$34,435,000. Wastewater Refunding Revenue Bonds, Series 2017

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1 NEW ISSUE - FULL BOOK-ENTRY RATINGS: Insured: Standard & Poor s: AA Moody s: A2 Underlying: Standard & Poor s: BBB+ Moody s: A3 See Ratings In the Opinion of Aleshire & Wynder, LLP, Bond Counsel, based on existing statutes, regulations, rulings and court decisions and assuming, among other matters, compliance with certain covenants, interest on the 2017 Bonds is excludable from gross income for federal income tax purposes, and is exempt from State of California personal income taxes. In the opinion of Bond Counsel, interest on the 2017 Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that it is included in adjusted current earnings in calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding other federal or State tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the 2017 Bonds. See TAX MATTERS. $34,435,000 City of Fillmore Wastewater Refunding Revenue Bonds, Series 2017 Dated: Date of Delivery Due: May 1, as shown on inside cover Authority for Issuance. The bonds captioned above (the 2017 Bonds ) are being issued by the City of Fillmore (the City ) under an Indenture of Trust dated as of June 1, 2017 (the Indenture ), by and between the City and MUFG Union Bank, N.A., as trustee. See THE 2017 BONDS Authority for Issuance. Security for the 2017 Bonds. The 2017 Bonds are special obligations of the City, payable solely from Net Revenues of the City s municipal wastewater system (the Enterprise ), and amounts on deposit in the funds and accounts established under the Indenture as and to the extent provided in the Indenture. See SECURITY FOR THE 2017 BONDS. Future Parity Debt. Additional series of bonds or other debt may be issued that are payable from Net Revenues on a parity with the 2017 Bonds and the portion of the Prior Bonds (as defined below) that will remain outstanding following the issuance of the 2017 Bonds, subject to the conditions contained in the Indenture. See SECURITY FOR THE 2017 BONDS Parity Debt. Use of Proceeds. The 2017 Bonds are expected to be issued to provide funds to (i) refund and defease a portion of the outstanding bonds captioned $59,490,000 Fillmore Public Financing Authority Revenue Bonds, Series 2007 (City of Fillmore Wastewater System Financing Project) (the Prior Bonds ), (ii) provide a debt service reserve for the 2017 Bonds through the purchase of a debt service reserve insurance policy to be issued by the Bond Insurer (as defined below), and (iii) pay the costs of issuing the 2017 Bonds. See FINANCING PLAN. Bond Terms; Book-Entry Only. The 2017 Bonds will bear interest at the rates shown on the inside cover, payable semiannually on November 1 and May 1 of each year, commencing on November 1, 2017, and will be issued in fully registered form without coupons in the denomination of $5,000 or any integral multiple of $5,000. The 2017 Bonds will be issued in book-entry only form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). Purchasers of the 2017 Bonds will not receive certificates representing their interests in the 2017 Bonds. Payments of the principal of, premium, if any, and interest on the 2017 Bonds will be made by to DTC, which is obligated in turn to remit such principal, premium, if any, and interest to its DTC Participants for subsequent disbursement to the beneficial owners of the 2017 Bonds. See THE 2017 BONDS General Provisions. Redemption. The 2017 Bonds are subject to optional redemption and mandatory sinking fund redemption prior to maturity. See THE 2017 BONDS Redemption. Municipal Bond Insurance. The scheduled payment of principal of and interest on the 2017 Bonds when due, will be guaranteed under an insurance policy to be issued concurrently with the delivery of the 2017 Bonds by ASSURED GUARANTY MUNICIPAL CORP. (the Bond Insurer ). Neither the full faith and credit nor the taxing power of the City is pledged to the payment of the 2017 Bonds or interest thereon. The 2017 Bonds are not secured by a legal or equitable pledge of, or charge, or lien, or encumbrance upon, any of the property of the City or any of its income or receipts, except the Net Revenues of the ENTERPRISE and amounts on deposit in the funds and accounts established under the INDENTURE as and to the extent provided in the INDENTURE. MATURITY SCHEDULE (see inside cover) THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT A SUMMARY OF THIS ISSUE OF BONDS. INVESTORS MUST READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION WITH RESPECT TO THE PURCHASE OF THE 2017 BONDS. INVESTMENT IN THE BONDS INVOLVES RISKS THAT MAY NOT BE APPROPRIATE FOR SOME INVESTORS. SEE BOND OWNERS RISKS. The Bonds are offered when, as and if issued and accepted by the Underwriter, subject to approval as to their legality by Aleshire & Wynder, Irvine, California, Bond Counsel, and subject to certain other conditions. Certain legal matters will be passed upon for the City by Jones Hall, A Professional Law Corporation, San Francisco, California, as disclosure counsel, and by Aleshire & Wynder, LLP, as City Attorney. Katten Muchin Roseman LLP, New York, NY, California, is serving as counsel to the Underwriter. It is anticipated that the 2017 Bonds, in book-entry only form, will be available through the facilities of DTC on or about June 27, BofA Merrill Lynch The date of this Official Statement is: June 13, 2017

2 MATURITY SCHEDULE $11,260,000 Serial Bonds (Base CUSIP : ) Maturity (May 1) Principal Amount Interest Rate Yield Price CUSIP 2031 $1,425, % 3.200% % C AA ,480, C AB ,540, C AC ,600, C AD ,665, C AE ,730, C AF ,820, C AG1 $10,335, % Term Bond due May 1, 2042, Yield: 3.660%, Price: % C CUSIP No AH9 $12,840, % Term Bond due May 1, 2047, Yield: 3.270%, Price: % C CUSIP No AJ5 Copyright 2017, American Bankers Association. CUSIP data herein are provided for convenience of reference only. Neither the City nor the Underwriter assumes any responsibility for the accuracy of CUSIP data. C Priced to first optional call at par on May 1, 2027.

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59 APPENDIX A SUMMARY OF INDENTURE OF TRUST The following is a summary of certain provisions of the Indenture which are not described elsewhere in this 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. Definitions of Certain Terms Act means the provisions of Articles 10 and 11 of Chapter 3 of Division 2 of Title 5 of the of the California Government Code. Additional Payments means the payments so designated and required to be paid by the City pursuant to the 2007 Installment Sale Agreement related to the outstanding 2007 Bonds. Authority means the Fillmore Public Financing Authority. Authorized Representative means, with respect to the City, the City Manager, the Finance Director or the Treasurer or any other person designated as an Authorized Representative of the City by a Certificate of the City signed by the City Manager, Finance Director or the Treasurer and filed with the Trustee. Bond Fund means the fund by that name established pursuant to the Indenture. Bond Insurer means Assured Guaranty Municipal Corp., a New York stock insurance company, or any successor thereto or assignee thereof. Bond Registration Books means the books maintained by the Trustee pursuant to the Indenture for the registration and transfer of ownership of the Bonds. Bonds means the City of Fillmore Wastewater Refunding Revenue Bonds, Series 2017, issued and at any time Outstanding under the Indenture. Bond Year means any twelve-month period commencing on May 2 in a year and ending on the next succeeding May 1, both dates inclusive; provided, however, that the first Bond Year shall commence on the Closing Date relating to the Bonds and shall end on May 1, Business Day means a day of the year other than a Saturday and Sunday, and any day of the year on which banks in Los Angeles, California, and the principal corporate Trust Office of the Trustee are not required or authorized to remain closed and on which The New York Stock Exchange is not closed. Certificate, Statement, Request, Requisition and Order of the City mean, respectively, a written certificate, statement, request, requisition or order signed in the name of the City by an Authorized Representative of the City. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other A-1

60 instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. City means the City of Fillmore, a municipal corporation and charter city organized and existing under the constitution and laws of the State, and any successor thereto. City Council means the City Council of the City. Closing Date means the date upon which there is an exchange of the Bonds for the proceeds representing the purchase of the Bonds by the Original Purchaser thereof. Code means the Internal Revenue Code of 1986 as in effect on the Closing Date, or as it may be amended to apply to obligations issued on the Closing Date, together with applicable temporary and final regulations promulgated under the Code. Continuing Disclosure Certificate means that certain Continuing Disclosure Certificate executed by the City and dated the date of issuance and delivery of the Bonds, as originally executed and as it may be amended from time to time in accordance with the terms thereof. Costs of Issuance means all expenses directly or indirectly payable by the City and related to the authorization, issuance, sale and delivery of Bonds, including but not limited to advertising and printing costs, costs of preparation and reproduction of documents, filing and recording fees, initial fees and charges of the Trustee, compensation, fees and expenses of the City, the Trustee and the Escrow Bank and their respective counsel, compensation to any financial consultants or underwriters, legal and bond counsel fees and expenses, rating agency fees, bond insurance fees or premium, if any, fees and charges for preparation, execution, transportation and safekeeping of Bonds, and any other cost, charge or fee in connection with the original issuance of Bonds. Costs of Issuance Fund means the fund so designated and established pursuant to the Indenture. Current Gross Revenues means all gross charges received for, and all other gross income and receipts derived by the City from, the ownership and operation of the Enterprise or otherwise arising from the Enterprise, including but not limited to investment earnings thereon; but excluding the proceeds of any ad valorem property taxes levied for the purpose of paying general obligation bonds of the City relating to the Enterprise, and the proceeds of any special assessments or special taxes levied upon real property within any improvement district served by the City levied for the purpose of paying special assessment bonds or special tax obligations of the City relating to the Enterprise. DBO Contract means that certain agreement, dated November 28, 2006, by and between the City and American Water Operations and Maintenance, Inc., providing for the design, construction and operation of the Project. Debt Service means, during any period of computation, the amount obtained for such period by totaling the following amounts: A-2

61 (a) The principal amount of all Outstanding Bonds coming due and payable by their terms in such period; and (b) The interest which would be due during such period on the aggregate principal amount of Bonds which would be Outstanding in such period if the Bonds are retired as scheduled, but deducting and excluding from such aggregate amount the amount of Bonds no longer Outstanding Defeasance Obligations means (a) cash, and (b) Federal Securities. Any security used for defeasance must provide for the timely payment of principal and interest and cannot be callable or pre-payable prior to maturity or earlier redemption of the rated debt (excluding securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date). Enterprise means entire municipal wastewater system of the City, comprising any and all facilities, properties and improvements at any time owned, controlled or operated by the City for the collection, treatment, disposal or reuse of wastewater, including sewage treatment plants, intercepting and collecting sewers, outfall sewers, force mains, pumping stations, ejector stations, pipes, valves, machinery and all other appurtenances necessary, useful or convenient for the collection, treatment, disposal or reuse of sewage, and any necessary lands, rights of way and other real or personal property useful in connection therewith. Escrow Agreement means the Escrow Deposit and Trust Agreement, dated the Closing Date, by and among the City, the Authority and the Escrow Bank, relating to the refunding a portion of each of the 2007 Installment Sale Agreement and the 2007 Bonds. Escrow Bank means MUFG Union Bank, N.A., a national banking association organized and existing under and pursuant to the laws of the United States of America. Escrow Fund means the Escrow Fund established and held by the Escrow Bank pursuant to the Escrow Agreement. Event of Default means any of the events of default described in the Indenture. Federal Securities means (a) cash, (b) direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America ( U.S. Treasury Obligations ), (c) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (d) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or (e) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligator and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated. Fiscal Year means the period commencing on July 1 of each year and terminating on the next succeeding June 30. A-3

62 Gross Revenues means Current Gross Revenues plus deposits to the Wastewater Fund from amounts on deposit in the Rate Stabilization Fund, but only as and to the extent specified in the Indenture and the documents related to Parity Obligations, less amounts transferred to the Rate Stabilization Fund. Indenture means that certain Indenture of Trust, dated as of June 1, 2017, by and between the City and the Trustee, as originally executed or as it may from time to time be supplemented, modified or amended by any Supplemental Indenture pursuant to the provisions thereof. Independent Accountant means any certified public accountant or firm of such accountants appointed and paid by the City, and who, or each of whom: (a) is in fact independent and not under domination of the City; (b) does not have any substantial interest, direct or indirect, with the City; and (c) is not connected with the City as an officer or employee of the City, but who may be regularly retained to make annual or other audits of the books of or reports to the City. Information Services means Electronic Municipal Market Access System (referred to as EMMA ), a facility of the Municipal Securities Rulemaking Board, at provided, however, in accordance with then current guidelines of the Securities and Exchange Commission, Information Services will mean such other services providing information with respect to the Bonds as the City may designate in a Certificate of the City delivered to the Trustee. Installment Payments means the amounts payable by the City pursuant to the 2007 Installment Sale Agreement, which are secured by a pledge of Net Revenues under the 2007 Installment Sale Agreement. Insurance Policy means the insurance policy issued by the Bond Insurer guaranteeing the scheduled payment of principal and interest on the Bonds when due. Interest Account means the account by that name in the Bond Fund established pursuant to the Indenture. Interest Payment Date means May 1 and November 1 in each year, beginning November 1, 2017, and continuing so long as any Bonds remain Outstanding. Maximum Aggregate Annual Debt Service means, as of the date of calculation, the maximum amount of Debt Service for the current or any future Bond Year with respect to all Bonds and the maximum amount of debt service on any Parity Obligations Outstanding. Moody s means Moody s Investors Service, New York, New York, or its successors. Net Revenues means, for any period, an amount equal to all of the Gross Revenues received with respect to any period, minus the amount required to pay all Operation and Maintenance Costs becoming payable with respect to such period. Operation and Maintenance Costs means the reasonable and necessary costs and expenses paid by the City for maintaining and operating the Enterprise, including but not limited to (a) payments made under and pursuant to the DBO Contract relating to the operation of the A-4

63 Project, (b) costs of electricity and other forms of energy supplied to the Enterprise, (c) the reasonable expenses of management and repair and other costs and expenses necessary to maintain and preserve the Enterprise in good repair and working order, and (d) the reasonable administrative costs of the City attributable to the operation and maintenance of the Enterprise; but in all cases excluding (i) debt service payable on obligations incurred by the City with respect to the Enterprise including but not limited to the Installment Payments and any Parity Obligations, (ii) depreciation, replacement and obsolescence charges or reserves therefor, and (iii) amortization of intangibles or other bookkeeping entries of a similar nature. Optional Redemption Account means the account by that name in the Redemption Fund established pursuant to the Indenture. Original Purchaser means the first purchaser of the Bonds from the City. Outstanding, when used as of any particular time with reference to Bonds, means all Bonds theretofore executed, issued and delivered by the City under the Indenture except: (a) Bonds theretofore canceled by the Trustee or surrendered to the Trustee for cancellation; (b) Bonds paid or deemed to have been paid within the meaning of the Indenture; and (c) Bonds in lieu of or in substitution for which other Bonds shall have been executed, issued and delivered by the City pursuant to the Indenture or any Supplemental Indenture. Owner or Bond Owner or Bondholder, when used with respect to any Bond, means the person in whose name the ownership of such Bond shall be registered on the Bond Registration Books. Parity Obligations means any leases, loan agreements, installment sale agreements, bonds, notes, interest rate swap agreements, currency swap agreements, forward payment agreements, futures, or contracts providing for payments based on levels of, or changes in, interest rates, currency exchange rates, stock or other indices, or contracts to exchange cash flows or a series of payments, or contracts, including, without limitation, interest rate floors or caps, options, puts or calls to hedge payment, currency, rate, spread, or similar exposure (except termination payments relating thereto which shall be payable on a subordinate basis) or other obligations of the City payable from and secured by a pledge of and lien upon any of the Net Revenues on a parity with the Installment Payments and the Bonds, entered into or issued pursuant to and in accordance with the Indenture. Participating Underwriter shall have the meaning ascribed thereto in the Continuing Disclosure Certificate. Permitted Investments means the following: (a) (b) Federal Securities; Federal Housing Administration debentures; (c) The following listed obligations from government-sponsored agencies which are not backed by the full faith and credit of the United States of America: A-5

64 (i) Federal Home Loan Mortgage Corporation (FHLMC) senior debt obligations and participation certificates (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts), (ii) Farm Credit System (formerly Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) consolidated system-wide bonds and notes, (iii) Federal Home Loan Banks (FHL Banks) consolidated debt obligations, and (iv) Federal National Mortgage Association (FNMA) senior debt obligations and mortgage-backed securities (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts); (d) Deposits the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation, in banks which have capital and surplus of at least $15 million or collateralized by Federal Securities for amounts in excess of FDIC insurance; (e) Unsecured certificates of deposit, time deposits, and bankers acceptances (having maturities of not more than 365 days) of any bank the short-term obligations of which are rated A-1+ or better by S&P and Prime-1 by Moody s, which may include the Trustee and its affiliates. (f) Money market funds rated Aam by S&P, or better and if rated by Moody s rated Aa2 or better, including funds for which the Trustee, its parent holding company, if any, or any affiliates or subsidiaries of the Trustee provide investment advisory or other management services but excluding funds with a floating net asset value. (g) Commercial paper (having original maturities of not more than 270 days) rated A- 1+ by S&P and Prime-1 by Moody s. (h) Direct general obligations of any state of the United States of America or any subdivision of agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated at least A3 by Moody s and at least A- by S&P, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated, (a) Direct general short-term obligations of any state agency or subdivision or agency thereof described in (i) above and rated A-1+ by S&P and MIG-1 by Moody s, and (b) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any state or state agency described in (a) above and rated AA- or better by S&P and Aa3 or better by Moody s. (i) Pre-refunded municipal obligations rated AAA by S&P and Aaa by Moody s meeting the following requirements: (i) the municipal obligations are (A) not subject to redemption prior to maturity or (B) the trustee for the municipal obligations has been given irrevocable instructions concerning A-6

65 their call and redemption and the issuer of the municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions, (ii) the municipal obligations are secured by cash or U.S. Treasury Obligations which may be applied only to payment of the principal of, interest and premium on such municipal obligations, (iii) the principal of and interest on the U.S. Treasury Obligations (plus any cash in the escrow) has been verified by the report of independent certified public accountants to be sufficient to pay in full all principal of, interest, and premium, if any, due and to become due on the municipal obligations ( Verification Report ), (iv) the cash or U.S. Treasury Obligations serving as security for the municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations (v) no substitution of a U.S. Treasury Obligation shall be permitted except with another U.S. Treasury Obligation and upon delivery of a new Verification Report, and (vi) the cash or U.S. Treasury Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent. (j) the Local Agency Investment Fund of the State, created pursuant to section of the California Government Code, to the extent the Trustee is authorized to register such investment in its name. (k) any other investments permitted under the laws of the State of California for public entities like the City. Principal Account means the account by that name in the Bond Fund established pursuant to the Indenture. Principal Payment Date means May 1 in each year, beginning May 1, 2018, and continuing so long as any Bonds remain Outstanding. Qualified Reserve Account Credit Instrument means an irrevocable standby or direct-pay letter of credit or surety bond issued by a commercial bank or insurance company and deposited with the Trustee pursuant to the Indenture, provided that all of the following requirements are met as of the time of delivery thereof to the Trustee: (a) S&P or Moody s has assigned a long-term credit rating of such bank or insurance company which, at the time of the original issuance of the Bonds, is A or higher by S&P or A2 or higher by Moody s, without regard to modifiers; (b) such letter of credit or surety bond has a term of at least twelve (12) months; (c) such letter of credit or surety bond has a stated amount at least equal to the portion of the Reserve Account Requirement with respect to which funds are proposed to be released pursuant to the Indenture; and (d) the Trustee is authorized pursuant to the terms of such letter of credit or surety bond to draw thereunder an amount equal to any deficiencies which may exist from time to time in the Interest Account or the Principal Account for the purpose of making payments required pursuant to the Indenture. A-7

66 Rate Stabilization Fund means the fund of that name created by the City and described in the Indenture. Record Date means the fifteenth (15th) calendar day of the month immediately preceding an Interest Payment Date. Redemption Fund means the fund by that name established pursuant to the Indenture. Redemption Price means, with respect to any Bond (or portion thereof) the principal amount of such Bond (or portion) plus the applicable premium, if any, payable upon redemption thereof pursuant to the provisions of such Bond and the Indenture. Reserve Account means the account by that name in the Bond Fund so designated and established pursuant to the Indenture. Reserve Account Requirement means, as of any date of calculation, to be equal to the least of (a) 50% of Maximum Annual Debt Service on the Bonds for the then current or every subsequent Bond Year, (b) 125% of average Annual Debt Service on the Bonds for the then current or every subsequent Bond Year, and (c) 10% of the original principal amount of the Bonds. Reserve Policy means the municipal bonds debt service reserve insurance policy issued by the Bond Insurer and deposited into the Reserve Account solely for the benefit of the Bonds. The Reserve Policy constitutes a Qualified Reserve Account Credit Instrument pursuant to the terms of the Indenture. Revenue Fund means the Wastewater Fund held by the City into which all Revenues, as received, are deposited. S&P means S&P Global, Inc., New York, New York, or its successors. State means the State of California. Securities Depositories means The Depository Trust Company; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the City may designate in a Certificate of the City delivered to the Trustee. Special Record Date means the date established by the Trustee pursuant to the Indenture as a record date for the payment of defaulted interest on Bonds. State means the State of California. Subordinate Debt means indebtedness secured by Net Revenues on a basis subordinate to the Bonds and any Parity Obligations. Supplemental Indenture means any indenture hereafter duly authorized and entered into between the City and the Trustee, amendatory of or supplemental to the Indenture, but only if and to the extent that such Supplemental Indenture is specifically authorized under the Indenture. A-8

67 Term Bonds means the Bonds maturing on May 1, 2042 and May 1, Trust Office means the principal corporate trust office of the Trustee in Los Angeles, California; provided, however, that the Trustee may from time to time designate other offices for purposes of payment, transfer, exchange or registration of Bonds. Trustee means MUFG Union Bank, N.A., appointed by the City to act as trustee under and pursuant to the Indenture, and its assigns or any other corporation or association which may at any time be substituted in its place, as provided in the Indenture Installment Sale Agreement means the Installment Sale Agreement dated as of June 1, 2007, by and between the City and the Fillmore Public Financing Authority, and includes any amendments thereto. Wastewater Fund means, collectively, the City s existing wastewater enterprise fund, established and held by the City with respect to the Enterprise. Establishment and Application of Costs of Issuance Fund The Trustee shall establish, maintain and hold in trust a separate fund designated as the Costs of Issuance Fund. The moneys in the Costs of Issuance shall be used and withdrawn by the Trustee to pay Costs of Issuance upon receipt by the Trustee of a Requisition of the City stating the person to whom payment is to be made, the amount to be paid, the purpose for which the obligation was incurred and that such payment is a proper charge against said account. At the end of six months from the Closing Date, or upon earlier receipt of a Certificate of the City stating that amounts in the Costs of Issuance Fund are no longer required for the payment of Costs of Issuance, the Costs of Issuance Fund shall be closed and any amounts then remaining in said fund shall be transferred to the Bond Fund. Pledge of Net Revenues Subject to the Indenture, the Bonds, the Installment Payments and any Parity Obligations shall be secured by a first pledge of all of the Net Revenues. In addition, the Bonds shall be secured by a pledge of all of the moneys in all funds and accounts held by the Trustee under the Indenture, including all amounts derived from the investment of such moneys. Such pledge shall constitute a lien on the Net Revenues and such other moneys for the payment of the principal of and interest and premium (if any) on the Bonds in accordance with the terms of the Indenture. The Bonds and any Parity Obligations shall be equally secured by a pledge, charge and lien upon the Net Revenues, without priority for number or date, shall be and are secured by an exclusive pledge, charge and lien upon the Net Revenues and such moneys, except as set forth in the Indenture. So long as any of the Bonds are Outstanding, the Net Revenues and such moneys shall not be used for any other purpose, except, that out of the Net Revenues, there may be apportioned such sums, for such purposes, as are expressly permitted by the Indenture. In consideration of the acceptance of the Bonds by those who shall hold the same from time to time, the Indenture shall be deemed to be and shall constitute a contract between the City and the Owners from time to time of the Bonds and the covenants and agreements set forth in the Indenture to be performed by or on behalf of the City shall be for the equal and proportionate A-9

68 benefit, security and protection of all Owners of the Bonds without preference, priority or distinction as to security or otherwise of any of the Bonds over any of the others by reason of the number or date thereof or the time of sale, execution and delivery thereof, or otherwise for any cause whatsoever, except as expressly provided therein. The City represents and warrants that it has not heretofore made a pledge of, granted a lien on or security interest in, or made an assignment or sale of the Net Revenues that ranks prior to the pledge granted under the Indenture, except to secure the obligations disclosed in the Indenture that will be outstanding upon issuance of the Bonds. The City also represents and warrants that it has not described the Net Revenues in a Uniform Commercial Code financing statement that will remain effective when the Bonds are issued, except in connection with the foregoing pledges, assignments, liens, and security interests. The City shall not hereafter make or suffer to exist any pledge or assignment of, lien on, or security interest in the Net Revenues that ranks prior to or on a parity with the pledge granted under the Indenture, or file any financing statement describing any such pledge, assignment, lien, or security interest, except as expressly permitted under the Indenture. The pledge of Net Revenues and all moneys in all funds and accounts held by the Trustee hereunder constitutes a lien on and security interest in the Net Revenues and such amounts, and shall attach, be perfected and be valid and binding from and after the Closing Date without the need for any physical delivery thereof or further act. Receipt, Deposit and Application of Gross Revenues and Net Revenues (a) Application of Revenues. The City has previously established the Revenue Fund to be held by the City. All of the Gross Revenues shall be deposited by the City, immediately upon receipt in the Revenue Fund. Upon receipt of Gross Revenues, the City shall segregate such amounts as shall be estimated to pay all Operation and Maintenance Costs for the period beginning on such date and ending on the next anticipated date of receipt of Gross Revenues. Amounts remaining on deposit in the Revenue Fund shall be Net Revenues. All Net Revenues shall be held in trust by the City, in the Revenue Fund for the benefit of the holder of the Bonds, the Installment Payments and Parity Obligations. (b) Transfers of Net Revenues. On or before the twenty-fifth (25 th ) day of each month, commencing October 25, 2017, the City shall withdraw from the Revenue Fund, after deducting the amounts in (a), and shall take the following actions: (i) The City shall transfer to the Trustee, for deposit in a special fund designated as the Bond Fund which the Trustee shall establish and which it shall maintain and hold in trust (and transfer on a parity to such similar funds or accounts established for the payment of Parity Obligations such amounts as are required for the payment thereof), an amount which, together with the balance then on deposit in the Bond Fund, the Interest Account and the Principal Account (other than amounts resulting from the prepayment of Bonds pursuant to optional redemption provisions and other than amounts required for payment of principal of or interest on any Bonds which have matured or been called for redemption but which have not been presented for payment), that is equal to one-sixth (1/6) of the aggregate amount of interest amount coming due and payable on the Bonds on the next succeeding Interest Payment Date and one-twelfth (1/12) A-10

69 of the principal coming due and payable on the Bonds on the next succeeding principal payment date; (ii) After making the payments, allocations and transfers provided for in subparagraphs (b)(i) above, (A) if the balance in the Reserve Account is less than the Reserve Account Requirement, the notice of which deficiency shall have been given by the Trustee to the City, or (B) if the balance in a bond reserve account established for any Parity Obligations is less than the bond reserve requirement established for such Parity Obligations, or (C) if any reserve Qualified Reserve Account Credit Instrument for the Bonds or any reserve surety bond for any Parity Obligations has been drawn upon to make delinquent payments, the notice of which deficiency shall have been given to the City, the deficiency shall be restored by transfers by the City from the first moneys which become available in the Revenue Fund to the Trustee for deposit by the Trustee in the Reserve Account and transfers to the applicable party for deposit in the bond reserve account established for such Parity Obligations to increase the amount on deposit to the Reserve Account requirement for such Parity Obligations; (iii) to pay all other amounts pledged and/or payable under Parity Obligations and pledged or payable under the Indenture; (iv) to pay all amounts when due and payable to any Subordinate Debt. (c) Surplus/ Release from Lien. Following all the transfers described in (b)(i)-(iv) above pursuant to the Indenture, excess Net Revenues shall be released from the lien of the Indenture and shall be available for any lawful purpose of the City. (d) Application of Net Revenues. On or before the fourth Business Day preceding each Interest Payment Date (and up until the Business Day preceding each Interest Payment Date, if additional Net Revenues are received pursuant to (b) above), the Trustee shall transfer from the Bond Fund and deposit into the following respective accounts (each of which the Trustee shall establish and maintain within the Bond Fund), the following amounts, in the following order of priority, the requirements of each such account (including the making up of any deficiencies in any such account resulting from lack of Net Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any transfer is made to any account subsequent in priority: First: to the Interest Account, the aggregate amount of interest becoming due and payable on the next succeeding Interest Payment Date on all Bonds then Outstanding; Second: to the Principal Account, the aggregate amount of principal becoming due and payable on the Outstanding Bonds on the next succeeding Interest Payment Date, if any; and Third: to the Reserve Account, the aggregate amount of each prior withdrawal from the Reserve Account for the purpose of making up a deficiency in the Interest Account or Principal Account; provided that no deposit need be made into the Reserve Account so long as the balance in said account shall be at least equal to the Reserve Account Requirement. A-11

70 Application of Interest Account All amounts in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying interest on the Bonds as it shall become due and payable (including accrued interest on any Bonds purchased prior to maturity pursuant to the Indenture). Application of Principal Account (a) All amounts in the Principal Account shall be used and withdrawn by the Trustee solely for the purposes of paying the principal of the Bonds when due and payable, except that all amounts in the Sinking Accounts shall be used and withdrawn by the Trustee solely to purchase or redeem or pay at maturity Term Bonds, as provided in the Indenture. (b) The Trustee shall when needed establish and maintain within the Principal Account a subaccount for the Term Bonds. On or before the second Business Day preceding each Mandatory Sinking Account Payment date, the Trustee shall transfer the amount deposited in the Principal Account pursuant to the Indenture for the purpose of making a Mandatory Sinking Account Payment from the Principal Account to the Sinking Account. With respect to the Sinking Account, on each Mandatory Sinking Account Payment date established for the Sinking Account, the Trustee shall apply the Mandatory Sinking Account Payment required on that date to the redemption (or payment at maturity, as the case may be) of Term Bonds, upon the notice and in the manner provided in the Indenture; provided that, at any time prior to giving such notice of such redemption, the Trustee upon the Order of the City shall apply moneys in the Sinking Account Fund to the purchase of Term Bonds made by the City at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as shall be directed by the City, except that the purchase price (excluding accrued interest) shall not exceed the Redemption Price that would be payable for such Bonds upon redemption by application of such Mandatory Sinking Account Payment. If, during the twelve-month period immediately preceding said Mandatory Sinking Account Payment date, the City has purchased Term Bonds with moneys in the Sinking Account, or, during said period and prior to giving said notice of redemption, the City has deposited Term Bonds with the Trustee, or Term Bonds were at any time purchased by the City or redeemed by the Trustee from the Redemption Fund and allocable to said Mandatory Sinking Account Payment, such Bonds so purchased or deposited or redeemed shall be applied, to the extent of the full principal amount thereof, to reduce said Mandatory Sinking Account Payment. All Bonds purchased or deposited pursuant to this subsection shall be canceled and destroyed by the Trustee in accordance with the Indenture. Any amounts remaining in the Sinking Account when all of the Term Bonds are no longer Outstanding shall be withdrawn by the Trustee and transferred to the City for deposit in the Revenue Fund. All Term Bonds purchased from the Sinking Account or deposited by the City with the Trustee shall be allocated first to the next succeeding Mandatory Sinking Account Payment, then pro-rata to the remaining Mandatory Sinking Account Payments in proportion to the amount of such Mandatory Sinking Account Payments. Notwithstanding the foregoing, if some but not all of the Term Bonds have been theretofore redeemed pursuant to Optional Redemption, the total amount of all future Mandatory Sinking A-12

71 Account Payments shall be reduced by the aggregate principal amount of Term Bonds so redeemed, allocated among such Mandatory Sinking Account Payments on a pro rata basis in integral multiples of $5,000 as determined by the City (notice of which determination shall be given to the Trustee). Any amounts remaining in the Sinking Account when all of the Term Bonds are no longer Outstanding shall be withdrawn by the Trustee and transferred to the Bond Fund. Application of Reserve Account All amounts in the Reserve Account shall be used and withdrawn by the Trustee solely for the purpose of (a) paying interest on or principal of the Bonds when due and payable to the extent that moneys deposited in the Interest Account or Principal Account (including the Sinking Account Payments), respectively, are not sufficient for such purpose, and (b) making the final payments of principal of and interest on the Bonds. On the date on which all Bonds shall be retired hereunder or provision made therefor pursuant to the Indenture, all moneys then on deposit in the Reserve Account shall be withdrawn by the Trustee and paid to the City. Amounts in the Reserve Account shall be valued by the Trustee no less often than semiannually on or before an Interest Payment Date. If, on any date of computation, moneys and securities on deposit in the Reserve Account are less than the Reserve Account Requirement (unless such deficiency is a result of a transfer therefrom), the City covenants and agrees that it will, within twelve months thereof, increase the amount therein to the Reserve Account Requirement. If such deficiency is a result of a transfer therefrom, the City covenants and agrees that it will, within twenty-four months thereof, increase the amount therein to the Reserve Account Requirement. If, on any date of computation, moneys and securities on deposit in the Reserve Account are in excess of the Reserve Account Requirement, the Trustee shall withdraw such excess amount and transfer such amount to the Interest Account. The City shall have the right at any time to direct the Trustee to release funds from the Reserve Account, in whole or in part, by tendering to the Trustee: (1) a Qualified Reserve Account Credit Instrument, and (2) an opinion of Bond Counsel stating that such release will not, of itself, cause interest with respect to the Bonds to become includable in gross income for purposes of federal income taxation. Upon tender of such items to the Trustee, the Trustee shall transfer such funds from the Reserve Account to the Bond Fund or, if permitted by an opinion of Bond Counsel to a segregated account maintained by the City and used exclusively for the acquisition, construction and installation of improvements to the Enterprise. Prior to the expiration of any Qualified Reserve Account Credit Instrument, the City shall be obligated either (a) to replace such Qualified Reserve Account Credit Instrument with a new Qualified Reserve Account Credit Instrument, or (b) to remit or cause to be remitted to the Trustee for deposit in the Reserve Account an amount of moneys equal to the Reserve Account Requirement, to be derived from Net Revenues; provided, however, that if the City shall fail to replace an expiring Qualified Reserve Account Credit Instrument or to deposit moneys equal to the Reserve Account Requirement, the Trustee shall draw on such Qualified Reserve Account Credit Instrument before such expiration and deposit the proceeds of such draw in the Reserve Account. A-13

72 In the event that the Reserve Account Requirement shall at any time be maintained in the form of a combination of cash and a Qualified Reserve Account Credit Instrument, the Trustee shall apply the amount of such cash to make any payment required to be made from the Reserve Account before the Trustee shall draw any moneys under such Qualified Reserve Account Credit Instrument for such purpose. In the event that more than one Qualified Reserve Account Credit Instrument shall be maintained as all or a portion of the Reserve Account Requirement, and the Trustee is otherwise required hereunder to draw on such Qualified Reserve Account Credit Instruments, the Trustee shall draw pro rata on each such Qualified Reserve Account Credit Instrument. In the event that the Trustee shall at any time draw funds under a Qualified Reserve Account Credit Instrument to make any payment then required to be made from the Reserve Account, the Net Revenues thereafter received by the Trustee, to the extent remaining after making the other deposits (if any) then required to be made pursuant to the Indenture, shall be used to reinstate the Qualified Reserve Account Credit Instrument. Notwithstanding any other provision of the Indenture, the City need not replace any Qualified Reserve Account Credit Instrument or deposit cash in the Reserve Account in the event that the provider of the Qualified Reserve Account Credit Instrument is downgraded by S&P or Moody s or fails to honor a draw thereon; it being the intent of the City that if the Qualified Reserve Account Credit Instrument meets the requirement of the Indenture at the time it is delivered to the Trustee, it will remain a Qualified Reserve Account Credit Instrument for its stated term. Application of Redemption Fund The Trustee shall establish and maintain within the Redemption Fund (which the Trustee shall establish when needed, maintain and hold in trust) a separate Optional Redemption Account. The City may at any time deposit moneys into the Optional Redemption Account for the purposes of optionally redeeming Bonds in accordance with the terms of the Indenture. All amounts deposited in the Optional Redemption Account and shall be used and withdrawn by the Trustee solely for the purpose of redeeming Bonds, in the manner and upon the terms and conditions specified in the Indenture, at the next succeeding date of redemption for which notice has been given and at the redemption prices then applicable to redemptions from the Optional Redemption Account; provided that, at any time prior to giving such notice of redemption, the Trustee upon Order of the City shall apply such amounts to the purchase of Bonds made by the City at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as shall be directed by the City, except that the purchase price (exclusive of accrued interest) may not exceed the par value of such Bonds. Rate Stabilization Fund The City has previously established a special fund called the Rate Stabilization Fund. The Rate Stabilization Fund is not pledged or intended to be security for the Bonds. From time to time, the City may deposit in the Rate Stabilization Fund from Current Gross Revenues such amounts as the City may determine, provided that deposits for each Fiscal Year may be made until (but not after) one hundred eighty (180) days following the end of such Fiscal Year. The City may withdraw amounts from the Rate Stabilization Fund only for transfer to the Wastewater Fund for inclusion in Gross Revenues for any Fiscal Year, such withdrawals to be made until (but not after) A-14

73 one hundred eighty (180) days after the end of such Fiscal Year. All interest or other earnings on deposits in the Rate Stabilization Fund shall be withdrawn therefrom and accounted for as Gross Revenues. Notwithstanding the foregoing, (i) no deposit of Current Gross Revenues to the Rate Stabilization Fund may be made to the extent that such Current Gross Revenues were included in an engineer s or independent consultant s certificate submitted in accordance with the Indenture and withdrawal of the Current Gross Revenues to be deposited in the Rate Stabilization Fund from Gross Revenues employed in rendering the parity test and (ii) no deposit of Net Revenues shall be made in the Rate Stabilization Fund to the extent that such deposit would cause noncompliance with the rate covenant in any Fiscal Year. The Rate Stabilization Fund is not pledged to secure the payment of the Installment Payments, the payments with respect to any Parity Obligations or the payment with respect to any Subordinate Debt. Investment of Moneys in Funds and Accounts. All moneys in any of the funds and accounts established pursuant to the Indenture shall, upon Request of the City provided at least two Business Days prior to the date of investment, be invested by the Trustee, but solely in Permitted Investments. In the absence of such Request of the City, the Trustee shall invest available moneys in investments described in paragraph (f) of the definition of Permitted Investments, to the extent practicable; provided, however, that the City shall identify in writing the specific fund or funds authorized for such investments and, provided further, that in the absence of timely and specific written direction of the specific fund by the City, amounts shall be held uninvested by the Trustee. All Permitted Investments shall be acquired subject to the limitations as to maturities set forth in the Indenture and such additional limitations or requirements consistent with the foregoing as may be established by Request of the City. Moneys in the Reserve Account shall be invested in Permitted Investments maturing prior to the final maturity of the Bonds. Moneys in the remaining funds and accounts held by the Trustee shall be invested in Permitted Investments maturing not later than the date on which it is estimated that such moneys will be required by the Trustee. Moneys held by the City may be invested in lawful investments permitted under the laws of the State. All interest, profits and other income received from the investment of moneys in any other fund or account established pursuant to the Indenture shall be deposited when received in the Bond Fund. Notwithstanding anything to the contrary contained in this paragraph, an amount of interest received with respect to any Permitted Investment equal to the amount of accrued interest, if any, paid as part of the purchase price of such Permitted Investment shall be credited to the fund or account for the credit of which such Permitted Investment was acquired. The Trustee may commingle any of the funds or accounts established pursuant to the Indenture into a separate fund or funds for investment purposes only, provided that all funds or accounts held by the Trustee hereunder shall be accounted for separately as required by the Indenture. The Trustee may act as principal or agent in the making or disposing of any investment. The Trustee may sell, or present for redemption, any Permitted Investments so purchased whenever it shall be necessary to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund or account to which such Permitted Investment is credited, and, subject to the provisions of the Indenture, the Trustee shall not be liable or responsible for any loss resulting from such investment. A-15

74 The City acknowledges that, to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grants the City the right to receive brokerage confirmations of security transactions as they occur, the City specifically waives receipt of such confirmations to the extent permitted by law. The City further understands that trade confirmations for securities transactions effected by the Trustee will be available upon request and at no additional cost and other trade confirmations may be obtained from the applicable broker. The Trustee will furnish the City periodic cash transaction statements which include detail for all investment transactions made by the Trustee hereunder. Upon the City s election, such statements will be delivered via the Trustee s online service and upon electing such service, paper statements will be provided only upon request. The Trustee may make any investments hereunder through its own bond or investment department or trust investment department, or those of its parent or any affiliate. The Trustee or any of its affiliates may act as sponsor, advisor or manager in connection with any investments made by the Trustee hereunder. Certain Covenants Punctual Payment. The City agrees to punctually pay or cause to be paid the principal and interest to become due in respect of all the Bonds, in strict conformity with the terms of the Bonds and of the Indenture, according to the true intent and meaning thereof, but only out of Net Revenues and other assets pledged for such payment as provided in the Indenture. Extension of Payment of Bonds. The City shall not directly or indirectly extend or assent to the extension of the maturity of any of the Bonds or the time of payment of any of the claims for interest by the purchase or funding of such Bonds or claims for interest or by any other arrangement and in case the maturity of any of the Bonds or the time of payment of any such claims for interest shall be extended, such Bonds or claims for interest shall not be entitled, in case of any default under the Indenture, to the benefits of the Indenture, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest thereon which shall not have been so extended. Nothing in the Indenture shall be deemed to limit the right of the City to issue Bonds for the purpose of refunding any Outstanding Bonds, and such issuance shall not be deemed to constitute an extension of maturity of Bonds. Discharge of Claims. The City covenants that in order to fully preserve and protect the priority and security of the Bonds the City shall pay from the Net Revenues and discharge all lawful claims for labor, materials and supplies furnished for or in connection with the Enterprise which, if unpaid, may become a lien or charge upon the Net Revenues prior or superior to the lien of the Bonds and impair the security of the Bonds. The City shall also pay from the Net Revenues all taxes and assessments or other governmental charges lawfully levied or assessed upon or in respect of the Enterprise or upon any part thereof or upon any of the Net Revenues therefrom. Operation of Enterprise in Efficient and Economical Manner. The City covenants and agrees to operate, or cause to be operated, the Enterprise in an efficient and economical manner and to operate, maintain and preserve the Enterprise in good repair and working order. Against Encumbrance. Except as provided in the Indenture, the City covenants that the property, facilities and improvements of the Enterprise shall not be mortgaged or otherwise encumbered, leased, pledged, any charge placed thereon, or disposed of as a whole or substantially A-16

75 as a whole unless: (a) the City shall cause to be filed with the Trustee written evidence from Moody s, if Moody s is rating the Bonds, and/or S&P, if S&P is rating the Bonds, that such sale or other disposition will not cause a reduction or withdrawal of the uninsured rating then assigned to the Bonds by each such rating agency; and (b) such sale or other disposition shall be so arranged as to provide for a continuance of payments into the Bond Fund sufficient in amount to permit payment therefrom of the principal of and interest on and premiums, if any, due upon the Outstanding Bonds, and also to provide for such payments into the funds as are required under the terms of the Indenture. The City further covenants that the Net Revenues or any other funds pledged or otherwise made available to secure payment of the principal of and interest on the Outstanding Bonds shall not be mortgaged, encumbered, sold, leased, pledged, any charge placed thereon, or disposed of or used except as authorized by the terms of the Indenture. The City further covenants that it will not enter into any agreement which impairs the operation of the Enterprise or any part of it necessary to secure adequate Net Revenues to pay the principal and interest of the Bonds or which otherwise would impair the rights of the Bond Owners with respect to the Net Revenues. Records and Accounts. The City covenants that it shall keep proper books of record and accounts of the Enterprise, separate from all other records and accounts, in which complete and correct entries shall be made of all transactions relating to the Enterprise. Said books shall, upon reasonable request, be subject to the inspection of the Owners of not less than ten percent (10%) of the Outstanding Bonds or their representatives authorized in writing. The City covenants that it will cause the books and accounts of the Enterprise to be audited annually by an Independent Accountant and will make available for inspection by the Bond Owners, upon reasonable request, a copy of the report of such Independent Accountant. Any such audit may be combined with and be a part of the general audit of the City s financial records. Limitations on Future Obligations Secured by Net Revenues Rates and Charges (a) Covenant Regarding Gross Revenues. The City covenants to fix, prescribe, revise and collect rates, fees and charges for the Enterprise for each Fiscal Year as a whole for the services and facilities furnished by the Enterprise during each Fiscal Year which are at least sufficient, after making allowances for contingencies and error in the estimates, to yield Revenues that are sufficient to pay the following amounts: Fiscal Year; (i) all current Operation and Maintenance Costs of the Enterprise for such (ii) Debt Service payments on the Bonds and on any Parity Obligations as they become due and payable during such Fiscal Year, without preference or priority, except to the extent such Debt Service payments are payable from the proceeds of the Bonds or Parity Obligations or from any other source of legally available funds of the City that have been deposited with the Trustee for purposes prior to the commencement of such Fiscal Year; A-17

76 (iii) All payments required for compliance with the terms of the Indenture and of the 2007 Installment Sale Agreement, including amounts required to replenish the Reserve Account or to reimburse a draw on a Qualified Reserve Account Credit Instrument; and (iv) All payments to meet any other obligations of the City which are charges, liens or encumbrances upon, or payable from, the Gross Revenues. (b) Covenant Regarding Net Revenues. In addition to the requirements of the foregoing subsection (a) above, the City covenants that it shall fix, prescribe and collect rates, fees and charges for the services and facilities of the Enterprise for each Fiscal Year so as to yield Net Revenues during such Fiscal Year equal to at least 1.15 times the debt service payable on the Bonds, the Installment Payments and all payments required with respect to all Parity Obligations in such Fiscal Year. The City may make or permit to be made adjustments from time to time in such rates, fees and charges and may make or permit to be made such classification thereof as it deems necessary, but shall not reduce or permit to be reduced such rates, fees and charges below those then in effect unless the Gross Revenues from such reduced rates, fees and charges will at all times be sufficient to meet the requirements of the rate covenant. Limitations on Future Obligations Secured by Net Revenues (a) No Obligations Superior to Bonds or Parity Obligations. In order to protect further the availability of the Net Revenues and the security for the Bonds and any Parity Obligations, the City covenants that no additional bonds or other indebtedness will be issued or incurred on a senior basis to the Bonds or such Parity Obligations that are payable out of the Net Revenues in whole or in part. (b) Parity Obligations. The City further covenants that it will not issue or incur any Parity Obligations unless: (i) The City is not in default under the terms of the Indenture or any agreements relating to then existing Parity Obligations; (ii) Either: (A) Net Revenues, calculated on sound accounting principles, as shown by the books of the City for the latest Fiscal Year or any twelve (12) month period out of the most recent eighteen months selected by the City ending not more than sixty (60) days prior to the adoption of the resolution pursuant to which such Parity Obligations are authorized to be issued or incurred, as shown by the books of the City, shall have amounted to at least 1.15 times the maximum amount of debt service on the Bonds and all Parity Obligations outstanding immediately subsequent to the incurring of such additional obligations coming due and payable in any future Fiscal Year. Either or both of the following items may be added to such Net Revenues for the purpose of applying the restriction contained in this subsection (b)(ii)(a): A-18

77 (1) An allowance for revenues to be derived from any additions to or improvements or extensions of the Enterprise which, during all or any part of such Fiscal Year or the twelve (12) month period out of the most recent eighteen months selected by the City ending not more than sixty (60) days prior to the adoption of the resolution pursuant to which such Parity Obligations are authorized to be issued or incurred, were not in service, in an amount equal to 100% of the estimated additional average annual Net Revenues to be derived from such additions, improvements and extensions, all as shown by the certificate or opinion of a qualified independent consultant employed by the City. (2) An allowance for any increase in the charges made for service from the Enterprise which has become effective prior to the incurring of such Parity Obligations but which, during all or any part of such Fiscal Year or the twelve (12) month period out of the most recent eighteen months selected by the City ending not more than sixty (60) days prior to the adoption of the resolution pursuant to which such Parity Obligations are authorized to be issued or incurred, was not in effect, in an amount equal to 100% of the amount by which the Net Revenues would have been increased if such increase in charges had been in effect during the whole of such Fiscal Year or the twelve (12) month period out of the most recent eighteen months selected by the City ending not more than sixty (60) days prior to the adoption of the resolution pursuant to which such Parity Obligations are authorized to be issued or incurred, as shown by the certificate or opinion of a qualified independent consultant employed by the City; or (B) Estimated Net Revenues, based on a report of a qualified independent engineer employed by the City or a report of a qualified independent consultant employed by the City, for each of the five (5) Fiscal Years next following the earlier of (i) the end of the period during which interest on the Parity Obligations proposed to be executed is to be capitalized or, if no interest is capitalized the Fiscal Year in which the proposed Parity Obligations are to be issued, or (ii) the date on which substantially all projects financed with the proposed Parity Obligations are expected to commence operations, shall have amounted to at least 1.15 times the maximum amount of debt service on the Bonds and all Parity Obligations outstanding immediately subsequent to the incurring of such additional obligations coming due and payable in any future Fiscal Year. Either or both of the following items may be added to such Net Revenues for the purpose of applying the restriction contained in this subsection (b)(ii)(b): (1) An allowance for revenues that are estimated to be derived from any increase in the rates, fees and charges in effect and being charged or from any increase in the rates, fees and charges that have been approved but are not yet in place; and (2) An allowance for revenues that are estimated to be derived from customers of the Enterprise anticipated to be served by the additions, betterments A-19

78 or improvements to the Enterprise to be financed by the proposed Parity Obligation during such five year period. (iii) Notwithstanding the foregoing provisions, there shall be no limitations on the ability of the City to issue or incur Parity Obligations at any time to refund Bonds or Parity Obligations for debt service savings. (c) Subordinate Debt. There shall be no limitations on the ability of the City to issue or incur Subordinate Debt so long as the City is not in default under the terms of the Indenture, any agreements relating to then existing Parity Obligations or any agreement relating to then existing Subordinate Debt. (d) Calculating Debt Service on Variable Rate Debt. For all purposes, variable rate indebtedness shall be assumed to bear interest at the highest of: (i) the actual rate on the date of calculation, or if the indebtedness is not yet outstanding, the initial rate (if established and binding), (ii) if the indebtedness has been outstanding for at least twelve months, the average rate over the twelve months immediately preceding the date of calculation, or (iii) (A) if interest on the indebtedness is excludable from gross income under the applicable provisions of the Code, the most recently published Bond Buyer Revenue Bond Index (or comparable index if no longer published), or (B) if interest is not so excludable, the interest rate on direct U.S. Treasury Obligations with comparable maturities plus 50 basis points; provided, however, that for purposes of any rate covenant measuring actual debt service coverage during a test period, variable rate indebtedness shall be deemed to bear interest at the actual rate per annum applicable during the test period. (e) Calculating Debt Service on Swaps. If any interest rate swap agreement under which the City is obligated to make payments based on a fixed interest rate is in place with respect to variable rate Parity Obligations, the amount payable by the City with respect to such variable rate Parity Obligations shall be assumed to be the fixed rate payable under such interest rate swap agreement. Tax Covenants Private Activity Bond Limitation. The City shall assure that the proceeds of the Bonds are not so used as to cause the Bonds to satisfy the private business tests of section 141(b) of the Code. Private Loan Financing Limitation. The City shall assure that the proceeds of the Bonds are not so used as to cause the Bonds to satisfy the private loan financing test of section 141(c) of the Code. Federal Guarantee Prohibition. The City shall not take any action or permit or suffer any action to be taken if the result of the same would be to cause any of the Bonds to be federally guaranteed within the meaning of section 149(b) of the Code. Rebate Requirement. The City shall take any and all actions necessary to assure compliance with section 148(f) of the Code, relating to the rebate of excess investment earnings, if any, to the federal government. A-20

79 No Arbitrage. The City shall not take, or permit or suffer to be taken by the Trustee or otherwise, any action with respect to the proceeds of the Bonds which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the Closing Date would have caused the Bonds, to be arbitrage bonds within the meaning of section 148 of the Code. Maintenance of Tax-Exemption. The City shall take all actions necessary to assure the exclusion of interest on the Bonds from the gross income of the Owners of the Bonds to the same extent as such interest is permitted to be excluded from gross income under the Code as in effect on the Closing Date. Other Covenants Continuing Disclosure. The City covenants and agrees that it 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 shall not be considered an event of default; however, 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. Maintenance and Operation of the Enterprise. The City covenants and agrees that it will operate and maintain the Enterprise in accordance with all applicable governmental laws, ordinances, approvals, rules, regulations and requirements including, without limitation, such zoning, sanitary, pollution and safety ordinances and laws and such rules and regulations thereunder as may be binding upon the City. Taxes, Assessments, Other Governmental Charges and Utility Charges. The City covenants and agrees that it will pay and discharge all taxes, assessments, governmental charges of any kind whatsoever, and utility charges which may be or have been assessed or which may have become liens upon the Enterprise or the interest therein of the Trustee or of the Owners of the Bonds, and will make such payments or cause such payments to be made, respectively, in due time to prevent any delinquency thereon or any forfeiture or sale of the Enterprise or any part thereof, and upon request, will furnish to the Trustee receipts for all such payments, or other evidence satisfactory to the Trustee; provided, however, that the City shall not be required to pay any tax, assessment, rate or charge as provided in the Indenture as long as it shall in good faith contest the validity thereof, provided that the City shall have set aside adequate reserves with respect thereto. Insurance Required - Disposition of Insurance and Condemnation Proceeds. Public Liability and Property Damage Insurance. The City shall maintain or cause to be maintained, so long as any Bonds or Parity Obligations remain outstanding, but only if and to the extent available at reasonable cost from reputable insurers, a standard comprehensive general insurance policy or policies in protection of the City, the City and their respective members, officers, agents, assignees and employees. Said policy or policies shall 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 operation of the Enterprise. Said A-21

80 policy or policies shall provide coverage in such liability amounts and shall be subject to such deductibles as shall be customary with respect to works and property of a like character. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the City, and may be maintained in whole or in part in the form of selfinsurance by the City in the form of the participation by the City in a joint powers agency or other program providing pooled insurance. The proceeds of such liability insurance shall be applied toward extinguishment or satisfaction of the liability with respect to which such proceeds have been paid. Casualty Insurance. The City shall procure and maintain or cause to be procured and maintained, so long as any Bonds or Parity Obligations remain outstanding, but only in the event and to the extent available from reputable insurers at reasonable cost, casualty insurance against loss or damage to any improvements constituting any part of the Enterprise, covering such hazards as are customarily covered with respect to works and property of like character. Such insurance may be subject to deductible clauses which are customary with respect to works and property of a like character. Such insurance may be maintained as part of or in conjunction with any other casualty insurance coverage carried by the City and may be maintained, in whole or in part, in the form of self-insurance by the City or in the form of the participation by the City in a joint powers agency or other program providing pooled insurance. All amounts collected from insurance against accident to or destruction of any portion of the Enterprise shall be used to repair, rebuild or replace such damaged or destroyed portion of the Enterprise and, to the extent not so applied or to the extent the City determines it is not economically feasible or in the best interests of the City to so repair, rebuild or replace such damaged or destroyed portion of the Enterprise, shall be applied pro rata to payments on the Bonds and Parity Obligations or be applied to redeem the Bonds pro rata with any Parity Obligations, if applicable. Insurance Net proceeds; Form of Policies. The City shall pay or cause to be paid when due the premiums for all insurance policies required by the Indenture. The City shall annually, on or before November 1, deliver to the Trustee a certificate to the effect that the City has complied with the requirements of the Indenture. Eminent Doman. Any amounts received as awards as a result of the taking of all or any part of the Enterprise by the lawful exercise of eminent domain, at the election of the City (evidenced by a Written Certificate of the City filed with the Trustee and the City) shall either (a) be used for the lease, acquisition or construction of improvements or extensions of the Enterprise in replacement of the condemned portions thereof, or (b) applied pro rata as a credit against the City s Obligation to make payments with respect to the Bonds and any Parity Obligations or be applied to redeem the Bonds pro rata with any Parity Obligations, if applicable. Events of Default and Remedies Events of Default. The following events shall be Events of Default: (a) default in the due and punctual payment of the principal of any Bond or any Parity Obligation when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by declaration or otherwise, in the amounts and at the times provided therefor; A-22

81 (b) default in the due and punctual payment of any installment of interest on any Bond or any Parity Obligation when and as such interest installment shall become due and payable; (c) default by the City in the observance of any of the covenants, agreements or conditions on its part in the Indenture or in the Bonds contained (other than as referred to in paragraphs (a) or (b) above), if such default shall have continued for a period of thirty (30) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the City by the Trustee, or to the City, and the Trustee or the Owners of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds at the time Outstanding; or (d) the City s filing a petition in voluntary bankruptcy, for the composition of its affairs or for its corporate reorganization under any state or federal bankruptcy or insolvency law, or making an assignment for the benefit of creditors, or admitting in writing to its insolvency or inability to pay debts as they mature, or consenting in writing to the appointment of a trustee or receiver for itself or for the whole or any substantial part of the Enterprise. Acceleration of Maturities. If an Event of Default shall occur, then, and in each and every such case during the continuance of such Event of Default, the Trustee, the Owners of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding (with respect to defaults under clause (b) above and upon notice to the Trustee) shall be entitled, upon notice in writing to the City, to declare the principal of all of the Bonds then Outstanding, and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in the Indenture or in the Bonds contained to the contrary notwithstanding. Any such declaration, however, is subject to the condition that if, at any time after such declaration and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, the City shall deposit with the Trustee a sum sufficient to pay all the principal, Redemption Price of and installments of interest on the Bonds payment of which is overdue, with interest on such overdue principal at the rate borne by the respective Bonds, and the reasonable charges and expenses of the Trustee, and any and all other defaults known to the Trustee (other than in the payment of principal of and interest on the Bonds due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case, the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding, by written notice to the City and the Trustee, or the Trustee if such declaration was made by the Trustee, may, on behalf of the Owners of all of the Bonds, rescind and annul such declaration and its consequences and waive such default; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon. Application of Net Revenues and Other Funds After Default. If an Event of Default shall occur and be continuing, all Net Revenues and any other funds then held or thereafter received by the Trustee under any of the provisions of the Indenture (subject to the provisions of the Indenture) shall be applied by the Trustee as follows and in the following order: A-23

82 (a) To the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Owners of the Bonds and payment of reasonable charges and expenses of the Trustee (including, but not limited to, reasonable fees and disbursements of its counsel, its advisors and agents) incurred in and about the performance of its powers and duties under the Indenture; (b) To the payment of the principal and interest then due on the Bonds (upon presentation of the Bonds to be paid, and stamping thereon of the payment if only partially paid, or surrender thereof if fully paid) subject to the provisions of the Indenture, as follows: (i) Unless the principal of all of the Bonds shall have become or have been declared due and payable, First: To the payment to the persons entitled thereto of all installments of interest then due in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and Second: To the payment to the persons entitled thereto of the unpaid principal of any Bonds which shall have become due, whether at maturity or by call for redemption, in the order of their due dates, with interest on the overdue principal at the rate borne by the respective Bonds, and, if the amount available shall not be sufficient to pay in full all the Bonds due on any date, together with such interest, then to the payment thereof ratably, according to the amounts of principal or redemption price due on such date to the persons entitled thereto, without any discrimination or preference; (ii) If the principal of all of the Bonds shall have become or have been declared due and payable, to the payment of the principal and interest then due and unpaid upon the Bonds, with interest on the overdue principal at the rate borne by the respective Bonds, and, if the amount available shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority of principal over interest, or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or preference. Trustee to Represent Bond Owners. The Trustee is irrevocably appointed (and the successive respective Owners of the Bonds, by taking and holding the same, shall be conclusively deemed to have so appointed the Trustee) as trustee and true and lawful attorney-in-fact of the Owners of the Bonds for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Owners under the provisions of the Bonds, the Indenture, the Act and applicable provisions of any other law. Upon the occurrence and continuance of an Event of Default or other occasion giving rise to a right in the Trustee to represent the Bond Owners, the Trustee in its discretion may, and shall, upon the written request of the Owners of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds then Outstanding (or, if A-24

83 more than one such request is received, the written request executed by the Owners of the greatest percentage of Bonds then Outstanding in excess of twenty-five percent (25%), and upon being indemnified to its satisfaction therefor, shall, proceed to protect or enforce its rights or the rights of such Owners by such appropriate action, suit, mandamus or other proceedings as it shall deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained in the Indenture, or in aid of the execution of any power granted in the Indenture, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Trustee or in such Owners under the Indenture, the Act or any other law; and upon instituting such proceeding, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the Net Revenues and other assets pledged under the Indenture, pending such proceedings. All rights of action under the Indenture or the Bonds or otherwise 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 suit, action or proceeding instituted by the Trustee shall be brought in the name of the Trustee for the benefit and protection of all the Owners of such Bonds, subject to the provisions of the Indenture. Bond Owners Direction of Proceedings. Anything in the Indenture to the contrary notwithstanding, the Owners of a majority in aggregate principal amount of the Bonds then Outstanding shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the method of conducting all remedial proceedings taken by the Trustee under the Indenture, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Indenture, and that the Trustee shall have the right to decline to follow any such direction which in the opinion of the Trustee would be unjustly prejudicial to Bond Owners not parties to such direction or would expose the Trustee to liability for which it has not been indemnified to its satisfaction. Remedies Not Exclusive. No remedy conferred upon or reserved to the Trustee or to the Owners of the Bonds is intended to be exclusive of any other remedy or remedies, and each and every such remedy, to the extent permitted by law, shall be cumulative and in addition to any other remedy given under the Indenture or now or hereafter existing at law or in equity or otherwise. Limitation on Owners Rights to Sue. No Owner of any Bond shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Indenture, the Act or any other applicable law with respect to such Bond, unless (1) such Owner shall have given to the Trustee written notice of the occurrence of an Event of Default; (2) the Owners of not less than twenty-five per cent (25%) in aggregate principal amount of the Bonds then Outstanding (or, if more than one such request is received, the written request executed by the Owners of the greatest percentage of Bonds then Outstanding in excess of twentyfive percent (25%)) shall have made written request upon the Trustee to exercise the powers hereinbefore granted or to institute such suit, action or proceeding in its own name; (3) such Owner or said Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (4) the Trustee shall have refused or omitted to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee. Such notification, request, tender of indemnity and refusal or omission are hereby declared, in every case, to be conditions precedent to the exercise by any Owner of Bonds of any remedy A-25

84 hereunder or under law; it being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Indenture or the rights of any other Owners of Bonds, or to enforce any right under the Indenture, the Act, the Government Code of the State or other applicable law with respect to the Bonds, except in the manner herein provided, and that all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained in the manner herein provided and for the benefit and protection of all Owners of the Outstanding Bonds, subject to the provisions of the Indenture (including Section 6.02). Amendments Permitted The Indenture and the rights and obligations of the City and of the Owners of the Bonds and of the Trustee may be modified or amended from time to time and at any time by a Supplemental Indenture, which the City and the Trustee may execute when Owners of a majority in aggregate principal amount of the Bonds then Outstanding shall have been filed with the Trustee; provided that if such modification or amendment will, by its terms, not take effect so long as any Bonds of any particular maturity remain Outstanding, the consent of the Owners of such Bonds shall not be required and such Bonds shall not be deemed to be Outstanding for the purpose of any calculation of Bonds Outstanding under the Indenture. No such modification or amendment shall (1) extend the fixed maturity of any Bond, or reduce the amount of principal or mandatory sinking account payment thereof, provided in the Indenture for the payment of any Bond, or reduce the rate of interest thereon, or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the Owner of each Bond so affected, or (2) reduce the aforesaid percentage of Bonds the consent of the Owners of which is required to effect any such modification or amendment, or permit the creation of any lien on the Net Revenues and other assets pledged under the Indenture prior to or on a parity with the lien created by the Indenture, other than Parity Obligations, or deprive the Owners of the Bonds of the lien created by the Indenture on such Net Revenues and other assets (except as expressly provided in the Indenture), without the consent of the Owners of all of the Bonds then Outstanding. It shall not be necessary for the consent of the Bond Owners to approve the particular form of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the City and the Trustee of any Supplemental Indenture, the Trustee shall mail a notice, setting forth in general terms the substance of such Supplemental Indenture to the Bond Owners at the addresses shown on the Bond Registration Books. Any failure to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplemental Indenture. The Indenture and the rights and obligations of the City, of the Trustee and of 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 City and the Trustee may execute without the consent of any Bond 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 covenants and agreements of the City in the Indenture contained 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 reserved to or conferred upon the City, provided, that no such covenant, agreement, pledge, A-26

85 assignment or surrender shall materially adversely affect the interests of the Owners of the Bonds; (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, or in regard to matters or questions arising under the Indenture, as the City may deem necessary or desirable and not inconsistent with the Indenture, and which shall not materially adversely affect the interests of the Owners of the Bonds; (iii) to make such additions, deletions or modifications as may be necessary to assure exclusion from gross income for purposes of federal income taxation of interest on the Bonds; or (iv) Instrument. to issue Parity Obligations or substitute a Qualified Reserve Account Credit No such Supplemental Indenture shall modify any of the rights or obligations of the Trustee without its prior written consent thereto; nor shall the Trustee be required to consent to any such Supplemental Indenture which affects its rights or obligations under the Indenture. Defeasance Discharge of Indenture. Any or all of the Bonds may be paid by the City in any of the following ways; provided that the City also pays or causes to be paid any other sums payable under the Indenture by the City: (a) by paying or causing to be paid the principal, Redemption Price of and interest on such Bonds Outstanding, as and when the same become due and payable; (b) by depositing with the Trustee, in trust, at or before maturity, money or Defeasance Obligations in the necessary amount (as provided in the Indenture) to pay or redeem such Bonds Outstanding; or (c) by delivering to the Trustee, for cancellation by it, such Bonds Outstanding. If the City shall pay all Bonds Outstanding and shall also pay or cause to be paid all other sums payable under the Indenture by the City, then and in that case, at the election of the City (evidenced by a Certificate of the City, filed with the Trustee, signifying the intention of the City to discharge all such indebtedness and the Indenture), and notwithstanding that any Bonds shall not have been surrendered for payment, the Indenture and the pledge of Net Revenues and other assets made under the Indenture and all covenants, agreements and other obligations of the City under the Indenture shall cease, terminate, become void and be completely discharged and satisfied, except only as provided in the Indenture. In such event, upon Request of the City, the Trustee shall cause an accounting for such period or periods as may be requested by the City to be prepared and filed with the City and shall execute and deliver to the City all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee shall pay over, transfer, assign or deliver to the City all moneys or securities or other property held by A-27

86 it pursuant to the Indenture which are not required for the payment of Bonds not theretofore surrendered for such payment or redemption. Discharge of Liability on Bonds. Upon the deposit with the Trustee, in trust, at or before maturity, of money or securities in the necessary amount (as provided in the Indenture) to pay or redeem any Outstanding Bond (upon or prior to its maturity or redemption date of such Bond), then all liability of the City in respect of such Bond shall cease, terminate and be completely discharged, except only that thereafter the Owner thereof shall be entitled to payment of the principal of and interest to the maturity or redemption date on such Bond by the City, and the City shall remain liable for such payment, but only out of such money or securities deposited with the Trustee as aforesaid for such payment, provided further, however, that the provisions of the Indenture shall apply in all events. The City may at any time surrender to the Trustee for cancellation by it any Bonds previously issued and delivered which the City may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired. Deposit of Money or Securities with Trustee. Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or Defeasance Obligations in the necessary amount to pay or redeem any Bonds, the money or Defeasance Obligations so to be deposited or held may include money or Defeasance Obligations held by the Trustee in the funds and accounts established pursuant to the Indenture and shall be: (a) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given as in the Indenture provided or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount or Redemption Price of such Bonds and all unpaid interest thereon to the redemption date; or (b) Defeasance Obligations the principal of and interest on which when due will provide money sufficient, in the opinion of an Independent Accountant, to pay the principal or Redemption Price of and all unpaid interest to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed, as such principal or Redemption Price and interest become due, provided that, in the case of Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as in Article IV provided or provision satisfactory to the Trustee shall have been made for the giving of such notice; provided, in each case, that the Trustee shall have been irrevocably instructed (by the terms of the Indenture or by Request of the City) to apply such money to the payment of such principal or Redemption Price and interest with respect to such Bonds. Provisions Relating to Insurance Policy So long as the Bond Insurer insures the Bonds, the provisions of this Section shall apply to the Bonds. To the extent the following provisions in the Indenture relating to the Insurance Policy A-28

87 conflict or are inconsistent with any other provision set forth in the Indenture, the policies in this Section shall control. (a) The prior written consent of the Bond Insurer shall be a condition precedent to the deposit of any credit instrument provided in lieu of a cash deposit into the Reserve Account. Amounts on deposit in the Reserve Account shall be applied solely to the payment of debt service due on the Bonds. (b) The Bond Insurer shall be deemed to be the sole holder of the Bonds for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the holders of the Bonds are entitled to take pursuant to the Indenture pertaining to (i) defaults and remedies and (ii) the duties and obligations of the Trustee. In furtherance thereof and as a term of the Indenture and each Bond, the Trustee and each holder of a Bond appoint the Bond Insurer as their agent and attorney-in-fact and agree that the Bond Insurer may at any time during the continuation of any proceeding by or against the City under the United States Bankruptcy Code or any other applicable bankruptcy, insolvency, receivership, rehabilitation or similar law (an Insolvency Proceeding ) direct all matters relating to such Insolvency Proceeding, including without limitation, (A) all matters relating to any claim or enforcement proceeding in connection with an Insolvency Proceeding (a Claim ), (B) the direction of any appeal of any order relating to any Claim, (C) the posting of any surety, supersede as or performance bond pending any such appeal, and (D) the right to vote to accept or reject any plan of adjustment. In addition, the Trustee (solely with respect to the Bonds) each holder of a Bond delegate and assigns to the Bond Insurer, to the fullest extent permitted by law, the rights of each Bondholder in the conduct of any Insolvency Proceeding, including, without limitation, all rights of any party to an adversary proceeding or action with respect to any court order issued in connection with any such Insolvency Proceeding. Remedies granted to the Bondholders include mandamus. (c) The maturity of the Bonds shall not be accelerated without the consent of the Bond Insurer and in the event the maturity of the Bonds is accelerated, the Bond Insurer may elect, in its sole discretion, to pay accelerated principal and interest accrued, on such principal to the date of acceleration (to the extent unpaid by the City) and the Trustee shall be required to accept such amounts. Upon payment of such accelerated principal and interest accrued to the acceleration date as provided above, the Bond Insurer s obligations under the Insurance Policy with respect to such Bonds shall be fully discharged. (d) No grace period for a covenant default shall exceed thirty (30) days or be extended for more than sixty (60) days, without the prior written consent of the Bond Insurer. No grace period shall be permitted for payment defaults. (e) The Bond Insurer is a third party beneficiary under the Indenture. (f) Upon the occurrence of an extraordinary optional, special or extraordinary mandatory redemption in part, the selection of Bonds to be redeemed shall be subject to the approval of the Bond Insurer. The exercise of any provision of the Indenture which permits the purchase of Bonds in lieu of redemption shall require the prior written approval of the Bond Insurer if any Bond so purchased is not cancelled upon purchase. (g) Any amendment, supplement, modification to, or waiver of, the Indenture that requires the consent of Owners or adversely affects the rights and interests of the Bond Insurer shall be subject to the prior written consent of the Bond Insurer. A-29

88 (h) The rights granted to the Bond Insurer under the Indenture to request, consent to or direct any action are rights granted to the Bond Insurer in consideration of its issuance of the Insurance Policy. Any exercise by the Bond Insurer of such rights is merely an exercise of the Bond Insurer s contractual rights and shall not be construed or deemed to be taken for the benefit, or on behalf, of the Owners and such action does not evidence any position of the Bond Insurer, affirmative or negative, as to whether the consent of the Owners or any other person is required in addition to the consent of the Bond Insurer. (i) Only (1) cash, (2) non-callable direct obligations of the United States of America ( Treasuries ), (3) evidences of ownership of proportionate interests in future interest and principal payments on Treasuries held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying Treasuries are not available to any person claiming through the custodian or to whom the custodian may be obligated, (4) subject to the prior written consent of the Bond Insurer, pre-refunded municipal obligations rated AAA and Aaa by S&P and Moody s, respectively, or (5) subject to the prior written consent of the Bond Insurer, securities eligible for AAA defeasance under then existing criteria of S&P or any combination thereof, shall be used to effect defeasance of the Bonds unless the Bond Insurer otherwise approves. To accomplish defeasance, the City shall cause to be delivered to the Bond Insurer (i) a report of an independent firm of nationally recognized certified public accountants or such other accountant as shall be acceptable to the Bond Insurer ( Accountant ) verifying the sufficiency of the escrow established to pay the Bonds in full on the maturity or redemption date ( Verification ), (ii) an Escrow Deposit Agreement (which shall be acceptable in form and substance to the Bond Insurer), (iii) an opinion of nationally recognized bond counsel to the effect that the Bonds are no longer Outstanding under the Indenture and (iv) a certificate of discharge of the Trustee with respect to the Bonds. Each Verification and defeasance opinion shall be acceptable in form and substance, and addressed, to the City, Trustee and Bond Insurer. The Bond Insurer shall be provided with final drafts of the above-referenced documentation not less than five business days prior to the funding of the escrow. The Bonds shall be deemed Outstanding under the Indenture unless and until they are in fact paid and retired or the above criteria are met. (j) Amounts paid by the Bond Insurer under the Insurance Policy shall not be deemed paid for purposes of the Indenture and the Bonds relating to such payments shall remain Outstanding and continue to be due and owing until paid by the City in accordance with the Indenture. The Indenture shall not be discharged unless all amounts due or to become due to the Bond Insurer have been paid in full or duly provided for. (k) Each of the City and Trustee covenant and agree to take such action (including, as applicable, filing of UCC financing statements with regards to the City and continuations with regards to the Trustee thereof) as is necessary from time to time to preserve the priority of the pledge of the Net Revenues of the Enterprise under applicable law. (l) Claims Upon the Insurance Policy and Payments by and to the Bond Insurer. If, on the third Business Day prior to the related scheduled interest payment date or principal payment date ( Payment Date ) there is not on deposit with the Trustee, after making A-30

89 all transfers and deposits required under the Indenture, moneys sufficient to pay the principal of and interest on the Bonds due on such Payment Date, the Trustee shall give notice to the Bond Insurer and to its designated agent (if any) (the Bond Insurer s Fiscal Agent ) by telephone or telecopy of the amount of such deficiency by 12:00 noon, New York City time, on such Business Day. If, on the second Business Day prior to the related Payment Date, there continues to be a deficiency in the amount available to pay the principal of and interest on the Bonds due on such Payment Date, the Trustee shall make a claim under the Insurance Policy and give notice to the Bond Insurer and the Bond Insurer s Fiscal Agent (if any) by telephone of the amount of such deficiency, and the allocation of such deficiency between the amount required to pay interest on the Bonds and the amount required to pay principal of the Bonds, confirmed in writing to the Bond Insurer and the Bond Insurer s Fiscal Agent by 12:00 noon, New York City time, on such second Business Day by filling in the form of Notice of Claim and Certificate delivered with the Insurance Policy. The Trustee shall designate any portion of payment of principal on Bonds paid by the Bond Insurer, whether by virtue of mandatory sinking fund redemption, maturity or other advancement of maturity, on its books as a reduction in the principal amount of Bonds registered to the then current Bondholder, whether DTC or its nominee or otherwise, and shall issue a replacement Bond to the Bond Insurer, registered in the name of Assured Guaranty Municipal Corp., in a principal amount equal to the amount of principal so paid (without regard to authorized denominations); provided that the Trustee s failure to so designate any payment or issue any replacement Bond shall have no effect on the amount of principal or interest payable by the City on any Bond or the subrogation rights of the Bond Insurer. The Trustee shall keep a complete and accurate record of all funds deposited by the Bond Insurer into the Policy Payments Account (defined below) and the allocation of such funds to payment of interest on and principal of any Bond. The Bond Insurer shall have the right to inspect such records at reasonable times upon reasonable notice to the Trustee. Upon payment of a claim under the Insurance Policy, the Trustee shall establish a separate special purpose trust account for the benefit of Bondholders referred to herein as the Policy Payments Account and over which the Trustee shall have exclusive control and sole right of withdrawal. The Trustee shall receive any amount paid under the Insurance Policy in trust on behalf of Bondholders and shall deposit any such amount in the Policy Payments Account and distribute such amount only for purposes of making the payments for which a claim was made. Such amounts shall be disbursed by the Trustee to holders of Bonds in the same manner as principal and interest payments are to be made with respect to the Bonds under the sections of the Indenture regarding payment of Bonds. It shall not be necessary for such payments to be made by checks or wire transfers separate from the check or wire transfer used to pay debt service with other funds available to make such payments. Notwithstanding anything herein to the contrary, the City agrees to pay to the Bond Insurer (i) a sum equal to the total of all amounts paid by the Bond Insurer under the Insurance Policy (the Bond Insurer Advances ); and (ii) interest on such Bond Insurer Advances from the date paid by the Bond Insurer until payment thereof in full, payable to the Bond Insurer at the Late Payment Rate per annum (collectively, the Bond Insurer Reimbursement Amounts ). Late Payment Rate means the lesser of (a) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in The City of New York, as its prime or base lending rate (any change in such A-31

90 rate of interest to be effective on the date such change is announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest on the Bonds and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. The City hereby covenants and agrees that the Bond Insurer Reimbursement Amounts are secured by a lien on and pledge of the Net Revenues of the Enterprise and payable from such Net Revenues of the Enterprise on a parity with debt service due on the Bonds. Funds held in the Policy Payments Account shall not be invested by the Trustee and may not be applied to satisfy any costs, expenses or liabilities of the Trustee. Any funds remaining in the Policy Payments Account following a Bond payment date shall promptly be remitted to the Bond Insurer. (m) The Bond Insurer shall, to the extent it makes any payment of principal of or interest on the Bonds, become subrogated to the rights of the recipients of such payments in accordance with the terms of the Insurance Policy (which subrogation rights shall also include the rights of any such recipients in connection with any Insolvency Proceeding). Each obligation of the City to the Bond Insurer shall survive discharge or termination of the Indenture. (n) The City shall pay or reimburse the Bond Insurer any and all charges, fees, costs and expenses that the Bond Insurer may reasonably pay or incur in connection with (i) the administration, enforcement, defense or preservation of any rights or security in the Indenture; (ii) the pursuit of any remedies under the Indenture or otherwise afforded by law or equity, (iii) any amendment, waiver or other action with respect to, or related to, the Indenture whether or not executed or completed, or (iv) any litigation or other dispute in connection with the or the transactions contemplated thereby, other than costs resulting from the failure of the Bond Insurer to honor its obligations under the Insurance Policy. The Bond Insurer reserves the right to charge a reasonable fee as a condition to executing any amendment, waiver or consent proposed in respect of the Indenture. (o) After payment of reasonable expenses of the Trustee, the application of funds realized upon default shall be applied to the payment of expenses of the City or rebate only after the payment of past due and current debt service on the Bonds. (p) The Bond Insurer shall be entitled to pay principal or interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the City (as such terms are defined in the Insurance Policy) and any amounts due on the Bonds as a result of acceleration of the maturity thereof in accordance with the Indenture, whether or not the Bond Insurer has received a Notice of Nonpayment (as such terms are defined in the Insurance Policy) or a claim upon the Insurance Policy. (q) The Bond Insurer shall be provided with the following information by the City or Trustee, as the case may be: (i) Annual audited financial statements within one hundred eighty (180) days after the end of the City fiscal year (together with a certification of the City that it is not aware of any default or Event of Default under the Indenture), and the City annual budget within thirty (30) days after the approval thereof together with such other information, data or reports as the Bond Insurer shall reasonably request from time to time; A-32

91 (ii) Notice of any draw upon the Reserve Account within two Business Days after knowledge thereof other than (i) withdrawals of amounts in excess of the Reserve Account Requirement and (ii) withdrawals in connection with a refunding of the Bonds; (iii) Notice of any default known to the Trustee or City within five Business Days after knowledge thereof; (iv) Prior notice of the advance refunding or redemption of any of the Bonds, including the principal amount, maturities and CUSIP numbers thereof; (v) Notice of the resignation or removal of the Trustee and Bond Registrar and the appointment of, and acceptance of duties by, any successor thereto; (vi) Notice of the commencement of any proceeding by or against the City commenced under the United States Bankruptcy Code or any other applicable bankruptcy, insolvency, receivership, rehabilitation or similar law (an Insolvency Proceeding ); (vii) Notice of the making of any claim in connection with any Insolvency Proceeding seeking the avoidance as a preferential transfer of any payment of principal of, or interest on, the Bonds; (viii) A full original transcript of all proceedings relating to the execution of any amendment, supplement, or waiver to the Indenture; (ix) All reports, notices and correspondence to be delivered to Bondholders under the terms of the Indenture; and (x) All information furnished pursuant to a continuing disclosure agreement, covenant or undertaking with respect to the Bonds shall also be provided to the Bond Insurer, simultaneously with the furnishing of such information. (r) The Bond Insurer shall have the right to receive such additional information as it may reasonably request. (s) The City will permit the Bond Insurer to discuss the affairs, finances and accounts of the City or any information the Bond Insurer may reasonably request regarding the security for the Bonds with appropriate officers of the City and will use commercially reasonable efforts to enable the Insurer to have access to the facilities, books and records of the City on any business day upon reasonable prior notice. (t) The Trustee shall notify the Bond Insurer of any failure of the City to provide notices, certificates and other information under the transaction documents. (u) Notwithstanding satisfaction of the other conditions to the issuance of Additional Bonds set forth in the Indenture, no such issuance may occur if (i)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 shall be cured upon such issuance, unless otherwise permitted by the Bond Insurer; and (ii) unless the Reserve Account is fully funded at the Reserve Account Requirement (including the proposed issue) upon the issuance of such Additional Bonds, in either case unless otherwise permitted by the Insurer. (v) In determining whether any amendment, consent, waiver or other action to be taken, or any failure to take action, under the Indenture would adversely affect the security for A-33

92 the Bonds or the rights of the Bondholders, the Trustee shall consider the effect of any such amendment, consent, waiver, action or inaction as if there were no Insurance Policy. (w) No contract shall be entered into or any action taken by which the rights of the Bond Insurer or security for or sources of payment of the Bonds may be impaired or prejudiced in any material respect except upon obtaining the prior written consent of the Insurer. (x) So long as any of the Bonds remain outstanding or any amounts are owed to the Bond Insurer by the City, the City shall not issue or incur indebtedness payable from or secured in whole or in part by the Net Revenues of the Enterprise that (i) bears interest at other than fixed rates or (ii) permits the holder to tender such indebtedness for purchase prior to the stated maturity thereof, in either case without the prior written consent of the Insurer. (y) So long as any Bonds remain outstanding or any amounts are owed to the Bond Insurer by the City, the City shall not enter into any interest rate exchange agreement, cap, collar, floor ceiling or other agreement or instrument involving reciprocal payment obligations between the City and a counterparty base don interest rates applied to a notional amount of principal, without the prior consent of the Bond Insurer, payable from or secured in whole or in part by Net Revenues of the Enterprise. Provisions Relating to Reserve Policy So long as the Reserve Policy funds the Reserve Account with respect to the Bonds, the provisions of this Section will apply. To the extent the following provisions relating to the Reserve Policy conflict or are inconsistent with any other provision set forth in the Indenture, the policies in this Section shall control. (a) Upon Payment by the Bond Insurer under the Reserve Policy, the 2017 Insurer shall furnish to the City written instructions as to the manner in which the payments amounts owed to the Bond Insurer as a result of payment under the Reserve Policy shall be made. Amounts drawn under the Reserve Policy shall be used solely to pay unscheduled payments of principal and interest due on the Bonds. (b) The City shall repay the Bond Insurer any draws under the Reserve Policy and pay all expenses incurred by the Bond Insurer and shall pay interest thereon from the date of payment by the Bond Insurer at the Late Payment Rate. Late Payment Rate means the lesser of (A) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in the City of New York, as its prime or base lending rate ( Prime Rate ) (any change in such Prime Rate to be effective on the date such change is announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest on the Bonds and (B) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. In the event JPMorgan Chase Bank ceases to announce its Prime Rate publicly, Prime Rate shall be the publicly announced prime or base lending rate of such national bank as the Bond Insurer shall specify. If the interest provisions of this subparagraph (b) shall result in an effective rate of interest which, for any period, exceeds the limit of the usury or any other laws applicable to the indebtedness created herein, then all sums in excess of those lawfully collectible as interest for the period in question shall, without A-34

93 further agreement or notice between or by any party to the Indenture, be applied as additional interest for any later periods of time when amounts are outstanding under the Indenture to the extent that interest otherwise due under the Indenture for such periods plus such additional interest would not exceed the limit of the usury or such other laws, and any excess shall be applied upon principal immediately upon receipt of such moneys by the Bond Insurer, with the same force and effect as if the City had specifically designated such extra sums to be so applied and the Bond Insurer had agreed to accept such extra payment(s) as additional interest for such later periods. In no event shall any agreed-to or actual exaction as consideration for the indebtedness created herein exceed the limits imposed or provided by the law applicable to this transaction for the use or detention of money or for forbearance in seeking its collection. (c) Notwithstanding anything to the contrary in the Indenture, repayment of draws and payment of expenses and accrued interest thereon at the Late Payment Rate (collectively, Policy Costs ) shall commence in the first month following each draw, and each such monthly payment shall be in an amount at least equal to 1/12 of the aggregate of Policy Costs related to such draw. Amounts in respect of Policy Costs paid to AGM shall be credited first to interest due, then to the expenses due and then to principal due. (d) As and to the extent that payments are made to AGM on account of principal due, the coverage under the Reserve Policy will be increased by a like amount, subject to the terms of the Reserve Policy. (e) All cash and investments in the Reserve Account established for the Bonds shall be transferred to the Interest Account and Principal Account, as applicable, for payment of debt service on Bonds before any drawing may be made on the Reserve Policy or any other credit facility credited to the Reserve Account in lieu of cash ( Credit Facility ). Payment of any Policy Costs shall be made prior to replenishment of any such cash amounts. Draws on all Credit Facilities (including the Reserve Policy) on which there is available coverage shall be made on a pro-rata basis (calculated by reference to the coverage then available under each such Credit Facility) after applying all available cash and investments in the Reserve Account. Payment of Policy Costs and reimbursement of amounts with respect to other Credit Facilities shall be made on a pro-rata basis prior to replenishment of any cash drawn from the Reserve Account. For the avoidance of doubt, available coverage means the coverage then available for disbursement pursuant to the terms of the applicable alternative credit instrument without regard to the legal or financial ability or willingness of the provider of such instrument to honor a claim or draw thereon or the failure of such provider to honor any such claim or draw. (f) If the City shall fail to pay any Policy Costs in accordance with the requirements of the Indenture, the Bond Insurer shall be entitled to exercise any and all legal and equitable remedies available to it, including those provided under the Indenture other than (i) acceleration of the maturity of the Bonds or (ii) remedies which would adversely affect owners of the Bonds. (g) The Indenture shall not be discharged until all Policy Costs owing to the Bond Insurer shall have been paid in full. The City s obligation to pay such amounts shall expressly survive payment in full of the Bonds. A-35

94 (h) In order to secure the City s payment obligations with respect to the Policy Costs, the City grants pursuant to the Indenture to the Bond Insurer a security interest (subject only to the priority of payment provisions set forth in the Indenture) in all revenues and collateral pledged as security for the Bonds. (i) Policy Costs then due and owing to the Bond Insurer shall be included in debt service requirements for the purposes of the additional bonds test and the rate covenant in the Indenture. (j) For purposes of the Indenture, the Reserve Policy constitutes a Qualified Reserve Account Credit Instrument. (k) The Trustee shall ascertain the necessity for a claim upon the Reserve Policy in accordance with the provisions of the Indenture and provide notice to the Bond Insurer in accordance with the terms of the Reserve Policy at least five (5) business days prior to each date upon which interest or principal is due on the Bonds. Where deposits are required to be made by the City with the Trustee to the debt service fund for the Bonds more often than semiannually, the Trustee shall be instructed to give notice to the Bond Insurer of any failure of the City to make timely payment in full of such deposits within two business days of the date due. (l) The City will pay or reimburse the Bond Insurer any and all charges, fees, costs, losses, liabilities and expenses which the Bond Insurer may pay or incur as provided in the Indenture. A-36

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97 COMPREHENSIVE ANNUAL FINANCIAL REPORT Fiscal Year Ended June 30, 2016 CITY OF FILLMORE, CALIFORNIA

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99 CITY OF FILLMORE CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FISCAL YEAR ENDED JUNE 30, 2016 Prepared by the Finance Department Gaylynn Brien, Finance Director Janyne Brown, Assistant Finance Director

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101 City of Fillmore Table of Contents June 30, 2016 INTRODUCTORY SECTION: Letter of Transmittal Organizational Chart Listing of City Officials GFOA - Certificate of Achievement for Excellence in Financial Reporting Page i vii viii ix FINANCIAL SECTION: Independent Auditor s Report 1 Management s Discussion and Analysis 4 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Position 17 Statement of Activities 18 Fund Financial Statements: Governmental Funds: Balance Sheet 20 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position 21 Statement of Revenues, Expenditures, and Changes in Fund Balances 22 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities 23 Proprietary Funds: Statement of Net Position 24 Statement of Revenues, Expenses, and Changes in Net Position 26 Statement of Cash Flows 27 Fiduciary Funds: Statement of Fiduciary Net Position 29 Statement of Changes in Fiduciary Net Position 30 Notes to the Basic Financial Statements 31 Required Supplementary Information: Budgetary Comparison Schedules: General Fund 77 Housing Successor Special Revenue Major Fund 78 Schedule of Funding Progress - Other Post-Employment Benefits Plan 79 Schedule of the City's Proportionate Share of the Plans' Net Pension Liability and Related Ratios as of the Measurement Date - Last 10 Years 80 Schedule of Plans' Contributions - Last 10 Years 81 Notes to the Required Supplementary Information 82 Supplementary Information: Non Major Governmental Funds - Funds Descriptions 83 Non Major Governmental Funds: Combining Balance Sheet 86 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances 95

102 City of Fillmore Table of Contents, continued June 30, 2016 Page Supplementary Information (continued): Schedules of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual: Fillmore Public Financing Authority 105 Public Education & Government 106 Gas Tax 107 Local Transportation 108 Lighting/Landscape Assessment District 109 Storm Drain Assessment District 110 Community Development Block Grant 111 Public Transit 112 Bike Path Maintenance 113 Solid Waste Source 114 Swimming Pool Maintenance 115 Recreation 116 DIF Public Facility 117 DIF Transportation Improvement 118 DIF Parkland 119 DIF Sewer Improvement 120 DIF Water Improvement 121 DIF Storm Drain Improvement 122 Storm Water NPDES 123 Levees 124 Miscellaneous Capital Projects 125 Street Projects 126 Corporate Yard/Fire Station 127 Well #9 128 Proprietary Funds - Sewer Funds: Combining Statement of Net Position 129 Combining Statement of Revenues, Expenses, and Changes in Net Position 131 Agency Funds: Combining Statement of Fiduciary Assets and Liabilities 133 Combined Statement of Changes in Fiduciary Assets and Liabilities 135 STATISTICAL SECTION: Overview of Statistical Section 136 Net Position by Component 137 Change in Net Position 139 Fund Balances of Governmental Funds 145 Changes in Fund Balances of Governmental Funds 146 Water Utility Revenues By Customer Type 148 Sewer Utility Revenues By Customer Type 149 Water Rates By Meter Size 150 Sewer Rates By Customer Type 151 Water and Sewer Principal Payers By Customer Group 152 Assessed Value and Estimated Actual Value of Taxable Property 153 Direct and Overlaping Property Tax Rates 154 Principal Property Tax Payers 155 Property Tax Levies and Collections 156 Ratios of Outstanding Debt by Type 157 Ratios of General Bonded Debt by Type 158 Direct and Overlapping Debt 159 Legal Debt Margin Information 160 Pledged Revenue Coverage - General Obligation Debt 161 Pledged Revenue Coverage - Non-General Obligation Debt 163 Demographic and Economic Statistics 165 Principal Employers 166 Employment Trends and Other Information 167 Operating Indicators by Function 168 Capital Assets Statistics by Function 169

103 INTRODUCTORY SECTION

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105 December 13, 2016 To the Citizens of the City of Fillmore, Honorable Mayor, Members of the City Council: It is a pleasure to present the Fiscal Year Comprehensive Annual Financial Report (CAFR) for the City of Fillmore, California. State law requires that all general-purpose local governments publish within six months of the close of each fiscal year a complete set of financial statements presented in conformity with generally accepted accounting principles (GAAP) and audited in accordance with generally accepted auditing standards by a firm of licensed certified public accountants. Pursuant to that requirement, we hereby issue the Comprehensive Annual Financial Report of the City of Fillmore for the fiscal year ended June 30, This report consists of management s representations concerning the finances of the City. Consequently, management assumes full responsibility for the completeness and reliability of all of the information presented in this report. To provide a reasonable basis for making these representations, management of the City 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 the preparation of the City s 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, this financial report is complete and reliable in all material aspects. Rogers Anderson Malody & Scott, LLP, a firm of licensed certified public accountants, has audited the City s financial statements. The goal of the independent audit was to provide reasonable assurance that the financial statements of the City for the year ended June 30, 2016, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. The independent auditor concluded, based upon the audit, that there was a reasonable basis for rendering an unmodified opinion that the City s financial statements for the fiscal year ended June 30, 2016, are fairly presented in conformity with GAAP. The independent auditors report is presented as the first component of the financial section of this report. GAAP require 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 MD&A and should be read in conjunction with it. The City s MD&A can be found immediately following the report of the independent auditors. -i-

106 PROFILE OF THE CITY OF FILLMORE Fillmore is a City in Ventura County, California, approximately 60 miles north of the City of Los Angeles along Highway 126, and approximately 20 miles east of the Pacific Ocean, along the Santa Clara River Valley below the San Cayetano Mountain peak in the Los Padres National Forest. It s known for its rich agriculture and multiple fruit growing trees. Fillmore was established when Southern Pacific built the railroad through the valley in 1887 and was named after J. A. Fillmore, a general superintendent for Southern Pacific. Fillmore is a general law City and was incorporated in The City occupies a land area of 3.23 square miles and serves a population of approximately 15,530. The City is empowered to levy a property tax on both real and personal property located within its boundaries. Increases in property tax rates are subject to voter approval. It is also empowered by state statute to extend its corporate limits by annexation, which has occurred periodically in the past when deemed appropriate by the governing council. The City is governed by a five-member City Council under the council-manager form of government. The City Council is elected at large with staggered four-year terms and the positions of Mayor and Mayor Pro-Tem are selected amongst Council members annually. The council appoints the City Manager, who in turn appoints the heads of the various departments, and also appoints the City Attorney, who currently operates under contractual agreement. The City provides a full range of municipal services to its residents with a total regular full-time staff of 28 and part-time/volunteer staff of approximately 38 employees. Major services such as police are contracted with Ventura County Sheriff; and wastewater treatment plant operation, attorney, vector/animal control, landscape and storm drain maintenance are also provided through contractual arrangements. The City provides services such as fire protection, potable water utility services, emergency management, code enforcement, building and safety, city engineering, planning, economic development, recreation programs, park and facilities, street maintenance, crossing guard and administrative management services with city employees. The City prepares an annual budget consistent with Generally Accepted Accounting Principles (GAAP) for all governmental funds on a modified accrual basis where revenues are recognized when they become measurable and available to finance expenditures of the current period. Expenditures are recorded when the goods or services are received and the liabilities are incurred. Department directors are responsible, not only to accomplish his/her particular goals within each program, but also to monitor budget allocations consistent to the funding levels adopted by the City Council prior to July 1 of the budget year. The City reports on a fiscal year basis from July 1 to June 30. Departments and agencies submit current level expenditure budgets, requests for budget increases (Policy Items), requests for replacement of equipment items (Capital Asset Requests), and possible budget reductions (Reverse Priority Items) to the Budget Officer in early March. The City Manager and his/her staff conduct a series of budget review meetings with departments and agencies in April. The City Manager then presents a Preliminary Base Budget that contains line item budget information to the City Council for review in early May. The City Council conducts one or more budget hearings during the month of May and June, modifies the Preliminary Base Budget as appropriate, and adopts the Annual Budget no later than June 30. The City Council is committed to a budget process that is open and clear to the public and which provides for public input. Expenditures are budgeted at the line-item level according to fund and operational area. Overall budgetary control, however, is exercised at the fund level, except for the City s General Fund, where control is exercised at the department level. The City Council has the legal authority to amend the budget at any time during the fiscal year. The City Manager is also authorized to make administrative amendments to the budget, provided the amendments do not have a significant policy impact or affect budgeted year-end fund balances. -ii-

107 Interim financial reports can be generated on demand by operating departments. In addition, comprehensive financial reviews are prepared and submitted to the City Council at mid-year of each fiscal year and are reviewed publicly at regularly scheduled City Council meetings. Interim financial reports are made available to the general public upon request. Budget-to-actual comparisons are provided in this report for each individual governmental fund for which an appropriated annual budget has been adopted. For the General Fund and major special revenue funds, this comparison is presented in the Basic Financial Statements section of this report. For other governmental funds with appropriated annual budgets, this comparison is presented in the Supplementary Information section. ECONOMIC CONDITIONS The information presented in the financial statements is perhaps best understood when it is considered from the broader perspective of the specific environment within which the City operates. Local Economy. The City enjoyed more than ten consecutive years of General Fund growth prior to FY This growth was fueled by annual increases in assessed valuation, population increases, new development and a robust economy. The revenue allowed the City to accomplish a number of projects that increased the level of public safety, improved services to the public, and improved the effectiveness and efficiency of City operations. Due to an economic downturn at the national level, an ongoing State budget crisis, dissolution of redevelopment, and the extreme slowing in local land development, revenues decreased in FY through FY , but since then, this downward trend has tapered and the City is experiencing new growth. FY , locally generated revenues from property, transient occupancy, franchise, business and other taxes increased approximately by $301,000 or 11% over the prior fiscal year. Over the past two fiscal years, total General Fund revenues (excluding sales taxes) have increased by $358,000 or 9.6%. The resolution of the sales tax dispute resulted in a large payment of sales taxes in FY , so the reduction in sales tax revenue in FY is not a result of a decrease in the local economy. In recent years, the California economy has reflected a rebound, and City revenues are following suit. The City remains in strong financial shape and will remain so in consideration of the conservative budget practices of the City Council. The local unemployment rate is 6.0%, a slight decrease from the previous fiscal year. The City s commercial and industrial base continues to be diverse. Major industries with headquarters or divisions located within the City s boundaries, or in close proximity, include retail sales, real estate lending, health care, computer hardware, and light manufacturing. Residential development activity in the City continues to grow, reflective of the nationwide trend, and is expected to continue this increase in the upcoming year. Activity in the residential and commercial real estate market is expanding, and continued additions to the City s property tax roll are anticipated next year. Financial Position. Fillmore s financial situation deteriorated significantly between 2008 and 2013 due to the combined impact of the recession, State legislation that dissolved the City s redevelopment agency, and a sales tax dispute that resulted in the Board of Equalization withholding more than four years of sales tax revenue due to issues surrounding a sales tax sharing agreement. Those combined factors resulted in a significant reduction in spending, staffing, and services to the public due to lost tax revenue, a near cessation of land development activity, and the absence of redevelopment tax increment funds used to fund much needed infrastructure improvements. However, in fiscal year , the City showed a continuation in the improvement in their financial situation. The Fiscal Year financial report continues to show the City s economic recovery after several years of deficit General Fund spending that, of necessity, utilized reserves set aside in prior years to address the difficult financial times. It is reflective of the efforts of the City Council and staff to resolve significant financial issues involving a sales tax sharing dispute, a major recession, and the state-mandated dissolution of the former Fillmore Redevelopment Agency. -iii-

108 The City received most of the withheld sales tax from the Board of Equalization in October 2013, and the balance of withheld funds was received in FY From a land development standpoint, the City is experiencing an increase in residential development and this development is projected to continue over the next five years, which will result in improved property tax revenue and significantly improved land development fees. Additionally, sales tax and other General Fund revenues are anticipated to increase as the City s population is projected to increase by between 3% and 5% also over the next five years. The City must continue to generate additional revenues in order to further improve the level of services provided to the public. Additional revenues are needed to restore staffing levels of earlier years and for technology improvements to increase staff productivity. Such changes will allow the City Council to continue its efforts to operate on a more proactive level, rather than reactively responding to issues. With regard to staffing, the number of full-time staff decreased by 26 full-time positions between FY and FY , a 57% reduction. Six of those positions have since been restored, but additional staff is needed to manage capital projects, process land development applications in a timely manner, plan for emergencies, expand staff training efforts, encourage citywide economic development activity, and further strengthen the bond between city government and the general public. In that regard, efforts are in place to: - Encourage both commercial and residential development in accordance with the City s adopted Economic Development Plan. - Identify immediate and short-term infrastructure needs as identified in the City s newly developed Capital Improvement Program. - Review and update as appropriate the Master Fee Schedule that has not been adjusted for several years to assure that the City is being reimbursed for specialized services provided to developers and the public. - Expedite, whenever possible, new land development projects in order to generate additional sales tax, business tax, and property tax revenues. - Expand the focus on improving quality of life issues in the City by emphasizing complaint based code enforcement activities and expanding leisure service and recreational activities for persons of all ages. The City s population has grown by small increments, averaging less than 1% over the last two years. Turnover in the real estate market is increasing, along with further additions to the City s property tax roll. Residential and commercial development is moving forward, with residential permits increasing by 18.4%, issuing 45 permits in FY , up from 38 permits issued in the previous fiscal year, and the continued expansion in the business park. The City updates a Five-Year General Fund Financial Projection each year in an effort to identify and address structural issues while continuing to maintain sufficient cash reserves and providing quality service to residents into the future without the need for significant additional local revenues. The update was prepared with the assumption that the Consumer Price Index (CPI) will increase by 1.5% annually. Property tax revenues are projected to increase by 10% each year and sales tax is projected to increase by 5% per year through FY The Five-Year General Fund Financial Projection will continue to be used to provide a road map of the long-term actions necessary to address structural budget issues, even when the level of General Fund revenues is restored to previous levels. Despite a challenging financial environment, the City continues to be fiscally conservative, maintaining a prudent set-aside amount in fund balance. -iv-

109 LONG-TERM LIABILITIES/BONDED INDEBTEDNESS The total debt of the City is currently $59.7 million, with debt service requirements of approximately $4.0 million per year. The total debt of the Successor Agency to the RDA, reported as a private-purpose trust fund under the fiduciary funds, is $37.5 million, with debt service requirements of approximately $3.7 million per year, which are now paid through the county Redevelopment Property Tax Trust Fund (RPTTF). The Successor Agency has the Series 2015 Tax Allocation Refunding Bonds which refunded the 2005 Revenue Bonds and the 2006 Tax Allocation Bonds whose purpose was to finance a portion of the costs to implement the Redevelopment Plan and fund redevelopment activities within the Agency project area. Additionally, the City s Community Facilities Districts reported total debt of $21.9 million with annual debt service of approximately $602,900. At June 30, 2016, the City has no new outstanding bonds but does have long-term liabilities in the approximate amount of $376,900 for employee compensated absences (accrued leave). The City provides retirement benefits (pension) by contributing to the California Public Employees Retirement System (CalPERS). The City pays 100% of the Annual Required Contributions (ARC), as calculated by CalPERS. However, the retirement plan is not fully funded and the City is in the process of fully funding this plan. The City participates in the California Employers Retiree Benefit Trust (CERBT) administered by CalPERS to provide post-employment medical insurance to City retirees. The City accounts for this liability, per GASB 45, Other Post-Employment Benefits (OPEB). The most recent actuarial valuation was performed on June 30, 2016, and shows the OPEB liability at the end of the fiscal year was $900,411. For additional information please see Note 10 in the Notes to the Basic Financial Statements in this report. APPROPRIATION LIMIT Article XIIIB of the California Constitution (Proposition 4), commonly referred to as the GANN Initiative was approved by California voters in 1979, which placed limits on the amount of proceeds of taxes that State and Local agencies can appropriate and spend each fiscal year. In addition, voters approved Proposition 111 in 1990 to further increase the accountability of local government in adopting their limits by requiring the governing body to annually adopt, by resolution, an appropriation limit for the upcoming fiscal year. The appropriation limit and the City s appropriations subject to the limit for fiscal year 2015/2016 amounted to $13,052,794 and $8,052,794 respectively. AWARD The City, for the first time, submitted its Comprehensive Annual Financial Report (CAFR) and is submitting its CAFR for review by the Government Finance Officers Association of the United States and Canada (GFOA) in preparation to receive the distinguished award for the Certificate of Achievement for Excellence in Financial Reporting. In order to be awarded a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. The City of Fillmore received the Certificate of Achievement for Excellence in Financial Reporting for its CAFR. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report will meet the Certificate of Achievement Program s requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. -v-

110 OTHER REFERENCES Additional information and detail is contained in the Management s Discussion and Analysis (MD&A) and in the Notes to the Basic Financial Statements found in the Financial Section of this report. ACKNOWLEDGEMENT We would like to express appreciation to all City staff that assisted and contributed to the preparation of this report, particularly to the members of the Finance Department. We would also like to extend our appreciation to the auditors, Rogers, Anderson, Malody & Scott, LLP, Certified Public Accountants for their professional assistance. As in the past, the Annual Financial Report and now CAFR is available on the City s website at Respectfully submitted, David Rowlands City Manager Gaylynn Brien Finance Director -vi-

111 CITY OF FILLMORE ORGANIZATIONAL CHART ELECTORATE CITY CLERK CITY COUNCIL TREASURER CITY ADMINISTRATION PLANNING & COMM DEV CITY ATTORNEY City Clerk Services Planning City Manager's Office Economic Development Human Resources Risk Management COMMUNITY SERVICES PUBLIC WORKS BUILDING Active Adult Center Animal Control Plan Check Community Pool Operations Capital Projects Inspection Government Buildings Central Garage Code Enforcement Multi-Purpose Center Engineering Parks Operations Landscape and Lighting District Recreation Programs Parking Facilities Senior Nutrition Program Parks Maintenance Town Theater Regulatory Compliance Veterans Memorial Building Sewer Collection and Treatment Solid Waste Storm Drain Maintenance District Streets and Drains Maintenance Water Pumping and Distribution POLICE SERVICES FIRE PROTECTION FINANCE Police Administration City Cable Television Channel Community Development Block Patrol Fire Prevention Grant Program Detectives Fire Suppression Debt Management Communications Fireworks Enforcement Fiscal Services School Resource Officer Hazardous Materials Response Information Services School Crossing Guards Medical Response Redevelopment Successor Agency Management Treasury Services Utility Billing -vii-

112 CITY OF FILLMORE OFFICIALS CITY COUNCIL Dianne McCall, Mayor Carrie Broggie, Mayor Pro Tem Manuel Minjares, Council Member Rick Neal, Council Member Douglas Tucker, Council Member CITY TREASURER PLANNING COMMISSION Shannon Godfrey, Elected Tim Holmgren, Chair Christopher Hoy CITY CLERK Robert Smith Nancy Blendermann-Meyer, Elected Jayme Laber Diana Impeartrice, Deputy City Clerk Albert Mendez ADMINISTARTIVE STAFF David Rowlands, City Manager Keith Gurrola, Fire Chief David Wareham, Police Chief Gaylynn Brien, Finance Director Kevin McSweeney, Planning-Development Director Diana Impeartrice, Human Resources Director Annette Cardona, Community Services Supervisor David Smallwood, Public Works Supervisor CITY ATTORNEY Tiffany Israel Aleshire & Wynder, LLP PARKS & RECREATION COMISSION Kenneth Palmer, Chair Camilla Conaway, Vice Chair Geraldine Lee Jose Ibarra Giovany Robles Sara Beylik Angel Cisneros FILM COMISSION Carrie Broggie, Chair Pat Couse Nancy Bowlin Paul Nielsen Yvette Busby ACTIVE ADULT COMISSION Ernest Morales, Chair Douglas Tucker Robert Crum Charles Richardson -viii-

113 Certificate of Achievement for Excel~ence in Financial Reporting City 1of Fillmore Cattiornia For its Comprehoosj \fe.aimna] FililBDCial Report for lh~ J;;ii;:c_L.itl Yem' Jinded June 30,,2Qi1S ri l -ix-

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115 FINANCIAL SECTION

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117 ROGERS, ANDERSON, MALODY & SCOTT, LLP CERTIFIED PUBLIC ACCOUNTANTS, SINCE E. Carnegie Dr. Suite I 00 San Bernardino, CA I T F ramscpa. net Honorable Mayor and City Council City of Fillmore Fillmore, California PARTNERS Brenda L. Odle, CPA. MST Terry P. Shea. CPA Kirk A. Franks. CPA Scott W. Manno, CPA. CGMA Leena Shanbhag, CPA. MST. CGMA Bradferd A. Welebir, CPA. MBA. CGMA Jay H. Zercher. CPA (Partner Emeritus) Phillip H. Waller, CPA (Partner Emeritus) MANAGERS I STAFF Jenny Liu, CPA. MST Seong-Hyea Lee, CPA. MBA Charles De Simoni, CPA Nathan Statham, CPA. MBA Gardenya Duran. CPA Brianna Schultz. CPA Daniel Hernandez. CPA. MBA Lisa Dongxue Guo. CPA. MSA Report on the Financial Statements INDEPENDENT AUDITOR'S REPORT We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of City of Fillmore (City), California, as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's 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. MEMBERS American Institute of Certified Public Accountants PCPS The A/CPA Alliance for CPA Firms Governmental Audit Quality Center California Society of Cernf1ed Public Accountants An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. STABILITY. ACCURACY. TRUST. -1-

118 Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City 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. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, budgetary comparison information, OPEB schedule of funding progress, schedule of the City s proportionate share of the plans net pension liability and related ratios as of the measurement date, and schedule of plan s contributions, as listed in the 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 required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City s basic financial statements. The introductory section, combining and individual nonmajor fund financial statements, and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and nonmajor fund budgetary comparison schedules are the responsibility of management and were derived from, and relate directly to, the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual nonmajor fund financial statements are fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. -2-

119 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 13, 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. San Bernardino, California December 13,

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121 City of Fillmore Management s Discussion and Analysis Year ended June 30, 2016 This management's discussion and analysis provides an overview and analysis of financial activities of the City of Fillmore (City) for the fiscal year ended June 30, Please read this discussion and analysis in conjunction with the accompanying transmittal letter, basic financial statements and notes to the financial statements. USING THE ACCOMPANYING FINANCIAL STATEMENTS This report consists of a series of financial statements. The Statement of Net Position and the Statement of Activities under the Government Wide Financial Statements provide information about the activities of the City as a whole and present a longer-term view of the City s finances. Also, included in the accompanying report are the Funds financial statements that report how these services were financed in the short-term as well as what remains for future spending. Governmental Funds financial statements report the City s operations in a more detail manner than the government-wide financial statements by providing information about the City s most significant funds. In addition, the City presents Proprietary Funds financial statements that report the activities of the Water and Sewer funds of the City. The remaining Fiduciary Funds statements provide financial information about activities for which the City acts solely as a trustee or agent for the benefit of those outside of the government. OVERVIEW OF THE FINANCIAL STATEMENTS The Government-Wide Financial Statements present the financial position of the City using the economic resources measurement focus and the accrual basis of accounting. These statements present governmental activities and business-type activities separately. Also, these statements include all assets and deferred outflows of resources of the City, as well as all liabilities and deferred inflows of resources, including long-term debt. In accordance with GASB 34, certain eliminations have been made related to inter-fund activity, payables, and receivables. The Fund Financial Statements include governmental, proprietary, and fiduciary funds. The governmental funds are prepared using the current financial resources measurement focus and modified accrual basis of accounting. Reconciliations of the Funds Financial Statements to the Government-Wide Financial Statements are provided to explain the differences created by the integrated approach under GASB 34. The proprietary funds are prepared using the economic resources measurement focus and the accrual basis of accounting. The fiduciary funds consist of agency funds and a private purpose trust fund. The agency funds report a statement of fiduciary net position only and do not have a measurement focus, the private purpose trust fund, which reports the activities of the Successor Agency to the former Fillmore Redevelopment Agency, uses the economic resources measurement focus and accrual basis of accounting. REPORTING THE CITY AS A WHOLE The Statement of Net Position and the Statement of Activities 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, and deferred inflows of resources of the City using the accrual basis of accounting, which is similar to the accounting used by most private-sector entities. Under the accrual basis of accounting, certain outflows, liabilities and deferred revenues are recognized in the period in which they are earned while expenses are recorded when incurred. These statements report the City's net position and changes in them. Net position is the differences between assets and deferred outflows less liabilities and deferred inflows, which is one way to measure the City's financial health, or financial position. Over time, increases or decreases in the City's net position are one indicator of whether its financial health is improving or deteriorating. -4-

122 City of Fillmore Management s Discussion and Analysis Year ended June 30, 2016 Other factors to consider are changes in the City's property tax base and economic trends, such as expansion and development, as well as economic strength or weakness. In the Statement of Net Position and the Statement of Activities, the City's activities are categorized as follows: Governmental Activities Most of the City's basic services are reported in this category including the general government activities, such as Administrative Services, Fire Services, Police Services, Public Works, Development Services, Parks and Community Services, and General Services. Property and sales taxes, user fees, investment income, franchise fees, and other revenues finance these activities. Business-Type Activities The City charges a fee to customers to pay for the cost of certain services provided. The City's water system and wastewater system are reported in this category. Fund Financial Statements The Fund Financial Statements provide detailed information about the City's major funds - not the City as a whole. Some funds are required to be established by State law, grantors or by bond covenants. However, the City establishes other funds to help control and manage revenues for a particular purpose or to show that the City is meeting legal responsibilities for using certain revenues, grants, and other funds. Governmental Funds Most of the City's basic services are reported in governmental funds. These funds focus on reporting the flow of revenue and expenditures in and out of the funds and the balances left at fiscal year-end that are available for spending. These funds are reported using the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual (i.e., when they become measurable and available). "Measurable" means that the amount of the transaction can be determined and "available" means that it is collectible within the current period or soon enough thereafter to be used. The governmental fund financial statements provide a detailed short-term view of the City's general government operations and the basic services provided. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the City's programs. The differences between the Governmental Fund Financial Statements and the Government-Wide Financial Statements are explained in reconciliations following the Governmental Fund Financial Statements. Proprietary Funds When the City charges customers for services it provides - whether to outside customers or to programs of the City, these services are reported in most cases in proprietary funds. Proprietary funds activities are reported in the Statement of Net Position and the Statement of Revenues, Expenses, and Changes in Fund Net Position Proprietary Funds. The City's enterprise funds are the same as the business-type activities reported in the Government-Wide Financial Statements, but provide more detail and additional information, such as cash flows for each enterprise fund. Fiduciary Funds The City is the trustee for certain funds established to account for assets held by the City in a trustee capacity, or as an agent for individuals, private organizations, and other governmental units. The City's fiduciary activities are reported separately in the Statement of Fiduciary Net Position. These activities are excluded from the City's Government-Wide Financial Statements because the City cannot use these assets to finance its operations and is responsible for ensuring that the assets reported in these funds are used for their specified purposes. -5-

123 City of Fillmore Management s Discussion and Analysis Year ended June 30, 2016 GOVERNMENT-WIDE FINANCIAL ANALYSIS The Government-Wide Financial Statements provide long-term and short-term information about the City's overall financial condition. This analysis addresses the financial statements of the City as a whole. The largest portion of the City s net position reflects its investment in capital assets (e.g. land, buildings, and improvements other than buildings, equipment, infrastructure, and construction in progress); less any related debt used to acquire those assets that is still outstanding. 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 the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. At the end of fiscal year 2016, the current assets are 23.9% of the total assets with the remaining 76.1% representing capital assets not being depreciated and capital assets, net of accumulated depreciation and notes and loans receivable. The current liabilities are approximately 14.9 % of the total liabilities. Of the total net position, 13.3% was restricted and the remaining 86.7% represented invested in capital assets net of related debt and unrestricted net position. SUMMARY OF FINANCIAL POSITION AND RESULTS OF OPERATIONS The assets and deferred outflows of resources of the City exceeded its liabilities and deferred inflows of resources at June 30, 2016, by $82.1 million. This amount is referred to as the net position of the City. Of this amount, $17.2 million is unrestricted net position and may be used to meet the City s ongoing obligations to citizens and creditors. The City s net position increased by $4.4 million during the past year. Fiscal Year revenues decreased by $1.9 million from the prior year primarily due to a $1.6 million increase in charges for services and a $2.0 million decrease in sales tax revenues. Expenses (including non-cash expenses like depreciation) decreased by $2.7 million. As required by the Governmental Accounting Standards Board (GASB), the City implemented GASB Statement No. 68 in the Fiscal Year financial statements. Statement No. 68, Accounting and Financial Reporting for Pensions An Amendment of GASB Statement No. 27. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities. In addition, the City also implemented Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date An Amendment of GASB Statement No. 68. The objective of this Statement is to address an issue regarding application of the transition provisions of Statement No. 68, Accounting and Financial Reporting for Pensions As of June 30, 2016, the City s governmental funds (the General Fund plus Special Revenue, Debt Service and Capital Projects funds) reported combined ending fund balances of $13.5 million. Governmental fund revenues and other financing sources exceeded expenditures and other financing uses by $2.4 million during Fiscal Year Of the $13.5 million combined ending fund balances at June 30, 2016, $5.5 million is categorized as unassigned, $1.1 million is categorized as assigned, $6.9 million is categorized as restricted, and $0.01 million is categorized as non-spendable. More detailed information regarding these amounts can be found in Note 16 in the Notes to Basic Financial Statements. -6-

124 City of Fillmore Management s Discussion and Analysis Year ended June 30, 2016 The City s total Noncurrent liabilities, due in more than one year, which includes bonds payable, unamortized bond premiums and discounts, loans payable, capital leases payable, JPIA general liability and workers compensation payable, sales tax reimbursement payable, net pension liability, compensated absences, and other post-employment benefits, decreased by $0.9 million, or 14.5% during the Fiscal Year ending June 30, 2016, to a total outstanding amount of $5.1 million. Governmental Activities The following schedule summarizes the financial position of the City s governmental activities as of June 30, 2016 and 2015: Assets: Current assets $ 22,825,053 $ 19,814,419 Notes receivable 7,170,610 7,238,543 Capital assets not being depreciated 11,024,798 10,911,734 Capital assets being depreciated, net 29,796,164 30,549,795 Total assets 70,816,625 68,514,491 Deferred Outflows of Resources: Pension related 404, ,553 Liabilities: Current liabilities 9,114,564 8,799,694 Noncurrent liabilities: Due within one year 269,897 1,027,139 Due in more than one year 5,079,270 5,939,271 Total liabilities 14,463,731 15,766,104 Deferred Inflows of Resources Pension related 553, ,838 Net position: Net investment in capital assets 40,519,500 41,024,999 Restricted 6,904,471 5,220,450 Unrestricted 8,779,723 6,127,653 Total net position $ 56,203,694 $ 52,373,102-7-

125 City of Fillmore Management s Discussion and Analysis Year ended June 30, 2016 The cost of all governmental activities during fiscal year 2016 was $7.9 million. Some of the cost of governmental activities was paid by those who directly benefited from the programs ($2.8 million) or by other government agencies and organizations that subsidized certain programs with grants and contributions ($3.0 million). The remaining cost of governmental activities of $2.1 million was covered by the City's sources of general revenue (taxes and other general revenues) of $6.1 million. The City s governmental activities include General Government, Public Safety (Police and Fire services), Public Works, Community Development, Economic Development, Transit, Parks and Recreation, and Interest and Other Charges. The following table represents the changes in net position for governmental activities for the fiscal years ended June 30, 2016 and 2015: General revenues: Taxes $ 5,958,034 $ 7,959,779 Investment income 40,468 42,288 Other 141,781 51,538 Program revenues: Charges for services 2,792,948 1,456,803 Operating contributions and grants 1,550,050 1,690,262 Capital contributions and grants 1,411,795 1,791,474 Total revenues 11,895,076 12,992,144 Expenses: General government 961,923 3,265,982 Public safety 3,921,663 4,645,977 Public works 1,388,200 1,506,317 Community development 441, ,087 Economic development 49,945 84,423 Transit 319, ,654 Parks and recreation 828, ,104 Interest and other charges - 7,385 Total expenses 7,911,499 11,196,929 Increase in net position before transfers 3,983,577 1,795,215 Transfers in (out) (152,985) (146,770) Change in net position 3,830,592 1,648,445 Net position, beginning of year 52,373,102 50,724,657 Net position, end of year $ 56,203,694 $ 52,373,102-8-

126 City of Fillmore Management s Discussion and Analysis Year ended June 30, 2016 Governmental Activities Governmental activities expenditures and programs revenues for the year ended June 30, 2016: $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $- Expenses Program revenues Governmental activities revenues by source for the year ended June 30, 2016: Investment income 0% Other 1% Charges for services 24% Taxes 50% Operating contributions and grants 13% Capital contributions and grants 12% -9-

127 City of Fillmore Management s Discussion and Analysis Year ended June 30, 2016 Business-Type Activities The City operated two business-type activities: wastewater (sewer) and water. The Sewer Enterprise Fund s unrestricted net position at the end of Fiscal Year was $4.6 million, with an increase of $0.3 or 7.2% from the previous year primarily due to a shift from net investment in capital assets to unrestricted. The Water Enterprise Fund, unrestricted net position at June 30, 2016, was $3.8 million, an increase of $0.2 million, or 6.8%, from the previous year primarily due to an increase in net investment in capital assets ($0.4 million). As required by the Governmental Accounting Standards Board (GASB), the City implemented GASB Statement No. 68 in the Fiscal Year financial statements. Statement No. 68, Accounting and Financial Reporting for Pensions An Amendment of GASB Statement No. 27. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities. In addition, the City also implemented Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date An Amendment of GASB Statement No. 68. The objective of this Statement is to address an issue regarding application of the transition provisions of Statement No. 68, Accounting and Financial Reporting for Pensions. The net position section of the Enterprise Funds Statement of Net Position reflects net investment in capital assets, restricted and unrestricted net position. The restricted net position represents assets with external restrictions. The unrestricted net position may be used at the discretion of the City. Net position totaled $25.9 with $20.7 and $5.2 million, respectively, for the Sewer and Water Funds. Of the total net position, $12.6 and $0.8 million was invested in capital assets, and $3.4 and $0.6 million was restricted for debt service, for the Sewer and Water Funds respectively. -10-

128 City of Fillmore Management s Discussion and Analysis Year ended June 30, 2016 The following schedule summarizes the financial position of the City s business-type activities at June 30, 2016, and 2015: Assets: Current assets $ 11,901,402 $ 10,741,021 Cash and investments with fiscal agents 3,731,352 4,016,724 Capital assets not being depreciated 3,359,680 3,186,153 Capital assets being depreciated, net 71,176,745 72,339,995 Total assets 90,169,179 90,283,893 Deferred outflows of resources: Pension related 269, ,053 Deferred loss on refunding 242, ,355 Total deferred outflows of resources 511, ,408 Liabilities: Current liabilities 1,193,916 1,100,835 Noncurrent liabilities: Due within one year 1,132,134 1,053,480 Due in more than one year 62,049,806 62,783,575 Total liabilities 64,375,856 64,937,890 Deferred oinflows of resources: Pension related 368, ,968 Net position: Net investment in capital assets 13,465,952 13,417,326 Restricted 4,010,094 4,009,131 Unrestricted 8,460,027 7,904,986 Total net position $ 25,936,073 $ 25,331,

129 City of Fillmore Management s Discussion and Analysis Year ended June 30, 2016 The following table presents the changes in net position for the business-type activities for the fiscal years ended June 30, 2016 and 2015: General revenues: Investment income $ 49,143 $ 21,543 Program revenues: Charges for services 9,152,244 8,889,596 Total revenues 9,201,387 8,911,139 Expenses: Sewer 6,326,574 6,029,237 Water 2,423,168 2,096,090 Total expenses 8,749,742 8,125,327 Increase in net position before transfers 451, ,812 Transfers in (out) 152, ,770 Change in net position 604, ,582 Net position, beginning of year 25,331,443 24,398,861 Net position, end of year $ 25,936,073 $ 25,331,443 Total expenses for business-type activities for the fiscal year ended June 30, 2016, were $8.7 million. Program revenues are primarily comprised of charges for services in the amount of $9.2 million. Transfers from governmental activities amounted to $0.2 million. GENERAL FUND FUNDS FINANCIAL ANALYSIS The General Fund in the Basic Financial Statement includes the City s chief operating fund. As of June 30, 2016, the total fund balance of the General Fund was $6.0 million, an increase of $0.7 million from the previous year. The General Fund accounts for all financial resources traditionally associated with government activities that are not required legally to be accounted for in another fund. This increase is primarily due to increases in tax revenues and level expenditures. In 2003 the City entered into an Economic Development Agreement (EDA) (sales tax sharing), with MTS Consulting, LLC (MTS). The EDA states that for each local sales tax generating business that MTS brings to the City, the City would share with them the local sales tax generated by that business for 20 years. The City would share 85% with MTS and the remaining 15% would be retained by the City. In 2007, Owens & Minor (O&M), relocated their sales office to the City and started allocating sales tax to the City. The 20-year term for sharing local sales tax relating to O&M expires in This sales tax sharing and allocation of tax agreement was challenged by some of the municipalities where the sales tax originated causing the City to enter into litigation and future commitments that significantly affect the fund s resources for future use. Additional detail about these agreements can be found in Note 13 of this financial report. -12-

130 City of Fillmore Management s Discussion and Analysis Year ended June 30, 2016 Additional information on the City s General Fund balance can be found in Note 16 in the Notes to the Basic Financial Statements. General fund revenues for the year ended June 30, 2016: General Fund revenues Charges for services $700,712 Other $198,951 Taxes $5,562,638 Intergovernmental $268,748 Investment income $55,845 Fines and forfeitures $53,495 Licenses and permits $170,750 General fund expenditures for the year ended June 30, 2016: Community development $339,377 General Fund expenditures Economic development $58,528 Parks and recreation $135,807 General government $1,332,248 Public w orks $220,918 Public safety $4,640,