPEB Obligation. The City s annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), 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 normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years based on an open group. The following table shows the components of the City s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the City s net OPEB obligation for these benefits: Annual required contribution $2,712,574 Interest on Net OPEB Obligation (NOO) 163,025 NOO amortization adjustment to ARC (154,414) Annual OPEB cost (expense) 2,721,185 Annual contributions (including premiums paid) (2,397,397) Increase in net OPEB cost (expense) 323,788 Net OPEB obligation, beginning of year 3,622,775 Net OPEB obligation, end of year $3,946,563 The City s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for 2016 and the two preceding years were as follows: Schedule of Employer Postemployment Benefit Contributions Fiscal Year Annual Required Contribution Actual Contribution Percentage Contributed 6/30/2014 $2,134,522 $1,728, % 6/30/2015 2,134,522 1,828, % 6/30/2016 2,712,574 2,397, % Annual OPEB Cost Fiscal Year Annual OPEB Cost % of Annual OPEB Cost Contributed Net OPEB Obligation 6/30/2014 $2,141, % $3,310,261 6/30/2015 2,141, % 3,622,775 6/30/2016 2,721, % 3,946,563 81

227 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (16) Other Post Employment Benefits Plan (Defined Benefit), (Continued) Funded Status and Funding Progress. The funded status of the plan as of July 1, 2015, the most recent actuarial valuation date, was as follows: Actuarial accrued liability (AAL) $45,889,693 Actuarial value of plan assets -. Unfunded actuarial accrued liability (UAAL) $45,889,693 Funded ratio (actuarial value of plan assets/aal) 00.0% Covered payroll (active plan members) $30,578,088 UAAL as a percentage of covered payroll 150.1% Actuarial valuations for the OPEB plan involve estimates of the value of reported amounts and assumptions about the probability of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for the benefits. Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial assets, consistent with the long-term perspective of the calculations. The actuarial cost method used for this valuation is the Entry Age Normal (EAN) cost method. Under the EAN cost method, the Normal Cost for each participant is determined as a level percent of payroll throughout the participant s working lifetime. The Unfunded Actuarial Accrued Liability was amortized over a fixed 30-year period as a level percentage of payroll beginning July 1, The City, with guidance from Actuary, has selected the discount rate (4.5%) and future medical benefit cost increase (various ranging from 5.0% to 10.10%), with a 2.75% inflation rate. It is assumed the City s payroll will increase 3.0% per year. The Actuarial Valuation report can be obtained from the City s Finance department upon request. 82

228 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (17) Post Employment Benefits-RHS (Defined Contribution) On January 1, 2004, the City adopted a new Retirement Health Savings Plan (RHS) for all full-time active employees. This benefit was ratified in the City s contractual agreements (MOU) with the Costa Mesa Employees Association (CMCEA), Costa Mesa Police Association (CMPA), Costa Mesa Police Management Association (CMPMA), and the Costa Mesa Firefighters Association (CMFA). This post-employment medical benefit is to assist employees with their qualifying medical expenses or premiums upon retirement or separation from the City with no minimum age requirement. The RHS plan is a defined contribution plan for all full time employees at the City. Under this plan, the employee and the City each make a mandatory 1% of base pay contribution. If the employee separates from the City prior to the 10-year vesting period, the employee forfeits his or her share of the City s contribution. The City has no payment obligations once the employee separates from the City. Per a side letter agreement with employees, the RHS program was suspended starting November 7, The City s contribution to the defined contribution post retirement plan for the year ended June 30, 2016 was $0. (18) Expenditures in Excess of Appropriations Excess of expenditures over appropriations in individual funds at the function level (level of budgetary control) are as follows at June 30, 2016: Function Expenditures Appropriations Excess General Fund General Government $25,102,067 23,428,896 1,673,171 Housing Authority Special Revenue Fund Community Programs 686, ,418 51,774 Nonmajor Special Revenue Funds: Supplemental Law Enforcement Services Proposition 172 Protection of Persons and Property 310, , ,730 Protection of Persons and Property 1,210,435 1,162,233 48,202 83

229 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (19) Risk Management For the fiscal year ended June 30, 2016, the City participated in the California Municipal Excess Liability ( CAMEL ) Program. The membership of CAMEL consists of approximately 21 cities with similar interests and needs regarding liability insurance. Premiums are based upon the losses incurred. The Board of Directors sets the premiums for each participant and each participant is represented on the Board. Premiums are based upon the losses incurred by each member and are not affected by losses incurred by other members. In the Self-Insurance Workers Compensation/General Liability/Unemployment Internal Service Fund, the City has recorded liabilities of $10,593,740 for lawsuits and other claims arising in the ordinary course of business. The City is self-insured for the first $2,000,000 of each claim arising for workers compensation and has purchased outside insurance coverage in excess of the $2,000,000 up to an unlimited maximum. The City is self-insured for the first $2,000,000 of each claim arising for general liability. The City has purchased outside insurance coverage in excess of the $2,000,000 up to a maximum of $20,000,000 per occurrence. For the past three years, claim payments have not exceeded the amount of applicable insurance coverage. The City has estimated losses for claims and judgments and has established liabilities of $9,367,279 for workers compensation and $1,226,461 for general liability. Losses for claims incurred but not reported are recorded when the probable amount of loss can be reasonably estimated. These amounts represent estimates of amounts to be paid for reported claims and incurred but not yet reported claims based upon past experience, modified for current trends and information. While the ultimate amount of losses incurred through June 30, 2016 is dependent on future developments, based upon information from the City Attorney, the City s claims administrators and others involved with the administration of the programs, City management believes the accrual is adequate to cover such losses. The City is contingently liable for additional losses not reported in the accompanying financial statements in the range of approximately $25,000 to $2,000,000 for which the likelihood of an unfavorable outcome is only reasonably possible, as determined by legal counsel. Changes in claims payable for the past two fiscal years are as follows: Fiscal Year Beginning Balance Claims Incurred and Changes in Estimates Claim Payments Ending Balance $10,938,366 $2,174,466 ($2,233,348) $10,879, ,879, ,530 (1,154,274) 10,593,740 84

230 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (20) Pledged Revenue The City and its component units have one debt issuance outstanding that is collateralized by the pledging of certain revenues. The amount and term of the remainder of this commitment is indicated in the debt service to maturity table presented in the accompanying notes. The purpose for which the proceeds of the related debt issuance was utilized is disclosed in the debt description in Note 8. For the current year, debt service payments as a percentage of the pledged gross revenue (or net of certain expense where so required by the debt agreement) are indicated in the table below. This percentage also approximates the relationship of debt service to pledged revenue for the remainder of the term of the commitment: Annual Amount of Annual Debt Service Debt Service as a Description of Pledged Revenue (net Payments (of all debt Percentage of Pledged Revenue of expenses) secured by this revenue) Pledged Revenue Mello-Roos CFD 91-1 $ 247,505 $ 220, % (21) Golf Course Lease Agreement The City has entered into an agreement with Mesa Verde Partners (MVP) under which MVP will operate and collect user fees from the Costa Mesa Country Club through August 31, The agreement requires MVP to pay a percentage of gross receipts that MVP receives from green fees, driving range, cart rental, sale from proshop, food beverages, and the rental of banquet and meeting rooms, or a flat minimum monthly rate, whichever is greater. The percentage of gross receipts varies from 6 percent to 35 percent depending on the revenue type, and the minimum rent is adjusted every two years. The minimum rent for the period of September 1, 2015 to August 31, 2017 is $147,000 per month. In fiscal year 2016, the City received a total of $2,268,552 from the golf course operations, $2,167,021 of which is reported in the General Fund and the remaining $101,531 in the Golf Course Improvements Capital Projects Fund. The City reports the golf course and related equipment under capital assets in the government-wide financial statements. (22) Legislation and Litigation Affecting the Successor Agency In fiscal year , Assembly Bills 1x 26 (the Dissolution Act ) and 1x 27 were enacted to dissolve all redevelopment agencies in the State of California. The Legislature subsequently passed and the Governor signed AB 1484 making technical and substantive amendments to the Dissolution Act based on experience at the state and local level in implementing the Dissolution Act. In September 2015, the Legislature passed and the Governor signed SB 107, which made additional changes to the Dissolution Act. Under the Dissolution Act, California redevelopment agencies were dissolved as of February 1, Sponsoring communities that had the dissolved redevelopment agencies ( Dissolved Agencies ) and other designated entities were required to initiate the process of unwinding the affairs of the Dissolved Agencies. Successor Agencies were created by sponsoring communities of Dissolved Agencies unless the communities elected not to create the Successor Agencies. On February 1, 2012, the City elected to create a Successor Agency as authorized by City Council Resolution

231 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (22) Legislation and Litigation Affecting the Successor Agency, (Continued) The Dissolution Act also created oversight boards to monitor activities of Successor Agencies. The roles of Successor Agencies and oversight boards are to administer the winding down of Dissolved Agencies which includes making payments due on enforceable obligations, disposing of assets (other than housing assets), and remitting unencumbered balances of the Dissolved Agencies to County Auditor-Controllers for distribution to affected taxing entities. The Dissolution Act also allowed the sponsoring communities that formed the redevelopment agencies to assume housing functions and take over certain housing assets of the Dissolved Agencies. On January 17, 2012, the City elected to create a Housing Successor Agency pursuant to City Council Resolution As of February 1, 2012, housing assets and obligations of the former RDA were transferred to the Costa Mesa Housing Authority, activities of which are reported in the Housing Authority Special Revenue Fund in the City s financial statements. All other assets and obligations of the former RDA were transferred to the Successor Agency of the City of Costa Mesa Private Purpose Trust Fund, activities of which can be found under the fiduciary funds in the City s financial statements. The Dissolution Act and AB 1484 also established roles for County Auditor-Controllers ( CAC ), the California Department of Finance ( DOF ), and the California State Controller s office ( SCO ) in the dissolution process and satisfaction of enforceable obligations of the Dissolved Agencies. The County Auditor-Controllers were required to establish Redevelopment Property Tax Trust Funds ( RPTTF ) for Successor Agencies to deposit property taxes that would have been redevelopment property tax increment had the redevelopment agency not been dissolved. Successor Agencies use RPTTF deposits to pay enforceable obligations approved by the DOF. RPTTF deposits will be used for enforceable obligations of Successor Agencies until all obligations have been paid in full and non-housing assets have been liquidated. AB 1484 mandated two Due Diligence Reviews ( DDR ) for each Successor Agency. Based on the results of the DDR, Successor Agencies were required to remit unencumbered funds (cash) to the CAC. The DOF issued a Finding of Completion on May 24, 2013 in which DOF concurred that the Successor Agency had made all required payments as a result of the due diligence reviews. In addition to the Due Diligence Review, the State Controller s Office has been directed to review the propriety of any transfers of assets between Dissolved Agencies and other public bodies that occurred after January 1, If the public body that received such transfers was not contractually committed to a third party for the expenditure or encumbrance of those assets, the State Controller is required to order the available assets to be transferred to the public body designated as the Successor Agency. The City made a payment to the CAC in the amount of $2,492,747 on May 1, 2013, which included a credit of $116,867 to the Successor Agency. The SCO issued a final audit report for the transfer of assets dated January

232 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (22) Legislation and Litigation Affecting the Successor Agency, (Continued) Earlier in the dissolution process, the DOF disallowed a loan in the amount of $9,278,545 from the City s General Fund to the former Redevelopment Agency as an enforceable obligation. The DOF s Finding of Completion on May 24, 2013 allowed the placement of these loan agreements on the recognized obligation payment schedule (the ROPS ), provided the oversight board made a finding that the loan was for legitimate redevelopment purposes pursuant to Health and Safety Code section On October 9, 2013, the City filed a lawsuit in the Sacramento Superior Court, Case No , against the DOF and the Orange County Auditor-Controller. The lawsuit sought, among other relief, orders requiring the DOF to approve annual loan repayments to the City on future ROPS submitted by the Successor Agency and requiring the Orange County Auditor-Controller to refund the $2,492,747 payment the City made on May 1, Based on the uncertainty of DOF reinstatement of the loan, the City wrote off the outstanding balance of the loan in the fiscal year At this time, the status of the lawsuit is still active. On April 17, 2014, the oversight board approved the finding that the loan was for legitimate redevelopment purposes pursuant to Health and Safety Code section On May 6, 2014, the DOF sent a letter affirming the Oversight Board s decision that the loan was for legitimate redevelopment purpose and reestablishing the loan under certain Amended and Restated Agreement. Subsequent to the write-off of the loan, the City has adjusted the loan for principal additions, interest additions and principal received after the loan was recognized as an enforceable obligation. At June 30, 2016, the loan balance is estimated to be $9,670,830. The loan balance continues to be excluded from the fiscal year financial statements as certain assurances from the DOF need to occur before the City will formally reinstate the loan. (23) Successor Agency Bonds Payable Reporting in Fiduciary Funds The liabilities of the former Redevelopment Agency were transferred to the Successor Agency from the City of Costa Mesa Redevelopment Agency on February 1, 2012 as a result of the dissolution of the former Redevelopment Agency (see note 22). On October 1, 2003, the Costa Mesa Redevelopment Agency issued $7,470,000 Tax Allocation Refunding Bonds to refund the $9,955,000 Downtown Redevelopment Project 1993 Tax Allocation Refunding Bonds. The original bonds were issued to finance a portion of costs associated with implementing the Redevelopment Plan, which included the refurbishment of the Downtown Redevelopment Project Area. The bonds issued consist of serial bonds maturing from 2004 to 2017 in semi-annual installments ranging from $450,000 to $670,000. Interest is payable on April 1 and October 1, commencing on April 1, 2004 at rates ranging from 2.0% to 5.0%. Bonds maturing on or after October 1, 2014 are subject to optional redemption, in whole or in part from among maturities as selected by the Agency on October 1, The bonds are secured by tax revenue. The amount required for bond reserve for the 2003 Tax Allocation Refunding Bonds is $704,300. The City has $704,405 on reserve with the fiscal agent at June 30, The principal balance outstanding at June 30, 2016 is $1,305,

233 CITY OF COSTA MESA, CALIFORNIA Notes to the Basic Financial Statements Year ended June 30, 2016 (23) Successor Agency Bonds Payable Reporting in Fiduciary Funds (Continued) The annual debt service requirements for the Redevelopment Agency 2003 Tax Allocation Refunding Bonds as of June 30, 2016 are as follows: Year Ending Private Purpose Trust Fund June 30, Principal Interest 2017 $635,000 49, ,000 16,750 Total $1,305,000 66,125 (24) Restatement of Prior Year Financial Statements Restatement of the Governmental Activities net position as of July 1, 2015 is as follows: Government-Wide Financials Governmental Activities Net position at beginning of the year as previously reported $ 67,402,811 Implementation of GASB Statement No. 73 to record pension liability for the Police 1% Supplemental Plan at beginning of year (730,205) Net position at beginning of the year as restated $ 66,672,606 88

234 CITY OF COSTA MESA CALIFORNIA REQUIRED SUPPLEMENTARY INFORMATION

235 CITY OF COSTA MESA SCHEDULE OF PROPORTIONATE SHARE OF THE NET PENSION LIABILITY FIRE SAFETY PLAN Last Ten Fiscal Years* Fiscal year ended June 30, 2015 June 30, 2016 Measurement period June 30, 2014 June 30, 2015 Plan's proportion of the net pension liability % % Plan's proportionate share of the net pension liability $ 53,906,245 $ 59,018,969 Plan's covered - employee payroll $ 9,348,967 $ 8,616,507 Plan's proportionate share of the net pension liability as a percentage of covered - employee payroll % % Plan's proportionate share of the fiduciary net position as a percentage of the Plan's total pension liability 70.20% 67.65% Plan's proportionate share of aggregate employer contributions $ 4,567,080 $ 4,600,229 Notes to Schedule: Benefit Changes: There were no changes in benefits. Changes in Assumptions: GASB 68, paragraph 68 states that the long-term expected rate of return should be determined net of pension plan investment expense but without reduction for pension plan administrative expense. The discount rate of 7.50% used for the June 30, 2014 measurement date was net of administrative expenses. The discount rate of 7.65% used for the June 30, 2015 measurement date is without reduction of pension plan administrative expense. * - Fiscal year 2015 was the 1st year of implementation, therefore only two years are shown. 89

236 CITY OF COSTA MESA SCHEDULE OF CONTRIBUTIONS FIRE SAFETY PLAN Last Ten Fiscal Years* Fiscal year ended June 30, 2015 June 30, 2016 Contractually required contribution (actuarially determined) $ 3,877,163 $ 3,286,280 Contributions in relation to the actuarially determined contributions (4,603,714) (3,786,280) Contribution deficiency (excess) $ (726,551) $ (500,000) Covered - employee payroll $ 8,616,507 $ 9,235,056 Contributions as a percentage of covered - employee payroll 53.43% 41.00% Notes to Schedule: Valuation Date 6/30/2012 Methods and Assumptions Used to Determine Contribution Rates: Single and agent employers Entry age** Amortization method Level percentage of payroll, closed** Remaining amortization period 19 Years as of the Valuation Date Asset valuation method 15 Year Smoothed Market*** Inflation 2.75%** Salary increases Depending on age, service and type of employment** Investment rate of return 7.50%, net of pension plan investment expense, including inflation** Retirement age 50 years for 3.00%@50, 2.0%50 and 2.7%@57** Mortality Morality assumptions are based on mortality rates resulting from the most recent CalPERS Experience Study adopted by the CalPERS Board, first used in the June 30, 2009 valuation. For purposes of the post-retirement mortality rates, those revised rates include 5 years of projected on-going mortality improvement using Scale AA published by the Society of Actuaries until June 30, There is no margin for future mortality improvement beyond the valuation date.** * - Fiscal year 2015 was the 1st year of implementation, therefore only two years are shown. ** - The valuation for June 30, 2012 (applicable to fiscal year ended June 30, 2015) included the same actuarial assumptions *** - The valuation for June 30, 2012 (applicable to fiscal year ended June 30, 2015) valued assets using a 15 Year Smoothed Market method. 90

237 CITY OF COSTA MESA SCHEDULE OF CHANGES IN THE NET PENSION LIABILITY AND RELATED RATIOS MISCELLANEOUS PLAN Last Ten Fiscal Years* Fiscal Year Ended June 30, 2015 June 30, 2016 Measurement Period June 30, 2014 June 30, 2015 Total Pension Liability: Service cost $ 3,366,560 $ 3,187,235 Interest on total pension liability 17,792,384 18,262,096 Differences between expected and actual experience - (2,016,112) Changes in assumptions - (4,399,842) Changes in benefits - - Benefit payments, including refunds of employee contributions (12,853,585) (13,476,175) Net Change in Total Pension Liability 8,305,359 1,557,202 Total Pension Liability - Beginning of Year 241,975, ,280,650 Total Pension Liability - End of Year (a) $ 250,280,650 $ 251,837,852 Plan Fiduciary Net Position: Contributions - employer $ 4,903,142 $ 5,768,827 Contributions - employee 2,137,933 1,978,052 Net investment income 26,075,603 3,881,685 Benefit payments (12,853,585) (13,476,175) Plan to plan resource movement - 13,634 Administrative Expense - (193,607) Net Change in Plan Fiduciary Net Position 20,263,093 (2,027,584) Plan Fiduciary Net Position - Beginning of Year 153,666, ,929,934 Plan Fiduciary Net Position - End of Year (b) $ 173,929,934 $ 171,902,350 Net Pension Liability - Ending (a)-(b) $ 76,350,716 $ 79,935,502 Plan fiduciary net position as a percentage of the total pension liability 69.49% 68.26% Covered - employee payroll $ 18,366,435 $ 17,928,997 Net pension liability as percentage of covered- employee payroll % % Notes to Schedule: Benefit Changes: There were no changes in benefits. Changes in Assumptions: GASB 68, paragraph 68 states that the long-term expected rate of return should be determined net of pension plan investment expense but without reduction for pension plan administrative expense. The discount rate of 7.50% used for the June 30, 2014 measurement date was net of administrative expenses. The discount rate of 7.65% used for the June 30, 2015 measurement date is without reduction of pension plan administrative expense. * - Fiscal year 2015 was the 1st year of implementation, therefore only two years are shown. 91

238 CITY OF COSTA MESA SCHEDULE OF CONTRIBUTIONS MISCELLANEOUS PLAN Last Ten Fiscal Years* Fiscal year ended June 30, 2015 June 30, 2016 Actuarially determined contribution $ 5,221,083 $ 6,056,123 Contributions in relation to the actuarially determined contributions (5,221,083) (6,056,123) Contribution deficiency (excess) $ - $ - Covered - employee payroll $ 17,928,997 $ 19,890,931 Contributions as a percentage of covered - employee payroll 29.12% 30.45% Notes to Schedule: Valuation Date 6/30/2012 Methods and Assumptions Used to Determine Contribution Rates: Single and agent employers Entry age** Amortization method Level percentage of payroll, closed** Remaining amortization period 22 years as of the Valuation Date Asset valuation method 15 Year Smoothed Market*** Inflation 2.75%** Salary increases Depending on age, service and type of employment** Investment rate of return 7.50%, net of pension plan investment expense, including inflation** Retirement age 2.5%@55, 2.0%@60, 2%@62** Mortality Morality assumptions are based on mortality rates resulting from the most recent CalPERS Experience Study adopted by the CalPERS Board, first used in the June 30, 2009 valuation. For purposes of the post-retirement mortality rates, those revised rates include 5 years of projected on-going mortality improvement using Scale AA published by the Society of Actuaries until June 30, There is no margin for future mortality improvement beyond the valuation date.** * - Fiscal year 2015 was the 1st year of implementation, therefore only two years are shown. ** - The valuation for June 30, 2012 (applicable to fiscal year ended June 30, 2015) included the same actuarial assumptions *** - The valuation for June 30, 2012 (applicable to fiscal year ended June 30, 2015) valued assets using a 15 Year Smoothed Market method. 92

239 CITY OF COSTA MESA SCHEDULE OF CHANGES IN THE NET PENSION LIABILITY AND RELATED RATIOS POLICE SAFETY PLAN Last Ten Fiscal Years* Fiscal Year Ended June 30, 2015 June 30, 2016 Measurement Period June 30, 2014 June 30, 2015 Total Pension Liability: Service cost $ 4,675,505 $ 4,048,034 Interest on total pension liability 17,563,332 18,452,568 Differences between expected and actual experience - 1,744,508 Changes in assumptions - (4,744,823) Changes in benefits - - Benefit payments, including refunds of employee contributions (11,159,179) (12,625,831) Net Change in Total Pension Liability 11,079,658 6,874,456 Total Pension Liability - Beginning of Year 237,419, ,499,258 Total Pension Liability - End of Year (a) $ 248,499,258 $ 255,373,714 Plan Fiduciary Net Position: Contributions - employer $ 5,066,147 $ 5,228,944 Contributions - employee 2,204,590 2,191,295 Net investment income 24,794,991 3,618,253 Benefit payments (11,159,179) (12,625,831) Plan to plan resource movement - - Administrative Expense - (182,933) Net Change in Plan Fiduciary Net Position 20,906,549 (1,770,272) Plan Fiduciary Net Position - Beginning of Year 143,294, ,200,853 Plan Fiduciary Net Position - End of Year (b) $ 164,200,853 $ 162,430,581 Net Pension Liability - Ending (a)-(b) $ 84,298,405 $ 92,943,133 Plan fiduciary net position as a percentage of the total pension liability 66.08% 63.61% Covered - employee payroll $ 14,884,359 $ 13,714,558 Net pension liability as percentage of covered- employee payroll % % Notes to Schedule: Benefit Changes: There were no changes in benefits. Changes in Assumptions: GASB 68, paragraph 68 states that the long-term expected rate of return should be determined net of pension plan investment expense but without reduction for pension plan administrative expense. The discount rate of 7.50% used for the June 30, 2014 measurement date was net of administrative expenses. The discount rate of 7.65% used for the June 30, 2015 measurement date is without reduction of pension plan administrative expense. * - Fiscal year 2015 was the 1st year of implementation, therefore only two years are shown. 93

240 CITY OF COSTA MESA SCHEDULE OF CONTRIBUTIONS POLICE SAFETY PLAN Last Ten Fiscal Years* Fiscal year ended June 30, 2015 June 30, 2016 Actuarially determined contribution $ 5,237,595 $ 5,994,277 Contributions in relation to the actuarially determined contributions (5,237,595) (5,994,277) Contribution deficiency (excess) $ - $ - Covered - employee payroll $ 13,714,558 $ 14,161,162 Contributions as a percentage of covered - employee payroll 38.19% 42.33% Notes to Schedule: Valuation Date 6/30/2012 Methods and Assumptions Used to Determine Contribution Rates: Single and agent employers Entry age** Amortization method Level percentage of payroll, closed** Remaining amortization period 22 years as of the Valuation Date Asset valuation method 15 Year Smoothed Market*** Inflation 2.75%** Salary increases Depending on age, service and type of employment** Investment rate of return 7.50%, net of pension plan investment expense, including inflation** Retirement age 3%@50 and 2.7%@57** Mortality Morality assumptions are based on mortality rates resulting from the most recent CalPERS Experience Study adopted by the CalPERS Board, first used in the June 30, 2009 valuation. For purposes of the post-retirement mortality rates, those revised rates include 5 years of projected on-going mortality improvement using Scale AA published by the Society of Actuaries until June 30, There is no margin for future mortality improvement beyond the valuation date.** * - Fiscal year 2015 was the 1st year of implementation, therefore only two years are shown. ** - The valuation for June 30, 2012 (applicable to fiscal year ended June 30, 2015) included the same actuarial assumptions *** - The valuation for June 30, 2012 (applicable to fiscal year ended June 30, 2015) valued assets using a 15 Year Smoothed Market method. 94

241 CITY OF COSTA MESA SCHEDULE OF CHANGES IN THE NET PENSION LIABILITY AND RELATED RATIOS POLICE 1% SUPPLEMENTAL RETREMENT PLAN Last Ten Fiscal Years* Fiscal Year Ended June 30, 2016 Measurement Period June 30, 2016 Total Pension Liability: Service cost $ 80,931 Interest on total pension liability - Differences between expected and actual experience - Changes in assumptions - Changes in benefits - Benefit payments, including refunds of employee contributions (211,287) Net Change in Total Pension Liability (130,356) Total Pension Liability - Beginning of Year 2,897,028 Total Pension Liability - End of Year (a) $ 2,766,672 Plan Fiduciary Net Position: Contributions - employer $ - Contributions - employee - Net investment income - Benefit payments - Plan to plan resource movement - Administrative Expense - Net Change in Plan Fiduciary Net Position - Plan Fiduciary Net Position - Beginning of Year - Plan Fiduciary Net Position - End of Year (b) $ - Net Pension Liability - Ending (a)-(b) $ 2,766,672 Plan fiduciary net position as a percentage of the total pension liability 0.00% Covered - employee payroll Net pension liability as percentage of covered- employee payroll N/A N/A Notes to Schedule: Benefit Changes: There were no changes in benefits. Changes in Assumptions: There were no changes in assumptions * - Fiscal year 2016 was the 1st year of implementation, therefore only one year is shown. 95

242 CITY OF COSTA MESA SCHEDULE OF CONTRIBUTIONS POLICE 1% SUPPLEMENTAL RETIREMENT PLAN Last Ten Fiscal Years* Fiscal year ended June 30, 2016 Actuarially determined contribution $ - Contributions in relation to the actuarially determined contributions - Contribution deficiency (excess) $ - Covered - employee payroll Contributions as a percentage of covered - employee payroll N/A N/A Notes to Schedule: Measurement Date Actuarial Assumptions: Discount Rate Payroll Growth Inflation Rate Cost Method Employer Funding Policy Census Data Mortality 6/30/ % N/A; all participants have retired 2.75% per year Entry Age Normal as a level percentage of payroll Pay-as-you-go Census information was provided by the Plan Sponsor as of June Rates are based on CalPERS Safety Police Plan of the City of Costa Mesa annual valuation report as of June 30, Annual sample rate are as shown below: Healthy Retirees Non-Duty Disabled Retirees Age Male Female Male Female % 0.47% 1.68% 1.16% % 0.44% 2.29% 1.24% % 0.99% 2.88% 2.21% % 2.90% 6.08% 4.73% % 9.88% 14.80% 9.89% % 30.02% 32.54% 30.02% % % % % Retirement Disability/Turnover Rate N/A; all participants have retired * - Fiscal year 2016 was the 1st year of implementation, therefore only one year is shown. 96

243 CITY OF COSTA MESA, CALIFORNIA SCHEDULE OF FUNDING PROGRESS OTHER POST-EMPLOYMENT BENEFIT PLAN For the fiscal year ended June 30, 2016 (dollar amounts in thousands) Actuarial Valuation Date Entry Age Normal Accrued Liability Actuarial Value of Assets Unfunded Liability/ (Excess Assets) Funded Status Annual Covered Payroll UAAL* As a % of Payroll 7/1/12 $36,429 $ - $36, % $38, % 7/1/13 35,828-35, % 35, % 7/1/15 45,890-45, % 30, % *UAAL refers to unfunded actuarial accrued liability. 97

244 98

245 GENERAL FUND The General Fund is used to account for all general revenues of the City not specifically levied or collected for special purposes, and for expenditures related to the provision of general services by the City. The General Fund is used to account for all resources not required to be accounted for in another fund. MAJOR SPECIAL REVENUE FUNDS Housing Authority Fund Established pursuant to the Health and Safety Code, Section 34176(a). The primary purpose of the Housing Authority is to promote affordable housing for families of low and moderate income within the City. HOME Program Fund Established to account for the receipt and disbursement of funds received under the Federal Home Investment Partnership Program of the Department of Housing and Urban Development. These revenues must be expended for acquisition, rehabilitation, and new construction of rental housing. 99

246 Revenues: Taxes: CITY OF COSTA MESA, CALIFORNIA General Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Sales tax $ 52,862,000 52,862,000 57,593,561 4,731,561 51,115,064 Property tax 24,673,600 24,673,600 25,998,070 1,324,470 24,058,820 Transient occupancy tax 8,107,500 8,107,500 8,622, ,005 7,995,154 Franchise tax 5,039,600 5,039,600 5,060,402 20,802 4,885,926 Business license tax 952, , ,521 21, ,408 Total taxes 91,634,800 91,634,800 98,248,059 6,613,259 89,009,372 Licenses and permits 2,889,500 2,889,500 2,983,081 93,581 2,313,296 Fines and forfeitures 1,190,000 1,190,000 1,530, ,046 1,204,868 Intergovernmental: Motor vehicle in-lieu 9,615,500 9,615,500 9,982, ,448 9,481,340 Grants and other reimbursements 997,300 1,081, ,881 (615,324) 1,747,795 Total intergovernmental 10,612,800 10,696,705 10,448,829 (247,876) 11,229,135 Charges for services 3,460,800 3,562,300 3,634,255 71,955 3,574,264 Rental 2,963,900 2,963,900 2,890,731 (73,169) 2,932,280 Investment income 180, ,800 1,199,813 1,019,013 1,463,378 Miscellaneous 714, ,500 1,067, ,867 1,260,202 Total revenues 113,647, ,832, ,002,181 8,169, ,986,795 Expenditures: Current: General government: City council 378, , ,710 13, ,536 Chief executive officer: Administration 3,660,088 3,461,248 3,482,382 (21,134) 3,605,802 City clerk 637, , ,121 54, ,056 Personnel services 1,210,708 1,211,618 1,425,178 (213,560) 1,213,900 Risk management services 2,364,251 2,364,251 2,457,798 (93,547) 2,524,148 City attorney 1,000,000 1,000,000 1,223,132 (223,132) 1,305,124 Financial services 2,843,051 2,874,780 2,608, ,509 2,432,791 Information technology 3,328,366 3,482,179 2,684, ,688 2,637,899 Development services administration 645, , ,663 26, ,822 Facilities and equipment maintenance 10,455,550 10,822,002 9,339,858 1,482,144 8,824,341 Non-departmental (1,523,011) (3,584,891) 178,463 (3,763,354) 445,807 Total general government 25,000,523 23,428,896 25,102,067 (1,673,171) 24,699,226 (Continued) 100

247 CITY OF COSTA MESA, CALIFORNIA General Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) (Continued) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Protection of persons and property: Police protection 41,016,561 41,717,837 36,750,805 4,967,032 35,572,020 Fire protection 20,379,286 21,255,797 22,493,950 (1,238,153) 20,854,224 Building and safety 2,579,340 2,724,910 2,454, ,732 2,111,839 Total protection of persons and property 63,975,187 65,698,544 61,698,933 3,999,611 58,538,083 Community programs: Community recreation 4,958,298 5,171,879 4,700, ,420 4,538,488 Planning 2,319,163 2,813,767 2,255, ,754 1,701,056 Total community programs 7,277,461 7,985,646 6,955,472 1,030,174 6,239,544 Public services: Administration 1,509,463 1,569,323 1,509,074 60,249 1,472,963 Engineering 2,034,695 2,317,754 1,556, ,922 1,602,499 Transportation 2,650,813 2,808,660 2,471, ,297 2,489,841 Total public services 6,194,971 6,695,737 5,537,269 1,158,468 5,565,303 Total expenditures 102,448, ,808,823 99,293,741 4,515,082 95,042,156 Excess (deficiency) of revenues over (under) expenditures 11,198,958 10,023,682 22,708,440 12,684,758 17,944,639 Other financing sources (uses): Transfers in 400, , , Transfers out (9,016,140) (9,016,140) (12,452,435) (3,436,295) (14,329,215) Total other financing sources (uses) (8,616,140) (8,616,140) (12,051,930) (3,435,790) (14,329,014) Net change in fund balance 2,582,818 1,407,542 10,656,510 9,248,968 3,615,625 Fund balance at beginning of year 53,815,951 53,815,951 53,815,951-50,200,326 Fund balance at end of year $ 56,398,769 55,223,493 64,472,461 9,248,968 53,815,

248 CITY OF COSTA MESA, CALIFORNIA Housing Authority Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Taxes $ , ,275 71,935 Rental - 175, , ,791 78,550 Investment income ,479 10,479 4,964 Miscellaneous , , ,143 Total revenues - 175, , , ,592 Expenditures: Current: Community programs 166, , ,192 (51,774) 212,181 Debt service: Interest and fiscal charges Total expenditures 166, , ,192 (51,774) 212,181 Excess (deficiency) of revenues over (under) expenditures (166,658) (459,418) 236, , ,411 Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance (166,658) (459,418) 236, , ,411 Fund balance at beginning of year 912, , , ,829 Fund balance at end of year $ 745, ,822 1,148, , ,

249 CITY OF COSTA MESA, CALIFORNIA HOME Program Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Intergovernmental $ 743, , ,765 (584,500) 255,316 Investment income , Miscellaneous 50,000 50, , , ,626 Total revenues 793, , ,093 (473,322) 368,017 Expenditures: Current: Community programs 663,821 1,254, , , ,645 Total expenditures 663,821 1,254, , , ,645 Excess (deficiency) of revenues over (under) expenditures 129,594 (460,771) 25, ,135 (18,628) Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance 129,594 (460,771) 25, ,135 (18,628) Fund balance at beginning of year 71,890 71,890 71,890-90,518 Fund balance (deficit) at end of year $ 201,484 (388,881) 97, ,135 71,

250 CITY OF COSTA MESA, CALIFORNIA Notes to Required Supplementary Information For the fiscal year ended June 30, 2016 (1) Budgetary Data Annual budgets are legally adopted for all governmental funds on a basis consistent with generally accepted accounting principles, except for the following funds for which annual budgets were not adopted: Special Revenue Fund: Rental Rehabilitation Program Fund Debt Service Fund: Financing Authority Debt Service Fund Capital Project Fund: Golf Course Improvements Fund The City Council adopts an annual budget submitted by the Chief Executive Officer prior to the beginning of each new fiscal year. Public hearings are conducted prior to budget adoption by the Council. Supplemental appropriations, when required during the period, are also approved by the City Council. Interfunctional budget adjustments are approved by the Chief Executive Officer. Expenditures may not legally exceed appropriations at the function level. During the year ended June 30, 2016, supplementary appropriations were made totaling $40.9 million. At fiscal year-end all operating budget appropriations lapse. 104

251 CITY OF COSTA MESA CALIFORNIA SUPPLEMENTARY SCHEDULES

252 [THIS PAGE INTENTIONALLY LEFT BLANK]

253 CITY OF COSTA MESA, CALIFORNIA Nonmajor Governmental Funds Combining Balance Sheet June 30, 2016 (With Comparative Data for Prior Year) Assets Special Debt Capital Totals Revenue Service Projects Cash and investments $ 10,975, ,000 5,632,428 17,573,047 18,537,214 Cash and investments with fiscal agent - 4,356,813-4,356,813 4,334,210 Due from other governments 416, , ,217 Accounts receivable 12,000-9,789 21,789 32,944 Interest receivable 20,255-10,394 30,649 24,854 Loans receivable 541, , ,993 Total assets $ 11,965,660 5,321,813 5,652,618 22,940,091 23,942,432 Liabilities Accounts payable $ 609,533-37, , ,031 Accrued liabilities 396, , ,176 Retentions payable 55,062-12,511 67, ,085 Due to other funds 279, ,539 40,562 Total liabilities 1,340,551-49,642 1,390,193 1,788,854 Deferred Inflows of Resources Unavailable revenues 581, , ,777 Fund Balances Restricted for: Protection of persons and property 791, ,187 1,947,243 Community programs 147, , ,705 Public services 9,244, ,244,035 8,723,904 Debt service - 5,321,813-5,321,813 5,449,210 Assigned for: Protection of persons and property , , ,930 Public services - - 5,248,630 5,248,630 4,477,908 Unassigned (139,064) - - (139,064) (32,099) Total fund balances 10,043,444 5,321,813 5,602,976 20,968,233 21,423,801 Total liabilities, deferred inflows of resources, and fund balances $ 11,965,660 5,321,813 5,652,618 22,940,091 23,942,

254 CITY OF COSTA MESA, CALIFORNIA Nonmajor Governmental Funds Combining Statement of Revenues, Expenditures, and Changes in Fund Balances For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Special Debt Capital Totals Revenue Service Projects Revenues: Taxes $ 930,601-8, ,868 1,010,608 Fines and forfeitures 79, , ,322 Intergovernmental 3,700, ,700,051 5,845,836 Charges for services - - 1,082,176 1,082, ,668 Rental , , ,832 Investment income 125,409 92,919 58, , ,173 Miscellaneous 46, , ,675 Total revenues 4,881,779 92,919 1,250,923 6,225,621 8,063,114 Expenditures: Current: Protection of persons and property 2,727, ,727,443 2,558,321 Community programs 697, ,087 1,842,836 Public services 2,266, ,280 2,742,421 6,379,252 Debt service: Principal - 2,650,000-2,650,000 2,540,000 Interest and fiscal charges - 1,088,632-1,088,632 1,192,245 Total expenditures 5,690,671 3,738, ,280 9,905,583 14,512,654 Excess (deficiency) of revenues over (under) expenditures (808,892) (3,645,713) 774,643 (3,679,962) (6,449,540) Other financing sources (uses): Transfers in 106,583 3,518,316-3,624,899 3,601,744 Transfers out - - (400,505) (400,505) (201) Total other financing sources (uses) 106,583 3,518,316 (400,505) 3,224,394 3,601,543 Net change in fund balances (702,309) (127,397) 374,138 (455,568) (2,847,997) Fund balances at beginning of year 10,745,753 5,449,210 5,228,838 21,423,801 24,271,798 Fund balances at end of year $ 10,043,444 5,321,813 5,602,976 20,968,233 21,423,

255 NONMAJOR SPECIAL REVENUE FUNDS Special Revenue Funds are used to account for revenue derived from specific taxes or other earmarked revenues sources (other than expendable trust or for major capital projects) that are restricted by law or administrative action to expenditures for specified purposes. The following funds have been classified as nonmajor governmental funds in the accompanying fund financial statements. Special Gas Tax Fund Established to account for receipt and disbursement of funds required to be used for construction and maintenance of the City s road network system. Financing is provided by the City s share of State gasoline taxes. Proposition 172 Fund Established to account for receipt and disbursement of voter-approved one-half cent permanent increase in the state sales tax in November These revenues must be expended for public safety purposes. Air Quality Improvement Fund Established to account for the City s share of funds received under Health & Safety Code (AB 2766) to finance mobile source air pollution reduction programs consistent with the California Clean Air Act of Community Development Fund This fund accounts for revenues received from the Department of Housing and Urban Development. These revenues must be expended to accomplish one of the following objectives: elimination of slum or blighted areas of benefit to low and moderate income persons, or to meet certain urgent community development needs. Supplemental Law Enforcement Services Fund (SLESF) Established to account for the receipt and disbursement of funds received under the State Citizen s Option for Public Safety (COPS) Program allocated pursuant to Government Code Section enacted by Assembly Bill 3229, Chapter 134 of the 1996 Statutes. These COPS/SLESF funds are allocated based on population and can only be spent for front line municipal police services as per Government Code Section 30061(c)(2). Rental Rehabilitation Program Fund Established to account for revenues received from the Department of Housing and Urban Development under Section 17 of the U.S. Housing Act of These revenues must be expended to provide assistance to rehabilitate primarily privately-owned residential rental property. Narcotics Forfeiture Fund Established to account for receipt and disbursement of narcotic forfeitures received from County, State, and Federal agencies pursuant to Section of State Health and Safety Code and Federal Statute 21USC Section 881. Local Law Enforcement Block Grant Fund Established to account for Federal grant monies provided by the 1998 Appropriations Act, Public Law These funds are restricted for projects utilized to reduce crime and improve public safety. Office of Traffic Safety Fund Established to account for Federal grant monies received through the State Office of Traffic Safety. These funds are restricted for operations utilized to enhance traffic safety and to reduce drunk driving within the City. 107

256 CITY OF COSTA MESA, CALIFORNIA Nonmajor Special Revenue Funds Combining Balance Sheet June 30, 2016 (With Comparative Data for Prior Year) Assets Air Special Gas Proposition Quality Community Tax 172 Improvement Development Cash and investments $ 9,522, ,099 - Due from other governments - 81,433 38, ,815 Accounts receivable 12, Interest receivable 17, Loans receivable ,052 Total assets $ 9,551,708 81, , ,867 Liabilities Accounts payable $ 366,478 19, ,078 85,994 Accrued liabilities 16,556 14,155 17,920 5,333 Retentions payable 51, ,104 Due to other funds - 187,148-54,857 Total liabilities 434, , , ,288 Deferred Inflows of Resources Unavailable revenues 24, ,052 Fund Balances Restricted for: Protection of persons or property Community programs ,527 Public services 9,092, ,386 - Unassigned - (139,064) - - Total fund balances (deficit) 9,092,649 (139,064) 151,386 89,527 Total liabilities, deferred inflows of resources, and fund balances $ 9,551,708 81, , ,

257 Supplemental Local Law Law Rental Enforcement Office of Enforcement Rehabilitation Narcotics Block Traffic Totals Services Program Forfeiture Grant Safety ,435 57,652 1,103,665 31,644-10,975,619 11,958,908 1,504-16,780-38, , , , , ,255 17, , , ,993 4, ,228 1,122,484 31,702 38,915 11,965,660 12,989, , , ,343 4, , , , , , , ,539 40,562 4, ,303-37,534 1,340,551 1,513, ,469 16, , , ,104 31,702 1, ,187 1,947,243-57, , , ,244,035 8,723, (139,064) (32,099) - 57, ,104 31,702 1,381 10,043,444 10,745,753 4, ,228 1,122,484 31,702 38,915 11,965,660 12,989,

258 CITY OF COSTA MESA, CALIFORNIA Nonmajor Special Revenue Funds Combining Statement of Revenues, Expenditures, and Changes in Fund Balances For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Air Special Gas Proposition Quality Community Tax 172 Improvement Development Revenues: Taxes $ - 930, Fines and forfeitures Intergovernmental 2,534, , ,451 Investment income 103,192-3, Miscellaneous ,630 Total revenues 2,637, , , ,114 Expenditures: Current: Protection of persons and property - 1,210, Community programs ,087 Public services 1,891, ,404 - Total expenditures 1,891,737 1,210, , ,087 Excess (deficiency) of revenues over (under) expenditures 746,152 (279,834) (226,021) 27 Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balances 746,152 (279,834) (226,021) 27 Fund balances (deficit) at beginning of year 8,346, , ,407 89,500 Fund balances (deficit) at end of year $ 9,092,649 (139,064) 151,386 89,

259 Supplemental Local Law Law Rental Enforcement Office of Enforcement Rehabilitation Narcotics Block Traffic Totals Services Program Forfeiture Grant Safety ,601 1,002, , , , , , ,265 3,700,051 5,845, , ,409 60,816-40, , , ,555 40,554 96,604 15, ,265 4,881,779 7,256, ,134-1,111, ,785 2,727,443 2,558, ,087 1,842, ,266,141 4,673, ,134-1,111, ,785 5,690,671 9,074,813 (123,579) 40,554 (1,014,884) 15,213 33,480 (808,892) (1,818,109) 106, ,583 87, , ,583 87,165 (16,996) 40,554 (1,014,884) 15,213 33,480 (702,309) (1,730,944) 16,996 17,205 1,772,988 16,489 (32,099) 10,745,753 12,476,697-57, ,104 31,702 1,381 10,043,444 10,745,

260 CITY OF COSTA MESA, CALIFORNIA Special Gas Tax Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Intergovernmental $ 2,475,462 2,475,462 2,534,697 59,235 3,692,024 Investment income 20,000 20, ,192 83,192 46,214 Total revenues 2,495,462 2,495,462 2,637, ,427 3,738,238 Expenditures: Current: Public services 6,209,120 10,256,737 1,891,737 8,365,000 4,301,976 Total expenditures 6,209,120 10,256,737 1,891,737 8,365,000 4,301,976 Excess (deficiency) of revenues over (under) expenditures (3,713,658) (7,761,275) 746,152 8,507,427 (563,738) Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance (3,713,658) (7,761,275) 746,152 8,507,427 (563,738) Fund balance at beginning of year 8,346,497 8,346,497 8,346,497-8,910,235 Fund balance at end of year $ 4,632, ,222 9,092,649 8,507,427 8,346,

261 CITY OF COSTA MESA, CALIFORNIA Proposition 172 Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Taxes $ 1,054,415 1,054, ,601 (123,814) 1,002,065 Investment income (200) 91 Total revenues 1,054,615 1,054, ,601 (124,014) 1,002,156 Expenditures: Current: Protection of persons and property 1,162,233 1,162,233 1,210,435 (48,202) 1,143,006 Total expenditures 1,162,233 1,162,233 1,210,435 (48,202) 1,143,006 Excess (deficiency) of revenues over (under) expenditures (107,618) (107,618) (279,834) (172,216) (140,850) Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance (107,618) (107,618) (279,834) (172,216) (140,850) Fund balance at beginning of year 140, , , ,620 Fund balance (deficit) at end of year $ 33,152 33,152 (139,064) (172,216) 140,

262 CITY OF COSTA MESA, CALIFORNIA Air Quality Improvement Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Intergovernmental $ 125, , ,554 19, ,769 Investment income 2,500 2,500 3,829 1,329 1,882 Miscellaneous income Total revenues 127, , ,383 20, ,184 Expenditures: Current: Public services 15, , ,404 40, ,680 Total expenditures 15, , ,404 40, ,680 Excess (deficiency) of revenues over (under) expenditures 112,500 (287,634) (226,021) 61,613 (230,496) Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance 112,500 (287,634) (226,021) 61,613 (230,496) Fund balance at beginning of year 377, , , ,903 Fund balance at end of year $ 489,907 89, ,386 61, ,

263 CITY OF COSTA MESA, CALIFORNIA Community Development Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Intergovernmental $ 1,028,141 1,028, ,451 (337,690) 1,720,739 Investment income Miscellaneous - - 6,630 6, ,132 Total revenues 1,028,141 1,028, ,114 (331,027) 1,906,031 Expenditures: Current: Community programs 1,215,145 1,501, , ,145 1,842,836 Total expenditures 1,215,145 1,501, , ,145 1,842,836 Excess (deficiency) of revenues over (under) expenditures (187,004) (473,091) ,118 63,195 Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance (187,004) (473,091) ,118 63,195 Fund balance at beginning of year 89,500 89,500 89,500-26,305 Fund balance (deficit) at end of year $ (97,504) (383,591) 89, ,118 89,

264 CITY OF COSTA MESA, CALIFORNIA Supplemental Law Enforcement Services Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Intergovernmental $ 14,800 14, , , ,369 Total revenues 14,800 14, , , ,369 Expenditures: Current: Protection of persons and property 203, , ,134 (106,730) 273,538 Total expenditures 203, , ,134 (106,730) 273,538 Excess (deficiency) of revenues over (under) expenditures (188,604) (188,604) (123,579) 65,025 (70,169) Other financing sources (uses): Transfers in 188, , ,583 (82,021) 87,165 Transfers out Total other financing sources (uses) 188, , ,583 (82,021) 87,165 Net change in fund balance - - (16,996) (16,996) 16,996 Fund balance at beginning of year 16,996 16,996 16, Fund balance at end of year $ 16,996 16,996 - (16,996) 16,

265 CITY OF COSTA MESA, CALIFORNIA Narcotics Forfeiture Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Fines and forfeitures $ 495,608 61,567 79,088 17, ,322 Investment income 6,100 6,100 17,516 11,416 12,251 Intergovernmental Total revenues 501,708 67,667 96,604 28, ,573 Expenditures: Current: Protection of persons and property 1,063,889 3,061,464 1,111,488 1,949,976 1,033,500 Total expenditures 1,063,889 3,061,464 1,111,488 1,949,976 1,033,500 Excess (deficiency) of revenues over (under) expenditures (562,181) (2,993,797) (1,014,884) 1,978,913 (858,927) Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance (562,181) (2,993,797) (1,014,884) 1,978,913 (858,927) Fund balance at beginning of year 1,772,988 1,772,988 1,772,988-2,631,915 Fund balance (deficit) at end of year $ 1,210,807 (1,220,809) 758,104 1,978,913 1,772,

266 CITY OF COSTA MESA, CALIFORNIA Local Law Enforcement Block Grant Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Intergovernmental $ - 17,290 15,529 (1,761) 20,994 Investment income Total revenues - 17,290 15,814 (1,476) 21,121 Expenditures: Current: Protection of persons and property - 17, ,689 35,922 Total expenditures - 17, ,689 35,922 Excess (deficiency) of revenues over (under) expenditures ,213 15,213 (14,801) Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance ,213 15,213 (14,801) Fund balance at beginning of year 16,489 16,489 16,489-31,290 Fund balance at end of year $ 16,489 16,489 31,702 15,213 16,

267 CITY OF COSTA MESA, CALIFORNIA Office of Traffic Safety Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Intergovernmental $ - 150, ,265 (21,735) 69,941 Total revenues - 150, ,265 (21,735) 69,941 Expenditures: Current: Protection of persons and property - 150,000 94,785 55,215 72,355 Total expenditures - 150,000 94,785 55,215 72,355 Excess (deficiency) of revenues over (under) expenditures ,480 33,480 (2,414) Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance ,480 33,480 (2,414) Fund balance (deficit) at beginning of year (32,099) (32,099) (32,099) - (29,685) Fund balance (deficit) at end of year $ (32,099) (32,099) 1,381 33,480 (32,099) 119

268 120

269 NONMAJOR DEBT SERVICE FUND Debt Service Funds are used to account for accumulated resources for, and payment of, general long-term debt. The following fund has been classified as a nonmajor fund in the accompanying fund financial statements: Financing Authority Debt Service Fund To accumulate monies for payment of the 2007 Certificates of Participation (COP), 2006 Revenue Refunding Bonds, and 2003 Refunding Certificates of Participation. The 2007 COP provided funding for expansion of the police facility. The 2006 Revenue Refunding bonds refunded 1991 Local Agency Revenues Bonds that provided monies for the purchase of the Costa Mesa Community Facilities 1991 Special Tax Bonds. The 2003 Refunding COP refunded 1993 Refunding Revenue Bonds that provided for the refunding of the Costa Mesa City Hall and Public Safety Facilities, Inc and 1988 Lease Revenue Bond issues. 121

270 CITY OF COSTA MESA, CALIFORNIA Nonmajor Debt Service Fund Balance Sheet June 30, 2016 (With Comparative Data for Prior Year) Assets Financing Authority Debt Totals Service Cash and investments $ 965, ,000 1,115,000 Cash and investments with fiscal agent 4,356,813 4,356,813 4,334,210 Total assets $ 5,321,813 5,321,813 5,449,210 Liabilities and Fund Balances Liabilities: Accrued liabilities $ Advances from other funds Total liabilities Fund balances: Restricted for: Debt service 5,321,813 5,321,813 5,449,210 Total fund balances 5,321,813 5,321,813 5,449,210 Total liabilities and fund balances $ 5,321,813 5,321,813 5,449,

271 CITY OF COSTA MESA, CALIFORNIA Nonmajor Debt Service Fund Statement of Revenues, Expenditures, and Changes in Fund Balances For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Financing Authority Debt Totals Service Revenues: Investment income $ 92,919 92, ,346 Total revenues 92,919 92, ,346 Expenditures: Debt service: Principal 2,650,000 2,650,000 2,540,000 Interest and fiscal charges 1,088,632 1,088,632 1,192,245 Total expenditures 3,738,632 3,738,632 3,732,245 Excess (deficiency) of revenues over (under) expenditures (3,645,713) (3,645,713) (3,627,899) Other financing sources (uses): Transfers in 3,518,316 3,518,316 3,514,579 Transfers out Total other financing sources (uses) 3,518,316 3,518,316 3,514,579 Net change in fund balances (127,397) (127,397) (113,320) Fund balances at beginning of year 5,449,210 5,449,210 5,562,530 Fund balances at end of year $ 5,321,813 5,321,813 5,449,

272 124

273 MAJOR AND NONMAJOR CAPITAL PROJECTS FUNDS Capital Projects Funds are established to account for financial resources segregated for acquisition and construction of major capital facilities (other than those financed by proprietary funds). The following have been classified as major funds in the accompanying government-wide financial statements: Park Development Fund Established to account for development and maintenance of the City s park system. Financing is provided by fees charged to residential and commercial developers. Capital Improvements Fund Established to account for construction of capital facilities financed by the City s General Fund and various governmental grants. Measure M2 Fund Established to account for the expenditure of the 2006 voter-approved one-half percent sales tax for local transportation improvements. Measure M2 is a 30-year extension of the earlier Measure M program. The following have been classified as nonmajor funds in the accompanying fund financial statements: Parking Districts Fund Established under the Vehicle Parking District Law of 1943 to provide vehicle facilities in the downtown area. Financing is provided through specific property tax levies. Golf Course Improvements Fund Established to account for Costa Mesa Country Club capital expenditures. The City receives two and one-half percent of monthly gross receipts of green and tournament fees to finance capital improvements. Drainage Fees Fund Established to account for construction and maintenance of the City s drainage system. Financing is provided by fees charged to residential and commercial developers. Traffic Impact Fees Fund Established to account for the receipt and disbursement of funds for transportation improvements Citywide. Financing is provided by fees charged to residential and commercial developers. Fire System Development Fees Fund Established to account for receipt and disbursement of development impact fees established by Ordinance 89-1 for future construction of fire protection facilities and equipment for the north Costa Mesa area. 125

274 CITY OF COSTA MESA, CALIFORNIA Nonmajor Capital Projects Funds Combining Balance Sheet June 30, 2016 (With Comparative Data for Prior Year) Assets Parking Golf Course Drainage Districts Improvements Fees Cash and investments $ 51, ,615 1,558,601 Due from other governments Accounts receivable - 9,789 - Interest receivable ,879 Total assets $ 51, ,987 1,561,480 Liabilities Accounts payable $ Accrued liabilities Retentions payable Total liabilities Deferred Inflows of Resources Unavailable revenues Fund Balances Restricted for: Public services Assigned for: Protection of persons and property Public services 51, ,987 1,561,480 Total fund balances 51, ,987 1,561,480 Total liabilities, deferred inflows of resources, and fund balances $ 51, ,987 1,561,

275 Fire System Traffic Development Totals Impact Fees Fees ,352, ,693 5,632,428 5,463, ,789 32,944 6, ,394 7,843 3,358, ,346 5,652,618 5,504,101 37,131-37, , ,511-12,511 96,575 49,642-49, , , , ,930 3,309,173-5,248,630 4,477,908 3,309, ,346 5,602,976 5,228,838 3,358, ,346 5,652,618 5,504,

276 CITY OF COSTA MESA, CALIFORNIA Nonmajor Capital Projects Funds Combining Statement of Revenues, Expenditures, and Changes in Fund Balances For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Parking Golf Course Drainage Districts Improvements Fees Revenues: Taxes $ 8, Charges for services ,820 Rental - 101,531 - Investment income 539 3,479 16,034 Miscellaneous Total revenues 8, , ,854 Expenditures: Current: Public services - 54, ,701 Total expenditures - 54, ,701 Excess (deficiency) of revenues over (under) expenditures 8,806 50, ,153 Other financing sources (uses): Transfers in Transfers out (505) - - Total other financing sources (uses) (505) - - Net change in fund balance 8,301 50, ,153 Fund balance at beginning of year 43, ,184 1,154,327 Fund balance at end of year $ 51,990 $ 325,987 1,561,

277 Fire System Traffic Development Totals Impact Fees Fees ,267 8, ,356-1,082, , , ,832 35,481 3,416 58,949 29, , ,837 3,416 1,250, , , ,280 1,705, , ,280 1,705, ,465 3, ,643 (1,003,532) (400,000) (400,505) (201) - (400,000) (400,505) (201) 304,465 (396,584) 374,138 (1,003,733) 3,004, ,930 5,228,838 6,232,571 3,309, ,346 5,602,976 5,228,

278 CITY OF COSTA MESA, CALIFORNIA Parking Districts Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Prior Original Final Positive Year Budget Budget Actual (Negative) Actual Revenues: Taxes $ 6,850 6,850 8,267 1,417 8,543 Investment income Total revenues 7,020 7,020 8,806 1,786 8,759 Expenditures: Current: Public services Total expenditures Excess (deficiency) of revenues over (under) expenditures 7,020 7,020 8,806 1,786 8,759 Other financing sources (uses): Transfers in Transfers out - - (505) (505) (201) Total other financing sources (uses) - - (505) (505) (201) Net change in fund balance 7,020 7,020 8,301 1,281 8,558 Fund balance at beginning of year 43,689 43,689 43,689-35,131 Fund balance at end of year $ 50,709 50,709 51,990 1,281 43,

279 CITY OF COSTA MESA, CALIFORNIA Drainage Fees Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Charges for services $ 400, , , , ,771 Investment income 6,250 6,250 16,034 9,784 6,375 Total revenues 406, , , , ,146 Expenditures: Current: Public services 510, , , ,378 1,063,384 Total expenditures 510, , , ,378 1,063,384 Excess (deficiency) of revenues over (under) expenditures (103,750) (574,829) 407, ,982 (748,238) Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance (103,750) (574,829) 407, ,982 (748,238) Fund balance at beginning of year 1,154,327 1,154,327 1,154,327-1,902,565 Fund balance at end of year $ 1,050, ,498 1,561, ,982 1,154,

280 CITY OF COSTA MESA, CALIFORNIA Traffic Impact Fees Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Charges for services $ 150, , , , ,897 Investment income 16,424 16,424 35,481 19,057 17,147 Miscellaneous income ,010 Total revenues 166, , , , ,054 Expenditures: Current: Public services 800,000 1,385, ,372 1,209, ,871 Total expenditures 800,000 1,385, ,372 1,209, ,871 Excess (deficiency) of revenues over (under) expenditures (633,576) (1,219,218) 304,465 1,523,683 (277,817) Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance (633,576) (1,219,218) 304,465 1,523,683 (277,817) Fund balance at beginning of year 3,004,708 3,004,708 3,004,708-3,282,525 Fund balance at end of year $ 2,371,132 1,785,490 3,309,173 1,523,683 3,004,

281 CITY OF COSTA MESA, CALIFORNIA Fire System Development Fees Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Investment income $ 3,700 3,700 3,416 (284) 3,996 Total revenues 3,700 3,700 3,416 (284) 3,996 Expenditures: Current: Public services 400, , ,000 - Total expenditures 400, , ,000 - Excess (deficiency) of revenues over (under) expenditures (396,300) (396,300) 3, ,716 3,996 Other financing sources (uses): Transfers in Transfers out - - (400,000) (400,000) - Total other financing sources (uses) - - (400,000) (400,000) - Net change in fund balance (396,300) (396,300) (396,584) (284) 3,996 Fund balance at beginning of year 750, , , ,934 Fund balance at end of year $ 354, , ,346 (284) 750,

282 CITY OF COSTA MESA, CALIFORNIA Park Development Fund - Major Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Original Final Positive Prior Year Budget Budget Actual (Negative) Actual Revenues: Charges for services $ 500, ,000 1,952,014 1,452,014 1,992,098 Investment income 15,000 15,000 33,218 18,218 16,818 Total revenues 515, ,000 1,985,232 1,470,232 2,008,916 Expenditures: Current: Community programs 1,900,000 2,606,687 72,068 2,534,619 64,621 Debt service: Interest and fiscal charges 225, ,000 20, ,595 21,426 Total expenditures 2,125,200 2,831,687 92,473 2,739,214 86,047 Excess (deficiency) of revenues over (under) expenditures (1,610,200) (2,316,687) 1,892,759 4,209,446 1,922,869 Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance (1,610,200) (2,316,687) 1,892,759 4,209,446 1,922,869 Fund balance (deficit) at beginning of year (335,984) (335,984) (335,984) - (2,258,853) Fund balance (deficit) at end of year $ (1,946,184) (2,652,671) 1,556,775 4,209,446 (335,984) 134

283 CITY OF COSTA MESA, CALIFORNIA Capital Improvements Fund - Major Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Prior Original Final Positive Year Budget Budget Actual (Negative) Actual Revenues: Intergovernmental $ 800, , , ,896 1,569,824 Investment income 20,000 20, , ,760 58,340 Miscellaneous ,631 Total revenues 820, ,000 1,162, ,656 1,691,795 Expenditures: Current: Public services 13,627,536 29,922,518 5,773,755 24,148,763 3,933,477 Total expenditures 13,627,536 29,922,518 5,773,755 24,148,763 3,933,477 Excess (deficiency) of revenues over (under) expenditures (12,807,536) (29,102,518) (4,611,099) 24,491,419 (2,241,682) Other financing sources (uses): Transfers in 8,827,536 8,827,536 8,827,536-10,652,000 Transfers out Total other financing sources (uses) 8,827,536 8,827,536 8,827,536-10,652,000 Net change in fund balance (3,980,000) (20,274,982) 4,216,437 24,491,419 8,410,318 Fund balance at beginning of year 13,918,967 13,918,967 13,918,967-5,508,649 Fund balance at end of year $ 9,938,967 (6,356,015) 18,135,404 24,491,419 13,918,

284 CITY OF COSTA MESA, CALIFORNIA Measure "M2" Fund - Major Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Variance with Final Budget Prior Original Final Positive Year Budget Budget Actual (Negative) Actual Revenues: Intergovernmental $ 3,646,761 4,443,299 2,345,747 (2,097,552) 3,110,014 Investment income 16,600 16,600 50,095 33,495 33,779 Miscellaneous income ,151 Total revenues 3,663,361 4,459,899 2,395,842 (2,064,057) 3,148,944 Expenditures: Current: Public services 2,302,208 16,273,367 5,096,996 11,176,371 5,982,220 Total expenditures 2,302,208 16,273,367 5,096,996 11,176,371 5,982,220 Excess (deficiency) of revenues over (under) expenditures 1,361,153 (11,813,468) (2,701,154) 9,112,314 (2,833,276) Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Net change in fund balance 1,361,153 (11,813,468) (2,701,154) 9,112,314 (2,833,276) Fund balance at beginning of year 3,703,579 3,703,579 3,703,579-6,536,855 Fund balance (deficit) at end of year $ 5,064,732 (8,109,889) 1,002,425 9,112,314 3,703,

285 INTERNAL SERVICE FUNDS Internal Service Funds are used to account for the financing of goods and services provided by one City department to others, or of other governmental units on a cost-reimbursement basis. Equipment Replacement Fund Established to account for all motorized equipment used by City departments. Self Insurance Fund Workers Compensation/General Liability/Unemployment Established to account for receipt and disbursement of funds used to pay worker s compensation, general liability, and unemployment premiums and claims filed against the City. Information Technology Replacement Fund Established to provide funds for future replacement and upgrade to the City s computer equipment, systems and supporting infrastructure. 137

286 Assets CITY OF COSTA MESA, CALIFORNIA Internal Service Funds Combining Statement of Net Position June 30, 2016 Self-Insurance- Workers' Compensation/ General Information Equipment Liability/ Technology Totals Replacement Unemployment Replacement Current assets: Cash and investments $ 2,820,156 4,424, ,132 7,496,829 9,992,383 Accounts receivable ,228 Interest receivable 5,277 8, ,856 14,521 Prepaid expenses - 4,612-4,612 - Inventories 108, ,705 97,976 Total current assets 2,934,138 4,438, ,597 7,624,897 10,123,108 Capital assets: Motorized equipment 12,518, ,518,827 11,908,702 Other equipment 1,895, ,895, ,758 Accumulated depreciation (7,924,282) - - (7,924,282) (7,552,669) Net capital assets 6,490, ,490,355 4,580,791 Total assets 9,424,493 4,438, ,597 14,115,252 14,703,899 Liabilities Current liabilities: Accounts payable 39, , , ,219 Accrued liabilities 11, ,878 12,010 Capital lease payable Claims payable - 1,154,274-1,154,274 2,233,348 Total current liabilities 51,422 1,492,259-1,543,681 2,358,577 Long-term liabilities: Capital lease payable Claims payable - 9,439,466-9,439,466 8,646,136 Total long-term liabilities - 9,439,466-9,439,466 8,646,136 Total liabilities 51,422 10,931,725-10,983,147 11,004,713 Net Position (With Comparative Data for Prior Year) Net investment in capital assets 6,490, ,490,355 4,580,791 Unrestricted (deficit) 2,882,716 (6,493,563) 252,597 (3,358,250) (881,605) Total net position (deficit) $ 9,373,071 (6,493,563) 252,597 3,132,105 3,699,

287 CITY OF COSTA MESA, CALIFORNIA Internal Service Funds Combining Statement of Revenues, Expenses, and Changes in Net Position For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Self-Insurance- Workers' Compensation/ General Information Equipment Liability/ Technology Totals Replacement Unemployment Replacement Operating revenues: Charges for services $ 1,897,989 4,324, ,002 6,372,792 5,786,463 Total operating revenues 1,897,989 4,324, ,002 6,372,792 5,786,463 Operating expenses: Allocated administrative costs 798, ,677-1,425,942 1,409,157 Depreciation 616, , ,723 Fuel and repair parts 1,002, ,002,713 1,026,390 Claims and premiums - 4,002,807-4,002,807 4,699,381 Total operating expenses 2,417,941 4,630,484-7,048,425 7,796,651 Operating income (loss) (519,952) (305,683) 150,002 (675,633) (2,010,188) Nonoperating revenues (expenses): Investment income 45,892 47,353 2,207 95,452 53,787 Interest expense (23,889) Gain on sale of equipment 13, ,100 (123,878) Total nonoperating revenues (expenses) 58,992 47,353 2, ,552 (93,980) Income (loss) before transfers (460,960) (258,330) 152,209 (567,081) (2,104,168) Transfers in Transfers out Total transfers Change in net position (460,960) (258,330) 152,209 (567,081) (2,104,168) Net position (deficit) at beginning of year 9,834,031 (6,235,233) 100,388 3,699,186 5,803,354 Net position (deficit) at end of year $ 9,373,071 (6,493,563) 252,597 3,132,105 3,699,

288 CITY OF COSTA MESA, CALIFORNIA Internal Service Funds Combining Statement of Cash Flows For the fiscal year ended June 30, 2016 (With Comparative Data for Prior Year) Self-Insurance- Workers' Compensation/ General Equipment Liability/ IT Totals Replacement Unemployment Replacement Cash flows from operating activities: Cash received from customers and user departments $ 1,916,217 $ 4,323,906 $ 150,002 6,390,125 5,786,821 Cash payments to suppliers for goods and services (1,166,531) (4,626,687) - (5,793,218) (6,602,611) Cash payments to employees for services (675,151) - - (675,151) (625,920) Net cash provided by (used for) operating activities 74,535 (302,781) 150,002 (78,244) (1,441,710) Cash flows from capital and related financing activities: Cash received from disposal of assets 42, ,633 99,002 Acquisition of capital assets (2,556,060) - - (2,556,060) (232,950) Cash paid for capital related financing (439,284) Net cash provided by (used for) capital and related financing activities (2,513,427) - - (2,513,427) (573,232) Cash flows from investing activities: Investment income received 48,151 46,079 1,887 96,117 55,666 Net cash provided by (used for) investing activities 48,151 46,079 1,887 96,117 55,666 Net increase (decrease) in cash and cash equivalents (2,390,741) (256,702) 151,889 (2,495,554) (1,959,276) Cash and cash equivalents at beginning of year 5,210,897 4,681, ,243 9,992,383 11,951,659 Cash and cash equivalents at end of year $ 2,820,156 4,424, ,132 7,496,829 9,992,383 Reconciliation of operating income (loss) to net cash provided by operating activities: Operating income (loss) $ (519,952) (305,683) 150,002 (675,633) (2,010,188) Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Depreciation 616, , ,723 (Increase) decrease in inventories (10,729) - - (10,729) 6,981 (Increase) decrease in accounts receivable 18,228 (895) - 17,333 - (Increase) decrease in prepaid items - (4,612) - (4,612) 48,336 Increase (decrease) in accounts payable (29,843) 294, ,310 (90,035) Increase (decrease) in accrued liabilities (132) - - (132) 355 Increase (decrease) in claims payable - (285,744) - (285,744) (58,882) Net cash provided by (used for) operating activities $ 74,535 (302,781) 150,002 (78,244) (1,441,710) 140

289 AGENCY FUNDS Agency Funds are used to account for assets held by the City in a fiduciary capacity for individuals, government entities, and others. Such funds are operated by carrying out specifications of trust indentures, statutes, ordinances, or other governing regulations. Deposits Fund Established to account for various other funds held by the City in an agent or trustee capacity for individuals, private organizations, other governmental units, and/or other funds. Community Facilities District Fund Established to account for special taxes received under the Mello-Roos Community Facilities Act of Bonds were issued to provide for improvements within the District. Costa Mesa Foundation Fund Established for the purpose of providing opportunities for donors to contribute assets for the benefit of the Community. 141

290 CITY OF COSTA MESA, CALIFORNIA Agency Funds Combining Statement of Fiduciary Assets and Liabilities June 30, 2016 (With Comparative Data for Prior Year) Community Facilities Costa Mesa Totals Deposits District Foundation Assets Cash and investments $ 3,358, ,401 3,475,707 2,705,710 Accounts receivable 16, , Interest receivable Prepaid items 1, ,471 7,685 Total assets $ 3,376, ,618 3,493,633 2,714,257 Liabilities Accounts payable $ 840,691-4, , ,792 Deposits payable 2,535, ,564 2,648,888 2,449,465 Total liabilities $ 3,376, ,618 3,493,633 2,714,

291 Balance at Balance at July 1, 2015 Additions Deletions June 30, 2016 Cash and investments $ 2,611,603 51,319,195 50,572,492 3,358,306 Accounts receivable ,870 52,358 16,238 Prepaid items 7,685 1,471 7,685 1,471 Total assets $ 2,620,014 51,388,536 50,632,535 3,376,015 Liabilities Accounts payable $ 263,836 7,197,580 6,620, ,691 Deposits payable 2,356,178 44,311,600 44,132,454 2,535,324 Total liabilities $ 2,620,014 51,509,180 50,753,179 3,376,015 COMMUNITY FACILITIES DISTRICT Assets Cash and investments $ - 247, ,585 - Total assets $ - 247, ,585 - Liabilities Accounts payable $ - 242, ,545 - Held for bondholders - 247, ,585 Total liabilities $ - 490, ,130 - COSTA MESA FOUNDATION CITY OF COSTA MESA, CALIFORNIA Agency Funds Combining Statement of Changes in Fiduciary Assets and Liabilities For the fiscal year ended June 30, 2016 DEPOSITS Assets Assets Cash and investments $ 94,107 99,658 76, ,401 Interest receivable Total assets $ 94, ,011 76, ,618 Liabilities Accounts payable $ ,347 67,249 4,054 Deposits payable 93, ,111 88, ,564 Total liabilities $ 94, , , ,618 (Continued) 143

292 CITY OF COSTA MESA, CALIFORNIA (Continued) Agency Funds Combining Statement of Changes in Fiduciary Assets and Liabilities For the fiscal year ended June 30, 2016 TOTALS - ALL AGENCY FUNDS Assets Balance at Balance at July 1, 2015 Additions Deletions June 30, 2016 Cash and investments $ 2,705,710 51,666,438 50,896,441 3,475,707 Accounts receivable ,870 52,358 16,238 Interest receivable Prepaid items 7,685 1,471 7,685 1,471 Total assets $ 2,714,257 51,736,132 50,956,756 3,493,633 Liabilities Accounts payable $ 264,792 7,267,927 6,687, ,745 Deposits payable 2,499,465 44,420,711 44,221,288 2,698,888 Held for bondholders - 242, ,545 - Total liabilities $ 2,764,257 51,931,183 51,151,807 3,543,

293 CITY OF COSTA MESA CALIFORNIA STATISTICAL SECTION

294 STATISTICAL SECTION This part of the City s comprehensive annual financial report presents detailed information as a context for understanding what information in the financial statements, note disclosures, and required supplementary information says about the government s overall financial health. FINANCIAL TRENDS TABLES 1-4 These schedules contain financial trend information to help the reader understand how the government s financial performance and well-being have changed over time. REVENUE CAPACITY TABLES 5-12 These schedules contain revenue information to help the reader assess the government s most significant local revenue source. DEBT CAPACITY TABLES These schedules present information to help the reader assess the affordability of the government s current levels of outstanding debt and the government s ability to issue additional debt in the future. DEMOGRAPHIC AND ECONOMIC INFORMATION TABLES These schedules offer demographic and economic indicators to help the reader understand the environment within which the government s financial activities take place. OPERATING INFORMATION TABLES These schedules contain service and infrastructure data to help the reader understand how the information in the government s financial report relates to the services the government provides and the activities it performs. 145

295 CITY OF COSTA MESA, CALIFORNIA NET POSITION BY COMPONENT LAST TEN FISCAL YEARS (accrual basis of accounting) TABLE 1 Fiscal Years Governmental Activities Net investment in capital assets $ 223,882, ,078, ,167, ,204, ,554, ,954, ,884, ,291, ,133, ,195,466 Restricted Protection of Persons and Property 747, , ,718 1,040,371 1,303,260 2,519,015 2,329,840 1,441, ,573 1,022,546 Community programs 10,166,878 10,601,709 5,909,972 6,475,370 2,292,260 10,262,006 8,713,244 9,622,339 8,892,751 12,793,475 Public services 19,186,443 18,781,762 18,531,911 18,083,105 26,299,602 28,568,791 26,485,938 21,642,345 17,660,289 15,495,090 Redevelopment 8,743, Unrestricted 62,778,909 67,546,727 50,034,265 40,025,930 42,251,930 44,741,840 43,798,620 51,403,839 (170,836,260) (159,357,224) Total governmental activities net position 325,506, ,440, ,051, ,828, ,701, ,046, ,212, ,401,690 67,402,811 86,149,353 Source: Government-Wide Financial Statements 146

296 CITY OF COSTA MESA, CALIFORNIA CHANGES IN NET POSITION LAST TEN FISCAL YEARS (accrual basis of accounting) TABLE 2 Fiscal Years Expenses Governmental Activities: General government $ 28,246,216 29,508,603 29,708,604 24,640,217 22,942,186 19,977,655 22,655,452 23,396,581 25,225,607 24,631,010 Protection of persons and property 52,299,944 57,655,181 64,718,615 65,999,456 58,600,881 61,788,930 63,383,715 62,634,432 64,184,047 63,956,413 Community programs 5,945,293 7,704,374 10,953,425 6,957,413 5,585,317 4,310,750 6,519,916 6,784,867 10,189,480 4,639,743 Public services 24,479,949 28,707,820 22,068,699 20,338,489 18,051,024 18,873,545 20,508,217 22,768,197 21,549,681 22,498,495 Redevelopment 885,005 1,168, ,499 1,225, , , Interest on long-term debt 3,419,566 3,651,584 3,426,155 3,243,198 3,043,559 2,683,598 1,726,008 1,273,152 1,210,723 1,081,605 Total primary government expenses 115,275, ,396, ,250, ,404, ,085, ,546, ,793, ,857, ,359, ,807,266 Program Revenues Governmental Activities: Charges for services: Protection of persons and property 3,742,586 3,553,680 3,236,412 3,266,143 2,660,989 2,635,880 2,739,881 2,338,910 2,299,476 2,707,819 Community programs 5,423,255 5,554,124 6,075,951 5,617,827 5,290,235 5,268,839 5,856,107 6,229,677 7,498,348 8,232,995 Public services 5,680,415 2,822,877 1,839,433 1,974,779 2,626,032 2,861,971 2,646,611 2,680,625 3,089,801 3,721,366 Redevelopment Operating grants and contributions 11,459,481 8,948,635 10,276,030 5,699,857 6,717,009 8,832,089 8,443,327 8,534,673 8,562,955 4,907,815 Capital grants and contributions 6,506,495 10,594,837 8,938,881 6,441,397 6,233,234 4,555,065 5,140,960 6,148,876 5,143,592 3,370,260 Total primary government revenues 32,812,232 31,474,153 30,366,707 23,000,003 23,527,499 24,153,844 24,826,886 25,932,761 26,594,172 22,940,255 Total primary government net expense (82,463,741) (96,922,172) (100,884,290) (99,404,763) (85,558,009) (84,392,338) (89,966,422) (90,924,468) (95,765,366) (93,867,011) General Revenues and Other Changes in Net Position Governmental Activities: Taxes: Property taxes 22,921,884 24,715,336 25,327,904 23,885,560 24,626,634 21,564,340 23,192,755 22,984,093 24,139,297 26,168,612 Sales and use taxes 46,489,599 46,917,845 39,488,414 35,267,341 40,953,224 43,077,849 46,743,795 50,329,310 52,117,128 58,524,162 Transient occupancy tax 5,959,556 5,791,004 4,719,158 4,268,984 5,344,968 6,524,510 7,257,695 7,676,090 7,995,154 8,622,505 Franchise taxes 3,911,800 4,046,517 4,174,172 3,945,159 4,240,255 4,471,326 4,818,972 4,891,465 4,885,925 5,060,402 Business license tax 897, , , , , , , , , ,521 Other intergovernmental, unrestricted 8,687,055 9,155,864 9,215,927 9,117,466 9,112,000 8,594,277 8,814,644 9,229,059 5,660,305 11,209,989 Investment income 7,433,407 6,659,736 1,649,319 4,016,384 2,499,790 1,377, ,159 1,772,900 1,692,528 1,871,216 Miscellaneous 89, , ,080 1,784, , , , , , ,351 Settlements ,452, , Extraordinary items: Gain on transfer of assets to Successor Agency ,260, (Loss) on advance to Successor Agency (11,888,159) Total primary government 96,390,158 99,081,228 86,285,465 83,144,079 88,504,285 96,737,243 82,132,060 98,416,327 98,394, ,343,758 Change in Net Position 13,926,417 2,159,056 (14,598,825) (16,260,684) 2,946,276 12,344,905 (7,834,362) 7,491,859 2,628,912 19,476,747 Source: Government-Wide Financial Statements 147

297 CITY OF COSTA MESA, CALIFORNIA FUND BALANCES OF GOVERNMENTAL FUNDS LAST TEN FISCAL YEARS (modified accrual basis of accounting) TABLE 3 Fiscal Years (1) General fund Reserved $ 18,326,310 15,768,661 15,140,564 14,421, Unreserved 55,057,757 50,467,786 33,716,155 27,098, Nonspendable ,334,328 13,917,262 3,137,794 3,430,104 4,165,795 2,486,085 Restricted Committed ,125,000 16,125,000 16,125,000 16,125,000 16,125,000 16,125,000 Assisgned ,900,467 10,347,804 10,131,615 10,016,092 11,325,819 13,820,663 Unassigned ,915,735 7,419,860 16,252,032 20,629,130 22,199,337 32,040,713 Total general fund 73,384,067 66,236,447 48,856,719 41,520,065 45,275,530 47,809,926 45,646,441 50,200,326 53,815,951 64,472,461 All other governmental funds Reserved 26,378,785 23,661,322 10,576,691 9,357, Unreserved, reported in: Special revenue funds 20,625,152 7,904,617 13,042,672 14,952, Capital projects funds 15,128,023 18,759,882 15,658,912 10,780, Debt services funds (11,002,058) (10,400,263) (9,579,072) (10,136,674) Nonspendable , Restricted ,165,657 31,441,902 29,302,059 25,097,114 20,914,771 19,309,083 Committed Assisgned ,146,775 7,095,166 9,162,682 11,741,220 19,147,805 23,738,380 Unassigned (12,177,382) (2,572,973) (2,892,237) (2,288,538) (368,083) (139,064) Total primary government net expense 51,129,902 39,925,558 29,699,203 24,953,672 29,147,899 35,964,095 35,572,504 34,549,796 39,694,493 42,908,399 (1) City implemented GASB Statement No. 54 during the fiscal year ended June 30, This statement eliminated previous reserved and unreserved fund blanace categories, and replaced them with five new categories (nonspendable, restricted, committed, assigned, and unassigned). Fund balance amounts as of June 30, 2011 have been restated to present the new categories; however, all previous fiscal years are presented using the old categories. Source: Fund Financial Statements 148

298 CITY OF COSTA MESA, CALIFORNIA CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS LAST TEN FISCAL YEARS (modified accrual basis of accounting) TABLE 4 Revenues Fiscal Years Taxes $ 80,180,448 82,402,980 74,570,140 68,225,614 76,031,925 76,526,993 82,930,849 86,797,242 90,091,915 99,349,202 Licenses and permits 2,874,124 1,876,959 1,168,026 1,289,600 1,557,797 1,903,361 1,997,057 2,085,348 2,313,296 2,983,081 Fines and forfeits 2,915,299 3,066,355 2,965,960 2,868,066 2,104,816 3,508,181 4,483,240 3,614,144 1,367,190 1,609,134 Intergovernmental 22,675,698 27,088,736 26,359,128 21,137,881 21,681,418 19,838,941 19,213,168 21,769,293 22,010,125 17,612,288 Charges for services 7,789,875 4,355,738 4,179,547 4,156,944 4,478,711 4,167,896 4,320,932 4,721,191 6,117,030 6,668,445 Rental 2,909,707 3,128,271 3,189,975 2,838,744 2,900,049 3,054,100 2,987,055 3,021,585 3,113,662 3,336,053 Investment income 6,843,792 5,869,106 1,627,547 3,537,379 2,284,183 1,189, ,469 1,712,058 1,771,527 1,775,765 Return on equity ,551, Settlements ,452, , Miscellaneous 882, ,182,749 2,342,611 2,566,138 1,069,225 1,376, ,970 1,177,245 2,206,428 1,679,917 Total revenues 127,071, ,970, ,402, ,620, ,108, ,565, ,363, ,020, ,991, ,013,885 Expenditures General government 27,473,794 28,723,990 29,619,695 25,276,998 21,739,252 20,974,387 21,982,783 23,893,450 24,699,226 25,102,067 Protection of persons and property 61,444,097 66,889,007 68,691,164 61,884,416 56,207,290 59,993,364 60,468,091 64,047,209 61,096,404 64,426,376 Community programs 10,581,225 9,622,552 11,550,616 6,296,711 6,259,971 6,125,337 6,166,791 6,442,241 8,821,298 8,019,356 Public services 24,951,597 33,343,249 27,954,239 17,216,338 11,849,471 13,613,312 16,781,751 22,863,385 21,860,252 19,836,633 Redevelopment 885,005 1,168, ,499 1,225, , , Debt service: Principal 3,524,900 5,486,427 4,393,687 4,064,842 4,395,904 4,525,739 3,872,050 2,450,000 2,540,000 2,650,000 Interest 2,576,413 3,683,198 3,460,555 3,244,528 3,082,508 2,734,050 1,741,101 1,296,111 1,213,671 1,109,037 Other charges 593, Total expenditures 132,030, ,917, ,045, ,209, ,396, ,877, ,012, ,992, ,230, ,143,469 Excess of revenues over (under) expenditures (4,959,114) (19,946,292) (29,642,521) (12,589,460) 7,711,187 2,687,693 10,350,611 4,027,681 8,760,322 13,870,416 Other financing sources (uses): Transfers in 7,365,984 9,014,877 7,123,168 9,160,286 8,460,300 5,099,168 6,212,460 8,597,756 14,253,945 12,852,940 Transfers out (6,611,691) (8,195,611) (7,158,081) (8,653,011) (8,221,795) (5,099,168) (6,212,460) (9,094,260) (14,253,945) (12,852,940) Extraordinary Gain (loss) ,645,371 (11,888,159) Issuance of long-term debt Premium on debt issue 80, Payment to bond escrow agent Bond proceeds 29,960, Total other financing sources (uses) 30,794, ,266 (34,913) 507, ,505 5,645,371 (11,888,159) (496,504) - - Net change in fund balances 25,835,372 (19,127,026) (29,677,434) (12,082,185) 7,949,692 8,333,064 (1,537,548) 3,531,177 8,760,322 13,870,416 Debt service as a percentage of noncapital expenditures 6.15% 7.73% 6.25% 6.43% 7.45% 7.03% 5.40% 3.44% 3.37% 3.38% Source: Fund Financial Statements 149

299 CITY OF COSTA MESA, CALIFORNIA TAX REVENUES BY SOURCE, GOVERNMENTAL FUNDS LAST TEN FISCAL YEARS (modified accrual basis of accounting) TABLE 5 Transient Business Proposition Fiscal Years Sales Property Occupancy Franchise License 172 Total 2007 $ 45,641,219 22,921,885 5,959,556 3,911, , ,380 80,180, ,990,428 24,715,336 5,791,004 4,046, , ,417 82,402, ,659,256 25,327,904 4,719,158 4,174, , ,159 74,570, ,516,828 23,885,560 4,268,984 3,945, , ,513 68,225, ,173,714 24,626,634 5,344,968 4,240, , ,510 76,031, ,234,307 21,564,340 6,524,510 4,471, , ,542 76,526, ,830,107 23,192,755 7,257,695 4,818, , ,688 82,930, ,264,634 22,984,093 7,676,090 4,891, ,285 1,064,676 86,797, ,115,064 24,139,297 7,995,154 4,885, ,408 1,002,064 90,091, ,593,561 26,168,612 8,622,505 5,060, , ,601 99,349,202 Source: Required Supplementary Information 150

300 CITY OF COSTA MESA, CALIFORNIA TAXABLE SALES BY CATEGORY LAST TEN CALENDAR YEARS (in thousands of dollars) TABLE 6 Fiscal Years Apparel stores $ 463,521 $ 482,249 $ 432,965 $ 383,716 $ 436,980 $ 484,036 $ 604,936 $ 681,348 $ 715,097 $ 727,073 General merchandise 602, , , , , , , , , ,702 Food stores 100, , ,519 96,251 92,575 93,721 94,377 87,225 88, ,225 Eating and drinking establishments 360, , , , , , , , , ,465 Building materials 237, , , , , , , , , ,343 Auto dealers and supplies 724, , , , , , , , , ,187 Service stations 173, , , , , , , , , ,707 Other retail stores 1,052,096 1,030, , , , , , ,383 1,025,424 1,047,009 All other outlets 905, , , , , , , ,501 1,015,134 1,112,851 $ 4,620,144 $ 4,627,752 $ 4,171,472 $ 3,623,757 $ 3,898,506 $ 4,182,103 $ 4,512,645 $ 4,790,976 $ 5,096,097 $ 5,357,562 City direct sales tax rate 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Source: State of California Board of Equalization and The HdL Companies 151

301 CITY OF COSTA MESA, CALIFORNIA PRINCIPAL SALES TAX REMITTERS BY CATEGORY CURRENT YEAR AND NINE YEARS AGO TABLE Percentage Percentage of Total City of Total City Taxable Taxable Taxable Taxable Category Sales Rank Sales Sales Rank Sales All other outlets $ 1,112, % $ 967, % Other retail stores 1,047, % 965, % Auto dealers and supplies 858, % 708, % Apparel stores 727, % 543, % General merchandise 618, % 597, % Eating and drinking establishments 469, % 348, % Service stations 215, % 186, % Building materials 205, % 216, % Food stores 103, % 89, % Source: State of California Board of Equalization and The HdL Companies 152

302 CITY OF COSTA MESA, CALIFORNIA DIRECT AND OVERLAPPING SALES TAX RATES LAST TEN FISCAL YEARS TABLE 8 City Orange State of Total Direct County California Sales Tax Fiscal Years Rate Rate Rate Rate Source: State of California Board of Equalization 153

303 CITY OF COSTA MESA, CALIFORNIA PROPERTY TAX LEVIES AND COLLECTIONS LAST TEN FISCAL YEARS TABLE 9 Collected within the Fiscal Year Taxes Levied Fiscal Year of the Levy Collected for Total Collections to Date Ended for the Percentage Subsequent Percentage June 30, Fiscal Year Amount of Levy Years (2) Amount of Levy (1) 2007 $ 19,560,699 $ 18,685, % $ 312,318 $ 18,998, % ,888,474 19,998, % 532,478 20,530, % ,276,710 20,363, % 920,531 21,283, % ,092,684 17,122, % 911,902 18,034, % ,670,091 20,059, % 594,003 20,653, % ,574,309 19,958, % 408,220 20,367, % ,112,082 20,599, % 382,281 20,981, % ,178,464 21,732, % 285,325 22,018, % ,405,838 22,897, % 242,634 23,139, % ,960,369 24,222, % 227,104 24,449, % (1) The Percentage of Levy may exceed 100% if the amounts collected for subsequent years exceed the delinquency. (2) The County of Orange only makes this data available by collection year. Data by levy year is not available. Source: Orange County Assessor 2015/2016 Combined Tax Rolls 154

304 CITY OF COSTA MESA, CALIFORNIA ASSESSED VALUE AND ESTIMATED ACTUAL VALUE OF TAXABLE PROPERTY LAST TEN FISCAL YEARS (modified accrual basis of accounting) TABLE 10 Less: Total Taxable Estimated Taxable Assessed Residential Commerical Industial Miscellaneous Tax-Exempt Assessed Total Direct Actual Taxable Value as a Percentage Fiscal Years Property Property Property Property Property Value Tax Rate Value (1) of Actual Taxable Value 2007 $ 7,358,784,736 $ 2,216,054,436 $ 1,009,929,135 $ 2,149,934,744 $ - $ 12,734,703, % $ 12,734,703, % ,012,690,802 2,358,236,884 1,049,297,119 2,404,008,712-13,824,233, % 13,824,233, % ,164,306,671 2,553,080,097 1,129,832,358 2,518,888,713-14,366,107, % 14,366,107, % ,171,208,423 3,383,235,481 1,196,215,357 1,682,015,788-14,432,675, % 14,432,675, % ,347,650,226 3,466,364,532 1,138,864,468 1,163,583,656-14,116,462, % 14,116,462, % ,557,101,277 3,394,223,104 1,100,996,492 1,065,596,839-14,117,917, % 14,117,917, % ,704,306,093 3,479,681,880 1,122,815,201 1,070,250,329-14,377,053, % 14,377,053, % ,101,889,466 3,566,114,710 1,117,794,289 1,140,508,581-14,926,307, % 14,926,307, % ,745,389,688 3,633,678,888 1,126,437,386 1,206,217,946-15,711,723, % 15,711,723, % ,456,976,124 3,766,616,981 1,190,970,066 1,118,171,362-16,532,734, % 16,532,734, % (1) In 1978 the voters of the State of California passed Proposition 13 which limited taxes to a total maximum rate of 1%, based upon the assessed vaule of the property being taxed. Each year, the assessed value of property may be increased by an inflation factor (limited to a maximum of 2%). With few exceptions, property is only reassessed as a result of new construction or at the purchase price (market value) or economic value of he property sold. The assessed valuation data shown above, represents the only data currently available with respect to the actual market value of taxable property and is subject to the limitations described above. Therefore, the estimated actual taxable value equals the total taxable assessed value. Source: HdL Coren & Cone, Orange County Assessor 2006/ /2016 Combined Tax Rolls. 155

305 CITY OF COSTA MESA, CALIFORNIA DIRECT AND OVERLAPPING PROPERTY TAX RATES LAST TEN FISCAL YEARS TABLE 11 City Direct Rates Overlapping Rates General Total County of School Special Basic Obligation Redevelopment Redevelopment Direct Orange District Districts Fiscal Year Rate Debt Service Debt Service (2) Program Rate (1) Debt Debt Debt (1) Per the Government Finance Officers Association the definition of "total direct rate" is as follows: "The weighted average of all individual rates applied by the government preparing the statistical section" The "total direct rate" for the City of Costa Mesa is a weighted average derived by dividing total City revenue by taxable assessed value. (2) As of February 1, 2012, the Successor Agency to the former Costa Mesa Redevelopment Agency is responsible for the outstanding Redevelopment debt. Source: HdL Coren & Cone, Orange County Assessor 2006/ /2016 Combined Tax Rolls. 156

306 CITY OF COSTA MESA, CALIFORNIA PRINCIPAL PROPERTY TAX PAYERS CURRENT YEAR AND NINE YEARS AGO TABLE Percentage Percentage of Total City of Total City Property Property Property Property Tax Tax Tax Tax Taxpayer Revenue Rank Revenue Revenue Rank Revenue Irvine Company LLC $ 436, % Trust Costa Mesa Courtyards LLC 419, % South Coast Plaza 414, % $ 360, % PR II of MCC South Coast Properties 398, % 1901 Newport LLC Royal Street 336, % United Dominion Realty LP 285, % Behringer Harvard Pacifica Proj Owner 271, % BRE LLC 271, % WWG TSQ Owner LLC 269, % Marjack LLC Irvine Compnay 226, % Triangle Square Investment LLC 403, % RREEF America Reit II Corp. CCCC2 392, % Maguire Properties Pacific Arts Plaza LLP 369, % Teachers Retirement System 276, % KWI 1901 Newport Plaza LP 258, % Automobile Club of Southern California 206, % Los Angeles Times Communications LLC 172, % Center Tower Associates 157, % JKS-CMFV Experian Information 145, % Total $ 3,331, % $ 2,743, % Source: HdL Coren & Cone, Orange County Assessor 2015/2016 & 2006/2007 Combined Tax Rolls. 157

307 CITY OF COSTA MESA, CALIFORNIA RATIO OF GENERAL BONDED DEBT OUTSTANDING AND LEGAL DEBT MARGIN LAST TEN FISCAL YEARS TABLE 13 Fiscal Years General bonded debt outstanding General oligation bonds Redevelopment bonds (1) 6,105,000 5,630,000 5,145,000 4,650,000 4,140,000 3,615, Total 6,105,000 5,630,000 5,145,000 4,650,000 4,140,000 3,615, Percentage of taxable assessed value % % % % % % % % % % Per capita $ $ 7.18 $ 6.53 $ 9.90 $ 8.85 $ 8.43 $ - $ - $ - $ - Less: Amounts set aside to repay general debt 711, , , , , , Total net debt applicable to debt limit 5,393,018 4,923,955 4,440,700 3,945,700 3,435,700 2,910, Legal debt limit (3.75% of Assessed Value) 515,894, ,242, ,264, ,910, ,243, ,152, ,780, ,508, ,377, ,713,004 Legal debt margin 510,501, ,318, ,823, ,964, ,808, ,241, ,780, ,508, ,377, ,713,004 Legal debt margin as a percentage of the debt limit 98.95% 99.11% 99.24% 99.33% 99.40% 99.49% % % % % (1) As of February 1, 2012, the Successor Agency to the former Costa Mesa Redevelopment Agency is responsible for the outstanding Redevelopment debt. Source: City of Costa Mesa Finance Department 158

308 CITY OF COSTA MESA, CALIFORNIA RATIOS OF OUTSTANDING DEBT BY TYPE LAST TEN FISCAL YEARS TABLE 14 General Bonded Debt Other Governmental Activities Debt Percentage Fiscal Year General of Total Certificates Total Percentage Ended Obligation Redevelopment Taxable Per Revenue of Lease Purchase Primary of Personal Per June 30, Bonds Bond (1) Assessed Value Capita Bonds Particiaption Financing Government Income Capita $ 6,105, % $ ,935,000 29,960,000 $ 5,368,649 $ 62,368, % $ 2, ,630, % ,000,000 29,215,000 3,037,222 56,882, % 3, ,145, % ,980,000 28,465,000 1,898,535 52,488, % 1, ,650, % ,890,000 27,525,000 2,341,737 49,406, % 1, ,140, % ,735,000 26,355,000 1,780,834 45,010, % 1, ,615, % ,490,000 25,140,000 1,057,907 40,302, % 1, % - 8,140,000 23,875, ,729 32,626, % % - 7,005,000 22,560, ,395 29,980, % % - 5,830,000 21,195,000-27,025, % % - 4,600,000 19,775,000-24,375, % (1) As of February 1, 2012, the Successor Agency to the former Costa Mesa Redevelopment Agency is responsible for the outstanding Redevelopment debt. Source: City of Costa Mesa Finance Department 159

309 CITY OF COSTA MESA, CALIFORNIA DIRECT AND OVERLAPPING GOVERNMENTAL ACTIVITIES DEBT AS OF JUNE 30, 2016 TABLE 15 Estimated Share of Estimated Direct and Debt Percentage Overlapping Governmental Unit Outstanding Applicable Debt Overlapping Tax and Assessment debt repaid with property taxes City of Costa Mesa Community Facilities District No ,125, % 1,125,000 Newport Mesa Unified School District 224,859, % 59,835,020 Coast Community College District 498,864, % 65,660,546 Santa Ana Unified School District 274,001, % 8,365,277 Rancho Santiago Community College District 268,052, % 3,447,160 Rancho Santiago Community College District SFID No. 1 64,240, % 1,595,722 Metropolitan Water District 92,865, % 627,767 Subtotal overlapping Tax and Assessment debt repaid with property taxes 140,656,492 Overlapping general fund debt repaid with property taxes Coast Community College District General Fund Obligations 3,765, % 495,549 Municipal Water District of Orange County Water Facilities Corporation 2,770, % 109,720 Santa Ana Unified School District Certificates of Participation 70,982, % 2,167,087 Orange County General Fund Obligations 124,614, % 4,137,185 Orange County Pension Obligations 353,417, % 11,733,473 Orange County Board of Education Certificates of Participation 14,840, % 492,688 Subtotal overlapping general fund debt repaid with property taxes 19,135,702 City direct debt City of Costa Mesa General Fund Obligations (1) 24,375, % 24,375,000 Total direct and overlapping debt 184,167,194 (1) See Note 7 in Finance Statement for more information about the City's direct debt. Source: California Municipal Statistics, Inc. 160

310 CITY OF COSTA MESA, CALIFORNIA DEMOGRAPHIC AND ECONOMIC STATISTICS LAST TEN CALENDAR YEARS TABLE 16 Personal Income Per Capita Orange County (thousands Personal Median School Unemployment Year Population (2) of dollars) Income (1) Age (1) Enrollment (3) Rate (4) ,805 3,110,122 27, , % ,955 3,114,221 27, , % ,955 2,087,063 18, , % ,341 3,498,258 30, , % ,178 3,536,901 30, , % ,757 3,644,348 32, , % ,358 3,711,117 33, , % ,846 3,650,877 32, , % ,835 3,780,694 33, , % ,603 3,722,083 32, , % Source: (1) - City of Costa Mesa Finance Department / and The HdL Companies (2) - California State Department of Finance. (3) - Newport-Mesa Unified School District. (4) - State of California Employment Development Department as of June 30th each year. 161

311 CITY OF COSTA MESA, CALIFORNIA PRINCIPAL EMPLOYERS CURRENT YEAR AND NINE YEARS AGO TABLE Percentage Percentage of Total City of Total City Employer Employees Rank Employment Employees Rank Employment Epl Intermediate, Inc. 3, % Experian Information Solutions, Inc. 3, % Coast Community College District Foundation 2, % 3, % Automobile Club of Southern California 2, % Orange Coast Community College 1, % 2, % California State Hospital- Fairview Develop. Center 1, % 1, % Westar Capital Associates II, LLC 1, % Deloitte Consulting L.L.P % Dynamic Cooking Systems, Inc % Filenet Corporation % Coast Community College 2, % Interinsurance Exchange 1, % First Team Real Estate Inc. 1, % Los Angeles Times 1, % Macy's Department Stores Inc % Resources Connection Inc % International Business Machines % Source: Dunn & Bradstreet, State of California Employment Development Department 162

312 CITY OF COSTA MESA, CALIFORNIA OPERATING INDICATORS BY FUNCTION/PROGRAM LAST TEN FISCAL YEARS TABLE 18 Fiscal Years Function/Program General Government Number of residents served via public services programs 3,250 3,250 2,800 3,250 3,000 2,023 1,500 1,000 1, Accounts payable checks issued 12,250 12,000 12,500 12,500 10,187 9,634 9,561 9,506 9,764 9,182 Total printshop photocopies produced 5,200,000 5,250,000 4,965,000 2,260,000 2,528,476 2,746,559 1,554,927 1,691,606 1,806,965 1,619,784 Protection of persons and property Police protection Emergency calls 1,400 1,450 1,350 1,350 1,230 1,128 1,160 1,180 1,330 N/A Calls responded to within 5 minutes 80% 80% 82% 82% 82% 76% 80% 82% 77% N/A Assigned theft cases 1,000 1,000 2,055 2,000 2,055 1,951 1,900 1, Percentage of theft cases cleared 25% 25% 25% 25% 25% 34% 25% 40% 40% 40% Assigned burglary cases 1,600 1,600 1,425 1,600 1,425 1,452 1, Percentage of burglary cases cleared 25% 25% 25% 25% 25% 21% 25% 40% 40% 40% Case and arrest reports processed 24,180 24,603 24,603 24,603 19,814 15,324 21,921 18,133 15,128 14,584 Fire protection Number of calls for service 9,000 9,400 9,450 9,500 9,500 9,800 10,000 11,300 11,100 12,955 Fire related responses Emergency medical aid responses 6,840 6,700 6,700 6,700 7,200 6,400 7,000 7,818 7,250 9,366 Community Programs Number of program participants at the Downtown Recreation Center 32,799 67,134 33,843 33,357 30,903 32,404 42,411 31,018 31,521 33,446 Over-the-counter plan checks reviewed within five (5) working days Inspection requests with 24 hours 16,500 28,000 14,850 14,850 14,250 14,345 14,345 17,460 22,560 29,100 Complaint response within two (2) working days 22,000 12,000 19,800 19,000 13,500 13,590 13,590 13,590 12,750 13,500 Public services Number of trees trimmed annually 5,065 6,435 8,007 7,980 4,504 7,206 7,882 8,140 7,700 7,750 Number of catch basins cleaned annually 1,275 1,200 1,260 1,165 1,165 1,165 1,165 1,165 1,165 1,165 Source: City of Costa Mesa Finance Department 163

313 TABLE 19 CITY OF COSTA MESA, CALIFORNIA FULL-TIME EQUIVALENT CITY GOVERNMENT EMPLOYEES BY FUNCTION/PROGRAM LAST TEN FISCAL YEARS Fiscal Years Function/Program (1) (2) 2016 General Government City council Chief Executive Officer's Office City attorney Financial services Information technology Administrative services Development services Park and community services Protection of persons and property Police protection Fire protection Public services (1) (2) City's Administrative Servies Department was reorganized. Divisions previously allocated to that department such as Human Resources, Central Services, and Risk Management were combined with the Chief Executive Officer's Department and the Information Technology Division was combined with the Finance Department. In addition, the Recreation division was combined with Public Service Department. The Information Technology was separated from Financial Service Department. and Park & Community Services Department was separated from Public Service Department. Source: City of Costa Mesa Finance Department 164

314 CITY OF COSTA MESA, CALIFORNIA CAPITAL ASSET STATISTICS BY FUNCTION/PROGRAM LAST TEN FISCAL YEARS TABLE 20 Fiscal Years Function/Program Police Stations/Substations Fire Fire stations Other public works Streets (lane miles) Streetlights 6,676 6,669 6,669 6,669 6,669 6,674 6,674 6,674 6,674 6,674 Traffic signals Parks and recreation Acres of open space 1,957 1,957 1,957 1,957 1,957 1,957 1,957 1,957 1,957 1,957 Park sites Baseball/softball diamonds Soccer/football fields Community centers Wastewater (miles) Sanitary sewers Storm sewers Source: City of Costa Mesa Finance Department 165

315 166

316