NEW ISSUE - FULL BOOK-ENTRY

Transcription

1 NEW ISSUE - FULL BOOK-ENTRY NOT RATED In the opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel to the City, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See "CONCLUDING INFORMATION Tax Matters." $19,025,000 CITY OF SACRAMENTO LIMITED OBLIGATION REFUNDING BONDS REASSESSMENT DISTRICT II NO (WILLOWCREEK II A.D. NO and NORTH NATOMAS A.D. NO ) Dated: Date of Delivery Due: September 2, as shown on inside cover Authority for Issuance Purposes Security Interest Payments Book Entry; Denominations Early Redemption The bonds captioned above (the "Bonds") are being issued by the City of Sacramento (the "City ") under the Refunding Act of 1984 for 1915 Improvement Act Bonds (Division 11.5 of the Streets and Highways Code) (the 1984 Act ), and a Resolution of the City Council of the City (the City Council ), and a Fiscal Agent Agreement dated as of April 1, 2006, by and between the City and U.S. Bank National Association, San Francisco, California, as fiscal agent (the Fiscal Agent ). All of the proceedings of the City undertaken to form the City of Sacramento Reassessment District II No (Willowcreek II A.D. No and North Natomas A.D. No ) (the "District") and to levy the reassessments on property within the District (the Reassessments ) were undertaken under the 1984 Act. See "THE BONDS Authority for Issuance." The Bonds are being issued (i) to provide funds to refund on an advance basis the remaining principal amounts of two outstanding bonds issued by the City with respect to two prior assessment districts formed by the City to finance public improvements, (ii) to pay certain costs of issuing the Bonds, and (iii) to make a deposit into a debt service reserve fund for the Bonds. See "FINANCING PLAN." The Bonds are issued upon and secured by the unpaid Reassessments levied on parcels within the District. Under the 1984 Act, Reassessment installments of principal and interest sufficient to meet annual debt service on the Bonds are to be included on the regular county tax bills sent to owners of property against which there are unpaid Reassessments. These annual Reassessment installments are to be paid into the Redemption Account, to be held by the Fiscal Agent and used to pay debt service on the Bonds as it becomes due. To provide funds for payment of the Bonds and the interest thereon as a result of delinquent installments, the City will establish a Debt Service Reserve Fund from Bond proceeds. See "SECURITY FOR THE BONDS." Interest with respect to the Bonds will be payable to the registered owners of the Bonds on September 2, 2006, and thereafter semiannually on March 2 and September 2 of each year, until and at the respective maturity dates of the Bonds. See THE BONDS General Bond Terms. Initial purchases of beneficial interests in the Bonds will be made in book-entry form and the Bonds will be registered in the name of Cede & Co., as nominee for The Depository Trust Company ("DTC"). Initial Bond denominations are $5,000 and any integral multiple of $5,000. Purchasers of beneficial interests in the Bonds will not receive certificates representing their interests in the Bonds and will not be paid directly by the Fiscal Agent. See "THE BONDS - Book-Entry System." The Bonds are subject to optional redemption, mandatory redemption from prepaid Reassessments, and mandatory sinking fund redemption as more fully described herein. Transfers of property ownership and other similar circumstances could result in prepayment of all or part of the Reassessments. Such prepayment would result in redemption of a portion of the Bonds prior to their stated maturities. See THE BONDS Redemption. THE BONDS ARE LIMITED OBLIGATION IMPROVEMENT BONDS AND ARE SECURED SOLELY BY THE REASSESSMENTS AND THE AMOUNTS PLEDGED UNDER THE FISCAL AGENT AGREEMENT. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY, THE COUNTY OF SACRAMENTO, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION IS PLEDGED TO THE PAYMENT OF THE BONDS. EXCEPT FOR THE REASSESSMENTS, NO OTHER TAXES OR REASSESSMENTS ARE PLEDGED TO THE PAYMENT OF THE BONDS. THE BONDS ARE NOT GENERAL OR SPECIAL OBLIGATIONS OF THE CITY, BUT ARE LIMITED OBLIGATIONS OF THE CITY PAYABLE SOLELY FROM CERTAIN AMOUNTS DEPOSITED BY THE CITY UNDER THE FISCAL AGENT AGREEMENT. THE INFORMATION SET FORTH IN THIS OFFICIAL STATEMENT, INCLUDING INFORMATION UNDER THE HEADING "SPECIAL RISK FACTORS," SHOULD BE READ IN ITS ENTIRETY. This cover page contains certain information for general reference only. It is not a summary of this issue. Investors are advised to read the entire Official Statement to obtain information essential to making an informed investment decision. MATURITY SCHEDULE (See inside cover) The Bonds are being offered when, as, and if issued by the City and received by the Underwriter, subject to the approval as to legality by Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel. Certain legal matters will be passed upon for the Underwriter by Jones Hall, A Professional Law Corporation, San Francisco, California, as its counsel, and for the City by the Office of City Attorney. It is expected that the Bonds in book-entry form will be available for delivery in New York, New York, on or about May 10, The date of this Official Statement is: April 26, 2006

2 MATURITY SCHEDULE $15,590,000 Serial Bonds (Base CUSIP : ) Maturity Principal Interest (September 2) Amount Rate Yield Price CUSIP 2006 $1,345, % 3.750% % TE ,230, TF ,280, TG ,330, TH ,385, TJ ,445, TK ,580, TM ,650, TN , TP , TQ , TR , TS 8 $1,630, % Term Bond due September 2, 2020, Yield: 5.000%, Price: % CUSIP No. TU3 $1,805, % Term Bond due September 2, 2022, Yield: 5.050%, Price: % CUSIP No. TW 9 Copyright 2006, American Bankers Association. CUSIP data herein are provided by Standard & Poor's CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc., and are provided for convenience of reference only. Neither the City nor the Underwriter assumes any responsibility for the accuracy of these CUSIP data.

3 CITY OF SACRAMENTO CITY COUNCIL Heather Fargo, Mayor Ray Tretheway, Councilmember, District 1 Sandy Sheedy, Councilmember, District 2 Steve Cohn, Councilmember, District 3 Robert King Fong, Councilmember, District 4 Lauren Hammond, Councilmember, District 5 Kevin McCarty, Councilmember, District 6 Robbie Waters, Councilmember, District 7 Bonnie J. Pannell, Councilmember, District 8 CITY STAFF Thomas P. Friery, City Treasurer Ray Kerridge, City Manager Eileen M. Teichert, Esq., City Attorney Shirley Concolino, City Clerk Gary Reents, Director of Utilities Bond Counsel Orrick, Herrington & Sutcliffe LLP San Francisco, California Underwriter s Counsel Jones Hall, A Professional Law Corporation San Francisco, California Assessment Engineer Harris & Associates Irvine, California Verification Agent Causey, Demgen & Moore, Inc., Certified Public Accountants, Denver, Colorado Fiscal Agent U.S. Bank National Association San Francisco, California

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5 GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT Use of Official Statement. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement shall not be construed as a contract with the purchasers of the Bonds. No Unauthorized Representations. No dealer, broker, salesperson or other person has been authorized by the City to give any information or to make any representations with respect to the Bonds other than those contained in this Official Statement and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. No Unlawful Offers or Sales. This Official Statement does not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. Estimates and Projections. When used in this Official Statement, in any press release and in any oral statement made with the approval of an authorized officer of the City, the words or phrases will likely result, are expected to, will continue, is anticipated, estimate, project, forecast, expect, intend and similar expressions identify forward looking statements within the meaning of the Private Securities Litigation Reform Act of Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. Involvement of Underwriter. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Information Subject to Change. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, give rise to any implication that there has been no change in the affairs of the City or the District since the date hereof. Summaries. All summaries of provisions of the Fiscal Agent Agreement or other documents referred to in this Official Statement are made subject to the provisions of such documents and do not purport to be complete statements of any or all of such provisions. OVERALLOTMENT OR STABILIZING TRANSACTIONS. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. NO REGISTRATION. THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXCEPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

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7 TABLE OF CONTENTS Page INTRODUCTION 1 THE FINANCING PLAN 4 Refunding Plan 4 Estimated Sources and Uses of Funds 5 THE BONDS 6 Authority For Issuance 6 General Bond Terms 6 Redemption 7 Debt Service Schedule 10 SECURITY FOR THE BONDS 11 Pledge of Reassessments 11 Limited Obligation 11 Covenants Regarding the Collection of Reassessments 12 Covenant to Commence Superior Court Foreclosure 13 Alternative Method of Tax Apportionment (Teeter Plan) 14 Tax-Defaulted Property 14 Priority of Lien 15 Redemption Account 15 Prepayment Account 16 Debt Service Reserve Fund 17 THE DISTRICT 19 Background Regarding Prior Districts 19 Method of Assessment Spread 19 Scheduled Reassessments and Debt Service 20 Property Ownership and Land Uses 21 Page Assessed Value to Burden Ratio 23 Delinquency History 24 Overlapping Bonded Debt 24 Environmental Condition of the District 25 Flood Plain Hazards 25 SPECIAL RISK FACTORS 27 General 27 Collection of the Reassessment 27 Owners Not Obligated to Pay Bonds or Reassessments 28 Bankruptcy and Foreclosure Delays 29 Availability of Funds to Pay Delinquent Reassessment Installments 29 Limited Obligation upon Delinquency 29 Property Values and Property Development 30 Future Overlapping Indebtedness 31 No Acceleration Provision 31 Proposition CONCLUDING INFORMATION 33 Litigation 33 Tax Matters 35 Approval of Legality 37 Underwriting 37 No Rating 37 Continuing Disclosure 37 Verification of Mathematical Computations 38 Professional Fees 38 APPENDIX A - Excerpts from Engineer s Report APPENDIX B - General Information Regarding the City of Sacramento and Sacramento County APPENDIX C - Summary of Certain Provisions of the Fiscal Agent Agreement APPENDIX D - Form of Bond Counsel Opinion APPENDIX E -Form of Issuer Continuing Disclosure Certificate APPENDIX F -DTC and the Book-Entry System

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9 OFFICIAL STATEMENT $19,025,000 CITY OF SACRAMENTO LIMITED OBLIGATION REFUNDING BONDS REASSESSMENT DISTRICT II NO (WILLOWCREEK II A.D. NO and NORTH NATOMAS A.D. NO ) INTRODUCTION This Introduction is not a summary of the Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and attached appendices, and the documents summarized or described in the Official Statement. A full review should be made of the entire Official Statement. The offering of the Bonds to potential investors is made only by means of the entire Official Statement. Capitalized terms used but not defined in this Official Statement have the meanings set forth in the Fiscal Agent Agreement (as defined below). See APPENDIX C. Purpose of Official Statement. The purpose of this Official Statement, which includes the cover page and attached appendices (the "Official Statement"), is to provide certain information concerning the sale and issuance of the limited obligation refunding bonds captioned above (the "Bonds") being issued by the City of Sacramento (the City ). Authority for Issuance. The Bonds are issued under the Refunding Act of 1984 for 1915 Improvement Act Bonds (Division 11.5 of the Streets and Highways Code) (the 1984 Act ), a resolution approving the issuance of the Bonds adopted by the City Council of the City on April 18, 2006 (the "Resolution"), and a Fiscal Agent Agreement dated as of April 1, 2006 (the Fiscal Agent Agreement ) by and between the City and U.S. Bank National Association, as fiscal agent (the Fiscal Agent ). All of the proceedings of the City undertaken to form the City of Sacramento Reassessment District II No (Willowcreek II A.D. No and North Natomas A.D. No ) (the "District") and to levy the reassessments (the Reassessments ) were undertaken under the 1984 Act. See "THE BONDS Authority for Issuance."

10 The District. The City established the District using summary reassessment and refunding proceedings of the City conducted under the authority of the 1984 Act. The District is made up of two existing assessment districts previously established by the City (the Prior Districts ) to finance a variety of public improvements. The Prior Districts are as follows: City of Sacramento North Natomas Assessment District No ( AD No ) City of Sacramento Willowcreek II Assessment District No ( AD No ) The Prior Districts do not overlap, and are generally located in the northwestern portion of the City. The District is not completely developed and contains commercial, industrial and residential uses. The District comprises 1,758 parcels subject to the Reassessments (the Reassessment Parcels ). See THE DISTRICT. Purpose of the Bonds. The proceeds of the Bonds will primarily be used to provide funds to refund on an advance basis the remaining principal amounts of two outstanding bonds (the Prior Bonds ) issued by the City with respect to the Prior Districts, which are captioned as follows: City of Sacramento Limited Obligation Improvement Bonds, North Natomas Assessment District No , issued in the original principal amount of $38,446, City of Sacramento Limited Obligation Improvement Bonds, Willowcreek II Assessment District No , issued in the original principal amount of $14,248, Proceeds of the Bonds will also be used to pay certain costs of issuing the Bonds, and to make a deposit into a debt service reserve fund for the Bonds. See "FINANCING PLAN." Security for the Bonds. The Bonds are issued upon and secured by the unpaid Reassessments levied on parcels within the District. Under the 1984 Act, Reassessment installments of principal and interest sufficient to meet annual debt service on the Bonds are to be included on the regular County of Sacramento (the County ) tax bills sent to owners of property against which there are unpaid Reassessments. The unpaid Reassessments represent fixed liens on the parcels of land with unpaid Reassessments, and failure to pay the Reassessments could, in certain circumstances, result in proceedings to foreclose title to the delinquent property. The Reassessments do not constitute the personal indebtedness of the owners of assessed parcels and no proceedings to collect directly from an owner are permitted. See "SECURITY FOR THE BONDS." Debt Service Reserve Fund. The Fiscal Agent Agreement will establish a Debt Service Reserve Fund with a portion of the proceeds of the Bonds, to be held by the Fiscal Agent. Amounts in the Debt Service Reserve Fund will be transferred to the Bond Fund to the extent of delinquencies in the payment of the Reassessment installments. The Debt Service Reserve Fund will be maintained from available Reassessment payments, in an amount equal to the Reserve Requirement, as defined herein. See "SECURITY FOR THE BONDS Debt Service Reserve Fund. Limited Obligation of the City. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY, THE COUNTY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BONDS. EXCEPT FOR -2-

11 THE REASSESSMENTS, NO OTHER TAXES OR ASSESSMENTS ARE PLEDGED TO THE PAYMENT OF THE BONDS. THE BONDS ARE NOT GENERAL OR SPECIAL OBLIGATIONS OF THE CITY, BUT ARE LIMITED OBLIGATIONS OF THE CITY PAYABLE SOLELY FROM CERTAIN AMOUNTS DEPOSITED BY THE CITY UNDER THE FISCAL AGENT AGREEMENT. Summary of Information. There follow brief descriptions of the Bonds, the District, the Fiscal Agent Agreement, and certain other matters. Such descriptions and the discussions and information do not purport to be comprehensive or definitive, and are qualified in their entirety by references to the actual documents -3-

12 THE FINANCING PLAN Refunding Plan The Bonds are being issued primarily for the purpose of refunding on an advance basis the remaining principal amounts of the Prior Bonds, which are as follows: Prior Bonds Outstanding Principal AD No $17,105,000 AD No ,250,000 Concurrently with the delivery of the Bonds, the City and U.S. Bank National Association (the Escrow Agent) will enter into a refunding escrow agreement (the Refunding Escrow Agreement ) dated as of April 1, Amounts deposited under the Refunding Escrow Agreement will be held in a special fund (the Refunding Escrow ) and invested by the Escrow Agent in the Investment Securities set forth in the Refunding Escrow Agreement (consisting of United States Treasury Securities State and Local Government Series (SLGS)). The principal of and investment earnings on such deposits, plus any available cash to be held uninvested, will be verified by Causey, Demgen & Moore, Inc., Certified Public Accountants, Denver, Colorado (the Verification Agent ) to be sufficient to pay the principal of and interest on the Prior Bonds to and including September 2, 2006, at a prepayment price equal to the principal amount of the Prior Bonds, plus interest accrued to the date of redemption plus a redemption premium on certain of the Prior Bonds. As a result of the deposit and application of funds as provided for in the Refunding Escrow Agreement, assuming the accuracy of the computations used to make those deposits, the obligation to make payments of the principal of, premium, if any, and interest on the Prior Bonds will be defeased. See CONCLUDING INFORMATION Verification of Mathematical Computations. Certain funds on hand with respect to the Prior Bonds will be placed in the Refunding Escrow and will be applied to the payment of the redemption price of the Prior Bonds on September 2, The second installment of the assessments with respect to the Prior Districts for the year on the Sacramento County tax roll, which were to be received by (and were delinquent after) April 10, 2006, will be placed in the Redemption Account for the Bonds and will be applied to the payment of the first installment of debt service on the Bonds due on September 2, Other Uses of Proceeds. Proceeds of the Bonds will also be used to pay certain costs of issuing the Bonds, and to make a deposit into the Debt Service Reserve Fund for the Bonds, as set forth below. See Estimated Sources and Uses of Funds. -4-

13 Estimated Sources and Uses of Funds A summary of the estimated sources and uses of funds associated with the sale of the Bonds follows: ESTIMATED SOURCES AND USES OF FUNDS Estimated Sources of Funds: Principal Amount of Bonds $19,025, Plus: Funds Related to Prior Bonds 13,122, Plus: Net Original Issue Premium Less: Underwriter's Discount (268,971.75) Total $31,881, Estimated Uses of Funds: Transfer to Escrow Agent [1] $29,786, Deposit to Debt Service Reserve Fund [2] 1,902, Deposit to Costs of Issuance Fund [3] 192, Total $31,881, [1] To be deposited in the Refunding Escrow established under the Refunding Escrow Agreement and applied to defease and refund the Prior Bonds. See Refunding Plan above. [2] Equal to the Reserve Requirement with respect to the Bonds as of the date of delivery of the Bonds. [3] To be used for the payment of the costs and expenses incurred in connection with the issuance and sale of Bonds. -5-

14 THE BONDS Authority For Issuance General. The Bonds are issued under the 1984 Act, the Fiscal Agent Agreement and the Resolution. The Bonds are issued upon and primarily secured by the unpaid Reassessments, which are a lien against the parcels within the District against which they have been levied, together with interest thereon. See "SECURITY FOR THE BONDS." Actions Taken by the City Council. In addition, as required by the 1984 Act, the City Council has taken the following actions with respect to establishing the District and authorizing issuance of the Bonds: Resolution of Intention: On April 18, 2006, the City Council adopted Resolution No , declaring its preliminary intention to refund the Prior Bonds and directing the preparation of the Engineer s Report relating to the levy of the Reassessments and issuance of the Bonds under the 1984 Act. Resolution Confirming Reassessments: On April 18, 2006, the City Council adopted Resolution No , approving and confirming the Engineer s Report on the levy of Reassessments and the refunding of the Prior Bonds. Resolution Authorizing the Issuance of the Bonds: On April 18, 2006, the City Council adopted the Resolution (as Resolution No ), authorizing the issuance of the Bonds in the maximum principal amount of $19,130,000. General Bond Terms Denominations and Maturity. The Bonds will be issued in fully registered form without coupons in denominations of $5,000 or any integral multiple of $5,000, so long as no Bond has more than one maturity date. The Bonds will be dated as of their Delivery Date and will mature and be payable on September 2 in the years and in the aggregate principal amounts, and will be subject to and bear interest at the rates set forth, on the inside cover page of this Official Statement. Interest. As long as Cede & Co. is the registered owner of the Bonds, as described below, payments of interest on the Bonds will be made directly to DTC, or its nominee, Cede & Co. Interest on the Bonds will be payable on each Interest Payment Date, which is defined in the Fiscal Agent Agreement as March 2 and September 2 of each year, commencing September 2, 2006, so long as any Bonds remain Outstanding. Interest due on the Bonds will be calculated on the basis of a 360-day year comprised of twelve 30-day months. Interest on the Bonds will be payable from the Interest Payment Date next preceding the date of their authentication unless (i) a Bond is authenticated on or before an Interest Payment Date and after the close of business on the preceding Record Date, in which event it will bear -6-

15 interest from such Interest Payment Date, (ii) a Bond is authenticated on or before the first Record Date, in which event interest will be payable from the Closing Date, or (iii) interest on any Bond is in default as of the date of its authentication, in which event interest will be payable from the date to which interest has been paid in full, payable on each Interest Payment Date. Interest will be paid in lawful money of the United States on each Interest Payment Date to the Persons in whose names the ownership of the Bonds is registered on the Registration Books at the close of business on the immediately preceding Record Date, except as provided below. Interest on any Bond which is not punctually paid or duly provided for on any Interest Payment Date will be payable to the Person in whose name the ownership of such Bond is registered on the Registration Books at the close of business on a special Record Date to be established by the Fiscal Agent for the payment of such defaulted interest to be fixed by the Fiscal Agent, notice of which will be given to such Owner not less than 10 days prior to such special Record Date. Interest will be paid by check of the Fiscal Agent mailed by first class mail, postage prepaid, on each Interest Payment Date to the Bond Owners at their respective addresses shown on the Registration Books as of the close of business on the preceding Record Date or, at the request of any Owner of at least $1,000,000 aggregate principal amount of Bonds, by wire transfer of immediately available funds to an account in the United States specified by such Owner in writing to the Fiscal Agent for that purpose prior to the applicable Record Date. Principal. As long as Cede & Co. is the registered owner of the Bonds, as described below, payments of the principal of and premium, if any, on the Bonds will be made directly to DTC, or its nominee, Cede & Co. The principal of the Bonds will be payable in lawful money of the United States of America upon presentation and surrender thereof upon maturity or earlier redemption at the Office of the Fiscal Agent. Payment of principal of any Bond will be made only upon presentation and surrender of such Bond at the Office of the Fiscal Agent. Book-Entry Only System. The Bonds will be registered in the name of Cede & Co. as nominee of DTC, and will be available to ultimate purchasers under the book-entry system maintained by DTC. See APPENDIX F DTC and the Book-Entry Only System. As long as Cede & Co. is the registered owner of the Bonds, payments of the principal of, premium, if any, and interest on the Bonds will be made directly to DTC, or its nominee, Cede & Co. Disbursements of such payments to DTC's Participants is the responsibility of DTC and disbursements of such payments to the Beneficial Owners is the responsibility of DTC's Participants and Indirect Participants, as more fully described in APPENDIX F. Redemption Optional Redemption. The Bonds or any portion of them in the amount of $5,000 or any integral multiple thereof are subject to optional redemption on any Interest Payment Date; provided that the City will proceed pursuant to Part 11.1 of the Improvement Bond Act of 1915, being Division 10 of the California Streets and Highways Code (the "1915 Act"), in determining those Bonds to be redeemed and the manner of their redemption. -7-

16 The Bonds so called for redemption will be redeemed at the following redemption prices (expressed as a percentage of the principal amount of such Bonds or portions thereof called for redemption), together with accrued interest thereon to the date of redemption: Redemption Redemption Dates Premium September 2, 2006 through March 2, % September 2, 2014 or March 2, September 2, 2015 or March 2, Any Interest Payment Date on or after September 2, % Mandatory Redemption from Prepayment Account. The Bonds, or any portion of them in the amount of $5,000 or any integral multiple thereof, are subject to redemption prior to their respective stated maturity dates, as a whole or in part, on any Interest Payment Date, solely from money in the Prepayment Account, which consists of the proceeds of property owner prepayments of the Reassessment liens, excess amounts, if any, from the Debt Service Reserve Fund, and earnings from the funds and accounts established under the Fiscal Agent Agreement. Until and including March 2, 2014, Bonds redeemed from the Prepayment Account will be redeemed at a redemption price of 103% of the principal amount of the Bonds or portions thereof called for redemption, together with accrued interest thereon to the date of redemption. Beginning September 2, 2014, the prepayment premium will be the same as the prepayment premium set forth in the Fiscal Agent Agreement for optional redemption, as described above. In all cases, the City will proceed pursuant to Part 11.1 of the Improvement Bond Act of 1915 in determining those Bonds to be redeemed and the manner of the redemption thereof. Mandatory Sinking Fund Redemption. The Bonds maturing on September 2, 2020 are subject to mandatory redemption in part by lot on September 2 in each year commencing September 2, 2019 at the principal amount thereof plus accrued interest thereon to the date fixed for redemption in accordance with the following schedule, without premium: Sinking Fund Redemption Date (September 2) Principal Amount 2019 $795, (Maturity) 835,000 The Bonds maturing on September 2, 2022 are subject to mandatory redemption in part by lot on September 2 in each year commencing September 2, 2021 at the principal amount thereof plus accrued interest thereon to the date fixed for redemption in accordance with the following schedule, without premium: Sinking Fund Redemption Date (September 2) Principal Amount 2021 $880, (Maturity) 925,000-8-

17 Notice of Redemption. The Fiscal Agent, on behalf and at the expense of the City, will mail notice of any redemption to the respective Owners of any Bonds designated for redemption, by registered or certified mail or by personal service, at their respective addresses appearing on the Registration Books, and to the Securities Depositories and to one or more Information Services, at least 30 but not more than 60 days prior to the date fixed for redemption. Neither the failure to receive any notice so mailed, nor any defect in such notice, will affect the sufficiency of the proceedings for the redemption of the Bonds or the cessation of accrual of interest thereon from and after the date fixed for redemption. However, while the Bonds are subject to DTC s book-entry system, the Fiscal Agent will be required to give notice of redemption only to DTC as provided in the letter of representations executed by the City and received and accepted by DTC. DTC and the Participants will have sole responsibility for providing any such notice of redemption to the beneficial owners of the Bonds to be redeemed. Any failure of DTC to notify any Participant, or any failure of Participants to notify the beneficial owner of any Bonds to be redeemed, of a notice of redemption or its content or effect will not affect the validity of the notice of redemption, or alter the effect of redemption set forth in the Fiscal Agent Agreement. Selection of Bonds for Redemption. Whenever provision is made in the Fiscal Agent Agreement for the redemption of less than all of the Bonds of any maturity, the Fiscal Agent will select the Bonds to be redeemed, from all such Bonds not previously called for redemption, by lot in any manner which the Fiscal Agent in its sole discretion deems appropriate and fair. For purposes of such selection, all Bonds will be deemed to be comprised of separate $5,000 denominations and such separate denominations will be treated as separate Bonds which may be separately redeemed. Partial Redemption. Upon surrender of any Bonds redeemed in part only, the City will execute and the Fiscal Agent will authenticate and deliver to the Owner thereof, at the expense of the City, a new Bond or Bonds of authorized denominations equal in aggregate principal amount representing the unredeemed portion of the Bonds surrendered. Effect of Redemption. If notice of redemption is mailed as set forth in the Fiscal Agent Agreement, and moneys for the redemption (including the interest to the applicable date fixed for redemption and including any applicable premium), are set aside in the Redemption Account or Prepayment Account, as applicable, the Bonds will become due and payable on the redemption date, and, upon presentation and surrender thereof at the Office of the Fiscal Agent, those Bonds will be paid at the Redemption Price thereof, together with interest accrued and unpaid to the redemption date. If, on the date fixed for redemption, moneys for the redemption of all the Bonds to be redeemed, together with interest to the redemption date, are held by the Fiscal Agent so as to be available therefor on such date, and, if notice of redemption thereof has been mailed as described in the Fiscal Agent Agreement and not canceled, then, from and after the redemption date, interest on those Bonds will cease to accrue and become payable. All moneys held by or on behalf of the Fiscal Agent for the redemption of Bonds will be held in trust for the account of the Owners of the Bonds so to be redeemed. -9-

18 Debt Service Schedule The following table presents the debt service schedule for the Bonds, assuming no optional redemptions are made: Year Ending September 2 Principal Interest Annual Total 2006 $1,345,000 $267, $1,612, ,230, , ,037, ,280, , ,040, ,330, , ,039, ,385, , ,037, ,445, , ,037, ,510, , ,037, ,580, , ,039, ,650, , ,036, , , , , , , , , , , , , , , , , , , ,000 90, , ,000 46, , Total: $19,025,000 $6,641, $25,666,

19 SECURITY FOR THE BONDS This section describes certain provisions of the Fiscal Agent Agreement related to security and sources of payment for the Bonds. See APPENDIX C Summary of Certain Provisions of the Fiscal Agent Agreement for a summary of other provisions the Fiscal Agent Agreement. Pledge of Reassessments Pledge of Reassessments and Funds. Under the 1984 Act and the Fiscal Agent Agreement, and subject only to the provisions of the Fiscal Agent Agreement permitting the application thereof for the purposes and on the terms and conditions set forth therein, all of the Reassessments and any other amounts (including proceeds of the sale of the Bonds) held in any fund or account established under the Fiscal Agent Agreement (except the Administrative Account and the Rebate Fund) are pledged by the City to secure the payment of the principal of and interest on the Bonds in accordance with their terms, with the provisions of the Fiscal Agent Agreement, and with the 1984 Act. This pledge constitutes a first lien on and security interest in such assets. Definition of Reassessments. The Fiscal Agent Agreement defines Reassessments as the unpaid Reassessments levied within the District by the City Council under the proceedings taken pursuant to the Resolution Confirming Reassessments. Annual Collection of Reassessment Installments. The County assessor will annually make a record in its office showing the several installments of principal and interest on the Reassessments that are to be collected for the forthcoming year during the term of the Bonds; and an annual installment of such Reassessments will be payable and will be collected in each year corresponding in amount to the amount of Bonds unpaid and maturing or becoming subject to mandatory sinking fund redemption in such year, which amount will be sufficient to pay the Bonds as they become due or as they become subject to mandatory sinking fund redemption in such year. An annual installment of interest on such unpaid Reassessments will be payable and will be collected in each year corresponding in amount to the amount of interest which will accrue on the Bonds outstanding for such year, which amount will be sufficient to pay the interest that will become due on the next succeeding March 2 and September 2. Limited Obligation All obligations of the City under the Fiscal Agent Agreement and the Bonds are not general obligations of the City, but are limited obligations, payable solely from the Reassessments and the other assets pledged therefor under the Fiscal Agent Agreement. Neither the faith and credit nor the taxing power of the City nor of the State or any political subdivision thereof is pledged to the payment of the Bonds. The Bonds are Limited Obligation Refunding Bonds and are payable solely from and secured solely by the Reassessments and the other assets pledged under the Fiscal Agent Agreement. Notwithstanding any other provision of the Fiscal Agent Agreement, the City is not legally or morally obligated to advance available funds from the City treasury to cure any deficiency in the Redemption Account. -11-

20 Covenants Regarding the Collection of Reassessments Under the Fiscal Agent Agreement, so long as any of the Bonds are Outstanding and unpaid, the City makes certain covenants with the Bondowners, which are necessary and desirable to secure the Bonds and tend to make them more marketable; provided, however, that these covenants do not require the City to expend any funds or moneys other than the Reassessments and other amounts deposited to the Redemption Account. These covenants include, among others, the following: Collection and Application of Reassessments. The City will comply with all requirements of the 1984 Act, the Improvement Bond Act of 1915, the Resolution of Issuance and the Fiscal Agent Agreement to assure the timely collection of the Reassessments, including, without limitation, the enforcement of delinquent Reassessments. Any funds received by the City in and for the District, including, but not limited to, collections of Reassessments upon the secured tax rolls, collections of delinquent Reassessments and penalties, through foreclosure proceedings or otherwise, and the prepayment of all or a portion of the Reassessments, will be transmitted directly to the Fiscal Agent on or prior to each Interest Payment Date, without deduction (except as provided in the Fiscal Agent Agreement), to be applied to the payment of the principal of and interest on the Bonds. Tax Roll Collection. The Reassessments as set forth on the List of Unpaid Reassessments on file with the City Treasurer, together with accrued interest (computed at the rate specified in the Bonds and which will begin to accrue from the Dated Date), will be payable in annual installments corresponding in an amount equal to the amount of Bonds unpaid and to accrue in such year, which amount will be sufficient to pay the Bonds as the same become due, and an annual installment of interest on the unpaid Reassessments will be payable and collected in each year corresponding in an amount equal to the amount of interest which will accrue on the Bonds outstanding for such year. Each annual installment will be payable in each year, preceding the date of maturity of each of the several maturities of Bonds issued, sufficient to pay the Bonds when due, together with accrued interest. All sums received from the collection of the Reassessments and of the interest and penalties thereon will be placed in the Redemption Account. Any prepayments of Reassessments will be placed in the Prepayment Account. County Auditor Record. The City Treasurer will, before the final date on which the County Treasurer will accept the transmission of the Reassessments for the parcels within the District for inclusion on the next tax roll, prepare or cause to be prepared, and transmit to the County Treasurer, such data as the County Treasurer requires to include the installments of the Reassessments on the next secured tax roll of the City. The City Treasurer is authorized to employ consultants to assist in computing the installments of the Reassessments under the Fiscal Agent Agreement and in reconciling Reassessments billed to amounts received. Manner of Collection. The Reassessments will be payable and will be collected in the same manner and at the same time and in the same installments as the general taxes on real property are payable, and have the same priority, become delinquent at the same times and in the same proportionate amounts and bear the same proportionate penalties and interest after delinquency as do the general taxes on real property. -12-

21 Administrative Costs. In addition to any amounts authorized pursuant to Section 8682 of the Improvement Bond Act of 1915 to be included with the annual amounts of installments, the City, pursuant to Section of the Improvement Bond Act of 1915, may cause to be entered on the assessment roll on which taxes will next become due, opposite each lot or parcel of land within the District in the manner set forth in Section 8682, each lot s pro rata share of the estimated annual expenses of the City in connection with its administrative duties for the Bonds, including, but not limited to, the costs of registration, authentication, transfer and compliance with the provisions of the Fiscal Agent Agreement. No Required Advances from Available Funds. The City will not be required to advance available funds of the City to cure any deficiency which may occur in the Redemption Account or the Bond Fund. Punctual Payment. The City will punctually pay or cause to be paid the principal, premium (if any) and interest to become due in respect of all the Bonds, in strict conformity with the terms of the Bonds and of the Fiscal Agent Agreement, according to the true intent and meaning thereof, but only out of Reassessments and other assets pledged for such payment as provided in the Fiscal Agent Agreement and received by the City or the Fiscal Agent. Covenant to Commence Superior Court Foreclosure Conditions to Commencement of Foreclosure Actions. Under the Fiscal Agent Agreement, the City will make the following covenants for the benefit of the Owners of the Bonds: (a) The City Treasurer will annually, no later than September 1 of each year commencing September 1, 2007, review the records of the County of Sacramento to determine if any delinquencies exist in the payment of Reassessments or installments thereof. The City will covenant with the owners of the Refunding Bonds that, except as described in subsection (b) below, if any Reassessment installment (including any interest) is not paid when due, it will order and cause to be commenced not later than December 1 of the fiscal year immediately following the fiscal year in which such delinquency occurred, and thereafter diligently prosecute, judicial foreclosure proceedings upon such delinquent Reassessment installment and interest. Foreclosure proceedings will be commenced and prosecuted without regard to available surplus funds of the City. (b) The City will not be required to commence or prosecute a foreclosure action as described in subsection (a) above with respect to any parcel so long as: (1) the City, in its sole discretion, advances funds to the Redemption Account sufficient in both time and amount to pay when due scheduled principal of and interest on the Refunding Bonds, and no amounts have been withdrawn (and not reimbursed) from the Debt Service Reserve Fund; or (2) the delinquent amount on such parcel (including penalties, interest and costs) is less than $5,000 and the cumulative delinquencies (exclusive of penalties, interest and costs) in the District are less than 3% of the total levy of Reassessment installments for the immediately preceding Fiscal Year. Possibility of Foreclosure Delays. No assurances can be given that any real property subject to a judicial foreclosure sale will be sold or, if sold, that the proceeds of sale will be sufficient to pay any delinquent Reassessment installment. If court foreclosure proceedings are -13-

22 necessary, there may be a delay in payments to Owners of the Bonds pending prosecution of the foreclosure proceedings and receipt by the City of the proceeds of the foreclosure sale. It is also possible that no bid for the purchase of the applicable property would be received at the foreclosure sale. See SPECIAL RISK FACTORS Foreclosure and Sale Proceedings. Alternative Method of Tax Apportionment (Teeter Plan) Teeter Plan. In June 1993, the Board of Supervisors of the County approved the implementation of the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the Teeter Plan ), as provided for in Section 4701 et seq. of the California Revenue and Taxation Code. Under the Teeter Plan, the County apportions secured property taxes on an accrual basis (irrespective of actual collections) to local political subdivisions for which the County acts as the tax-levying or tax-collecting agency. The Teeter plan was effective for Fiscal Year commencing July 1, 1993, and pursuant to the Teeter Plan the County purchased all delinquent receivables (comprising delinquent taxes, penalties, and interest) that had accrued as of June 30, 1993, from local taxing entities and selected special assessment districts and community facilities districts. Under the Teeter Plan, the County distributes tax collections on a cash basis to taxing entities during the fiscal year and at year-end distributes 100% of any taxes delinquent as of June 30th to the respective taxing entities and those special assessment districts and community facilities districts (and individual parcels within each district) that the County determines are eligible to participate in the Teeter Plan. The County may make such eligibility determinations on an annual basis, and may exclude a district or an individual parcel that had previously been included in the plan. The County has the discretion to determine on a case-by-case basis which delinquent assessments will be paid through the Teeter Plan. Certain Risks Associated with Teeter Plan. The current practice of the County under the Teeter Plan is to pay the City 100% of the gross assessments payable annually to the City and to retain any penalties or delinquencies collected to offset such gross payment. There can be no assurances that the County will continue this practice in the future, or that the County will not discontinue the Teeter Plan or remove the City or the Reassessments from the Teeter Plan in the future. If the County determines that delinquent Reassessments are not eligible for the Teeter Plan, the City retains the authority to collect such delinquencies by way of informal collection efforts and judicial foreclosure actions. Tax-Defaulted Property General. If foreclosure is deemed necessary, property securing delinquent Reassessment installments that is not sold under the judicial foreclosure proceedings described above may be sold, subject to redemption by the property owner, in the same manner and to the same extent as real property sold for nonpayment of general County property taxes. On or before June 30 of the year in which such delinquency occurs, the property becomes tax-defaulted. This initiates a five-year period during which the property owner may redeem the property. At the end of the five-year period the property becomes subject to sale by the County Tax Collector. Except in certain circumstances, as provided in the 1915 Act, the purchaser at any such sale takes such property subject to all unpaid assessments, interest and penalties, costs, fees and other charges -14-

23 which are not satisfied by application of the sales proceeds and subject to all public improvement assessments which may have priority. Delinquency Resulting in Default on Bonds. The 1915 Act sets forth the procedures to be followed by the City in the event of deficiencies in the Redemption Account. These provisions include Part 12 of Division 10 (beginning with Section 8770) of the 1915 Act, which generally specify the procedures to be followed and order of priority in making payments on bonds when due. There is no assurance that funds will be available in the Debt Service Reserve Fund for this purpose and if, during the period of delinquency, there are insufficient funds in the Debt Service Reserve Fund, a delay may occur in payments to the Bondowners or there may be insufficient funds to make such payments. If there are additional delinquencies after exhaustion of funds in the Debt Service Reserve Fund, the City has no direct or contingent liability to transfer into the Redemption Account the amount of delinquency out of any other available monies of the City. Priority of Lien Under Section 9539 of the 1984 Act, the lien of the Reassessments is subordinate to any fixed special assessment liens imposed upon the parcels in the District before the liens securing the Prior Districts were imposed, but has priority over all private liens and over all fixed special assessment liens which were created against the parcels in the District after the liens securing the Prior Districts were imposed. This lien is co-equal to and independent of the lien for general property taxes and special taxes, including, without limitation, special taxes levied under the Mello-Roos Community Facilities Act of 1982 (being Chapter 2.5, Part 1, Division 2, Title 5 of the Government Code of the State of California), whenever created against the property. See THE DISTRICT for a description of overlapping liens affecting the property in the District. Redemption Account Establishment. Under the Fiscal Agent Agreement, the Redempton Account is established as a separate account to be held by the City Treasurer. Except as otherwise provided in the Fiscal Agent Agreement, the City Treasurer will deposit in the Redemption Account all Reassessments received from the County of Sacramento or any other source, including any prepayments thereof and penalties thereon, and any other amounts required to be deposited therein by the Fiscal Agent Agreement or the 1984 Act. Transfers. On or before each Interest Payment Date, the City Treasurer will withdraw from the Redemption Account and transfer to the Fiscal Agent the amount necessary for payment to the Owners of the Bonds of the principal, if any, and interest then due and payable on the Bonds, and the Fiscal Agent will deposit such amounts in the Bond Fund (as described below). Bond Fund. Under the Fiscal Agent Agreement, the Fiscal Agent will establish and maintain the Bond Fund. On each Interest Payment Date the Fiscal Agent will withdraw from the Bond Fund the amount necessary to pay interest and principal on the Bonds due on such Interest Payment Date, and will make those payments. If amounts in the Bond Fund are insufficient for this purpose, the Fiscal Agent will withdraw from the Debt Service Reserve Fund the amount of such insufficiency, and will transfer any amounts so withdrawn to the Bond Fund to be applied to the payment of the Bonds. If, after the -15-

24 foregoing transfer, there are insufficient funds in the Bond Fund to pay the principal due, if any, and interest on the Bonds, the Fiscal Agent will apply the available funds (i) first to the payment of interest on the Bonds, (ii) then to the payment of principal of the Bonds on a pro-rata basis. Prepayment Account Establishment. Under the Fiscal Agent Agreement, the Fiscal Agent will establish and maintain a special account within the Bond Fund designated the Prepayment Account. A property owner may prepay the reassessment and remove the lien of the same from his or her property by paying to the City the sum of the following amounts: (a) the amount of any delinquent installments of principal and interest, together with penalties accrued to the date of prepayment; (b) the unpaid, non-delinquent principal of the reassessment, including principal posted to the tax roll for the current fiscal year but not yet paid; (c) an allowance for redemption premium, calculated by multiplying the amount of the unmatured principal (exclusive of principal due during the fiscal year of prepayment if the prepayment is on the scheduled principal payment date) by the redemption premium; (d) a reasonable fee, to be fixed by the City, for the cost of administering the prepayment and advance redemption of Bonds (the amount of such will not be transferred to the Fiscal Agent); (e) interest accrued to the next Interest Payment Date which is not less than 90 days after the date of prepayment; and (f) less a credit for the Debt Service Reserve Fund equal to the transfer therefrom provided for in the Fiscal Agent Agreement. Upon receiving any prepayment of a reassessment, the City Treasurer will transfer to the Fiscal Agent for deposit in the Prepayment Account an amount of the prepayment as follows: (a) delinquent principal, interest and penalties will be deposited in the Bond Fund unless the Debt Service Reserve Fund has been depleted on account of the delinquencies, in which case the delinquent amounts and penalties will be deposited in the Debt Service Reserve Fund; (b) the installment of principal due in the fiscal year of prepayment will be deposited in the Bond Fund; (c) interest accrued to the next Interest Payment Date will be deposited in the Bond Fund; and (d) the balance of such prepayment will be retained in the Prepayment Account to be used to advance the maturity of Bonds to the next redemption date as provided in Part 11.1 of the Improvement Bond Act of

25 Amounts in the Prepayment Account will be disbursed therefrom for the payment of the Redemption Price of Bonds redeemed through mandatory prepayment redemption under the Fiscal Agent Agreement, as described above. See THE BONDS Redemption. Debt Service Reserve Fund Establishment. The Fiscal Agent will establish, maintain and hold in trust a special fund designated the Debt Service Reserve Fund. The City will cause the Debt Service Reserve Fund to be administered in accordance with Part 16 of the Improvement Bond Act of 1915; provided that proceeds from redemption or sale of properties, with respect to which payment of delinquent Reassessments and interest thereon was made from the Debt Service Reserve Fund, will be credited to the Debt Service Reserve Fund. Transfers. Except as otherwise provided in the Fiscal Agent Agreement, all amounts deposited in the Debt Service Reserve Fund will be used and withdrawn by the Fiscal Agent solely for the purpose of making transfers to the Bond Fund in the event of any deficiency at any time in the Bond Fund of the amount then required for payment of the principal of and interest and premium (if any) on the Bonds or, in accordance with the provisions of the Fiscal Agent Agreement, for the purpose of redeeming Bonds. If the amount on deposit in the Debt Service Reserve Fund falls below the Reserve Requirement (defined below) (as adjusted in accordance with the Fiscal Agent Agreement), earnings on amounts in the Debt Service Reserve Fund and any excess amounts in the Redemption Account or the Bond Fund related to interest earnings or collections of delinquent reassessment installments after payment of principal and interest due on the Bonds will be deposited in the Debt Service Reserve Fund until the amount in such fund equals the Reserve Requirement. Transfers will be made from the Debt Service Reserve Fund to the Bond Fund in the event of a deficiency in the Bond Fund, in accordance with the Fiscal Agent Agreement. Reserve Requirement. The Fiscal Agent Agreement defines the Reserve Requirement, as of any date of calculation, as the least of (a) 10% of the original principal amount of the Bonds, or (b) the maximum principal and interest payable on the Bonds in the current or any future Bond Year, or (c) 125% of the average amount of principal and interest payable on the Bonds in the current and in all future Bond Years, all as determined by the City under the Internal Revenue Code of 1986 and specified in writing to the Fiscal Agent. All or any portion of the Reserve Requirement may be satisfied by the provision of one or more Reserve Facilities (as defined in the Fiscal Agent Agreement). Under this definition, the Reserve Requirement will be reduced as a result of prepayments of Reassessments and by the retirement of the Bonds associated with the first maturing of the Prior Districts under the Fiscal Agent Agreement. -17-

26 Transfers Upon Termination of Reassessments Relating to AD No When the amount on deposit in the Debt Service Reserve Fund allocable to that proportion of the Bonds maturing on or before September 2, 2014 and secured by the Reassessments on property within the first maturing of the Prior Districts, AD No , is sufficient to retire that portion of the Bonds, whether by advance retirement or otherwise, levy of the principal and interest on the Reassessments on parcels within former AD will be discontinued by the City, and the amount in the Debt Service Reserve Fund allocable to that proportion of the Bonds maturing on or before September 2, 2014 and secured by the Reassessments on property within AD will be transferred by the Fiscal Agent to the Prepayment Account to the extent that such Bonds can be redeemed prior to maturity, and to the Bond Fund to the extent they cannot. If the amounts so transferred exceed the amount required to retire that proportion of the Bonds maturing on or before September 2, 2014 and secured by the Reassessments on property within AD 88-03, the excess will be used in accordance with the 1984 Act and the 1915 Act for the benefit of the reassessed properties within former AD Other Terms Regarding the Debt Service Reserve Fund. See APPENDIX C Summary of Certain provisions of the Fiscal Agent Agreement for a further description of the disposition of amounts on deposit in the Debt Service Reserve Fund. -18-

27 Background Regarding Prior Districts THE DISTRICT The District is made up of the two Prior Districts, which are further described as follows: City of Sacramento North Natomas Assessment District No AD No is located in the northwest portion of the City, in an area commonly known as North Natomas. AD No is generally bounded by Del Paso Raod on the north, Interstate 5 on the west, Interstate 80 on the south and the City limits on the east. City of Sacramento Willowcreek II Assessment District No AD No is located within the South Natomas Community Plan Area just west of the Natomas Main Drainage Canal, south of Interstate 80 and north of the Garden Highway. AD No includes In total, the District contains 1,758 Reassessment Parcels. Approximately 90.95% of the Reassessment Parcels are currently developed. The District contains industrial, commercial and residential uses. A diagram of the District is included in the excerpts from the Engineer s Report attached as APPENDIX A. Method of Assessment Spread The method of assessment apportionment contained in the Engineer s Report apportioned the Reassessments in exact proportion to the remaining principal amounts of the original assessments on the various parcels in each Prior District, which resulted in a uniform reduction, within each Prior District, in the amount assessed. A detailed description of the method of assessment spread is contained in the excerpts from the Engineer s Report attached as APPENDIX A. A full copy of the Engineer s Report is available upon request to the City Treasurer s office. -19-

28 Scheduled Reassessments and Debt Service. The following table sets forth the scheduled annual Reassessments that will be levied within the District, and the scheduled annual debt service on the Bonds. Under the Fiscal Agent Agreement, when the amount on deposit in the Debt Service Reserve Fund allocable to that proportion of the Bonds maturing on or before September 2, 2014 and secured by the Reassessments on property within AD No (which is the first maturing of the Prior Districts) is sufficient to retire that portion of the Bonds, whether by advance retirement or otherwise, levy of the principal and interest on the Reassessments on parcels within former AD will be discontinued by the City. See SECURITY FOR THE BONDS Debt Service Reserve Fund. The table below shows the projected decline in the collection of annual Reassessments after September 2, 2014, when the Reassessments corresponding to the prior AD No are no longer collected. Reassessments Prior District AD No Table 1 Reassessment Levy and Debt Service Reassessments Prior District AD No Year Ending September 2 Reassessments Total Scheduled Debt Service 2006 [1] N/A N/A N/A N/A 2007 $1,068, $969, $2,037, $2,037, ,069, , ,040, ,040, ,067, , ,039, ,039, ,067, , ,037, ,037, ,070, , ,037, ,037, ,069, , ,037, ,037, ,067, , ,039, ,039, ,067, , ,036, ,036, , , , , , , , , , , , , , , , , , , , , , , , , Total: [2] $8,547, $15,506, $24,054, $24,054, [1] Debt service on the Bonds due on September 2, 2006, which is equal to $1,612,014.22, will be funded from the second installment of the assessments with respect to the Prior Districts for the year on the Sacramento County tax roll, which were to be received by (and were delinquent after) April 10, See THE FINANCING PLAN Refunding Plan. [2] Excludes the debt service on the Bonds due on September 2, 2006, which will be funded from the second installment of the assessments with respect to the Prior Districts for the year. -20-

29 Property Ownership and Land Uses Ownership. The property in the District consists of 1,758 Reassessment Parcels that are owned by approximately 1,545 different property owners. The table below sets forth the top 10 property owners in the District based on outstanding Reassessment amount. Number of Parcels Table 2 Top 10 Assessees Land Use Classification Value to Lien Ratio Property Owner Prior District Assessed Value [1] Reassessment Amount % of Total Overlapping Liens [2] Beazer Homes Holdings Corp Industrial [3] $28,050,000 $2,398, % $3, :1 Alleghany Properties Inc Industrial 10,521,591 $1,817, % 1,957, :1 North Market Center LP Industrial 4,348, , % 5, :1 Park El Camino Natomas LLC Commercial 6,787, , % 2, :1 Tim Lewis Communities Residential 3,910, , % 2, :1 Camino Station Commercial 1,587, , % :1 Natomas Unified School District Both 4 School 0 535, % 1,628 N/A Acacia CR Fund 10 A LLC Residential 1,707, , % 352, :1 Raley's Industrial 21,075, , % 250, :1 Gary & Efren R Cota Ltd Multi-family 2,883, , % :1 Total Top 10: $80,871,802 $8,832, $2,577, :1 Total Reassessment District $19,025, [1] Based on County assessed values for Fiscal Year [2] Represents the combined lien of overlapping bonded assessment districts and community facilities districts. See Overlapping Bonded Debt below. [3] These parcels are currently intended for development as residential subdivisions. See Largest Land Developers below. Source: Harris & Associates. Largest Land Developers. The two largest land developers in the District are Beazer Homes Holdings Corp. and Alleghany Properties Inc., which are briefly described below. Beazer Homes Holdings Corp. ( Beazer Homes ) is a Delaware corporation and a subsidiary of Beazer Homes USA, a national homebuilder headquartered in Atlanta, Georgia ( Beazer ). Beazer and its affiliates currently build in over 40 markets in the Southeast, Mid-Atlantic, Midwest, West and Central United States. Beazer is publicly traded on the New York Stock Exchange under the symbol BZH. Financial information regarding Beazer is included in documents filed with the Securities and Exchange Commission. Additional information regarding Beazer can be found on the Internet at This Internet address is included for reference only, and the information on this Internet site is not a part of this Official Statement and is not incorporated by reference into this Official Statement. Beazer Homes currently has two subdivision projects within the District, River Oaks and Natomas Field. Both subdivisions are in the initial phases of development. The River Oaks subdivision contains approximately 80.3 acres in the portion of the District encompassed by the former AD No This subdivision s Tentative Map has been approved and is anticipated to consist of 642 single-family units. River Oaks is scheduled to begin construction in September 2006 and to be completed between July and December

30 The Natomas Field subdivision contains approximately 99 acres in the portion of the District encompassed by the former AD No It is anticipated that this area will include approximately 707 single-family units and approximately 200 multi-family units, as well as approximately 2.3 acres of property zoned for Community Commercial development. The Tentative Map has been approved and building is estimated to begin in August 2006 and to be completed between February and August Alleghany Properties Inc. ( Alleghany ) is a subsidiary of Alleghany Corporation, whose stock is listed for trading on the New York Stock Exchange under the symbol Y. Financial information regarding Alleghany Corporation is included in documents filed with the Securities and Exchange Commission. Additional information regarding Alleghany Corporation can be found on the Internet at This internet address is included for reference only, and the information on this internet site is not a part of this Official Statement and is not incorporated by reference into this Official Statement. Alleghany and its affiliates have active development operations in the California cities of Sacramento, Rocklin and Folsom. The property in the District owned by Alleghany consists of approximately 194 net acres known as Natomas Crossing, which is currently zoned for employment center, highway commercial, convenience commercial and medium density residential uses. All of the property has been graded, and Alleghany reports that HCP fees have been paid. Alleghany Properties LLC currently intends to sell a portion of its property to one or more builders, and to retain the remaining property for development as commercial property, but no contracts for sale have been entered into as of the date of this Official Statement. Land Use. The following table summarizes the land uses in the District. Property Type Developed Property Reassessment [1] Percent Table 3 Land Use Summary Undeveloped Property Reassessment [2] Percent Total Reassessments Percent of Total Commercial/Office $842, % $3,177, % $4,019, % Industrial 530, ,654, ,185, Public School 542, , Utility 7, , Multi-Family 565, , , Single Family 6,917, ,437, ,354, Total $9,405, % $9,619, % $19,025, % [1] Represents Reassessments on property currently with an assessed value for structures on the County Assessor s property tax rolls. [2] Represents Reassessments on property currently without an assessed value for structures on the County Assessor s property tax rolls. Source: Harris & Associates. -22-

31 Assessed Value to Burden Ratio General Information Regarding Value-to-Lien Ratios. The value-to-lien ratio on bonds secured by assessments will generally vary over the life of such bonds as a result of changes in the value of the property which is security for the Reassessments and the principal amount of the bonds. In comparing the aggregate assessed value of the real property within the District and the principal amount of the Bonds, it should be noted that only real property upon which there is a delinquent Reassessment can be foreclosed. In any event, individual parcels may be foreclosed upon to pay delinquent installments of the reassessments levied against such parcels. The principal amount of the Bonds is not allocated pro-rata among the parcels within the District; rather, the total Reassessment for the District has been allocated among the parcels within the District according to the method of reassessment apportionment shown in the Engineer s Report. The value to lien ratio includes the liens of special taxes or other assessments affecting property in the District. See SECURITY FOR THE BONDS Priority of Lien. Economic and other factors beyond the property owners' control, such as economic recession, deflation of land values, financial difficulty or bankruptcy by one or more property owners (or anyone who claims an interest in such property), or the complete or partial destruction of taxable property caused by, among other possibilities, earthquake, flood, fire or other natural disaster, could cause a reduction in the assessed value within the District. See SPECIAL RISK FACTORS Environmental Conditions that Could Affect Future Parcel Values. Value to Burden Ranges. The table below shows the projected value to burden ratio ranges for the Reassessment Parcels in the District, based on the assessed values maintained by the County Assessor for Fiscal Year and the lien represented by the Reassessments and overlapping bonded liens. No assurance can be given that the amounts shown in this table will conform to those ultimately realized in the event of a foreclosure action following delinquency in the payment of the Reassessments. Table 4 Value-to-Lien Ranges Other Assessment and CFD Debt [1] Total Bonded Debt Average Value to Lien Ratio Value/Lien Category Total Reassessment Percent of Total Total Parcel Value Less than 1:1 $918, % $141, $1,059, $ 86, :1 1:1 to 1.99:1 798, , , ,461, :1 2:1 to 2.99:1 2,072, ,115, ,188, ,665, :1 3:1 to 4.99:1 1,570, , ,968, ,620, :1 5:1 to 9.99:1 2,052, ,464, ,516, ,020, :1 10:1 to 19.99:1 3,095, , ,715, ,864, :1 20:1 and higher 8,517, ,112, ,629, ,932, :1 Total: $19,025, % $8,002, $27,027, $806,651, :1 [1] Represents the combined lien of overlapping bonded assessment districts and community facilities districts. See Overlapping Bonded Debt below. Source: Harris & Associates. -23-

32 Delinquency History The table below shows a summary of delinquencies in the collection of assessments with respect to the Prior Districts for the current Fiscal Year (based on the first installment that was due December 10, 2005) and the past five Fiscal Years. Table 5 Comprehensive Delinquency Report Prior District st Installment [1] Willowcreek Amount Levied $1,128, $1,131, $1,134, $1,131, $946, $567, Amount Delinquent $0.00 $0.00 $1, $2, $3, $15, Percent Delinquent 0.00% 0.00% 0.17% 0.20% 0.38% 2.65% Natomas Amount Levied $2,701, $2,850, $3,025, $3,942, $2,779, $1,388, Amount Delinquent $0.00 $ $ $ $2, $100, Percent Delinquent 0.00% 0.02% 0.01% 0.02% 0.09% 7.21% [1] Reflects amounts received by the County as of February 1, Because the assessments with respect to the Prior Districts are collected by the County and distributed under the Teeter Plan, the County will distribute 100% of any assessments delinquent as of the end of each fiscal year. See SECURITY FOR THE BONDS Alternative Method of Tax Apportionment (Teeter Plan). Source: City of Sacramento and MuniFinancial. Overlapping Bonded Debt Contained within the boundaries of the District are certain overlapping local agencies providing public services and assessing property taxes, assessments, special taxes and other charges on the property in the District. Many of these overlapping liens secure bonded indebtedness, as set forth below. Each of the districts described below affects only a portion of the District, and the outstanding amounts shown below represent only that portion of each lien overlapping the District. The table below excludes the anticipated lien of the Reassessments and the lien of the assessments levied with respect to each of the Prior Districts. -24-

33 The current and estimated direct and overlapping obligations affecting the property in the District are shown in the following table. Table 6 Direct and Overlapping Bonded Debt (as of February 2006) Prior District: AD No [1] Type Outstanding Overlapping Amount City of Sacramento CFD No. 2 (North Natomas Basins 5&6) CFD $4,495,000 $2,288,587 City of Sacramento CFD No (Development Financing Fee) CFD 5,805, ,068 City of Sacramento CFD No (North Natomas Drainage) CFD 35,460,000 5,291,440 SAFCA Capital Assessment District No. 2 [2] ,595,000 99,416 Subtotal AD No $8,042,511 Prior District: AD No [1] SAFCA Capital Assessment District No. 2 [2] 1915 $34,595,000 $74,487 Subtotal AD No $74,487 [1] Excludes the lien of the Prior Bonds and the assessments with respect to AD No and AD No [2] This assessment district was formed by the Sacramento Area Flood Control Agency (SAFCA). Figures shown are estimates of overlapping debt amounts based on limited information available from SAFCA. Source: City of Sacramento and Munifinancial. The City anticipates that projected additional development in the District will require additional public facilities, that could be financed through the issuance of additional bonds secured by community facilities district special taxes or assessment district liens. Environmental Condition of the District No environmentally hazardous or toxic conditions are known to exist in the District as of the date of the Bonds. However, no assurance can be given that hazardous or toxic conditions will not be found to exist, nor that regulations relating to such conditions will not become more stringent, thus requiring remediation by the owners of property within the District. In either or both such events, the value of some or all of the property comprising the Reassessment Parcels in the District could be reduced and the security for the Bonds could be impaired. The valuations presented in this Official Statement do not take into account the possible reduction in marketability or value of any existing or subsequent findings of hazardous or toxic conditions affecting the District. See SPECIAL RISK FACTORS Factors Affecting Parcel Value and Aggregate Values. Flood Plain Hazards The Federal Emergency Management Agency ( FEMA ) has revised the Flood Insurance Rate Maps for the North Natomas area (which encompasses AD No , as well as other land) to reflect the flood control improvement projects that have been completed to remove the area from both the overlaying 100-year flood plain from the Sacramento and American Rivers and the shallow floodplain from the internal channels. Recent hydrological analysis of levees in the Sacramento area has called into question whether portions of the levees are in a condition sufficient to provide adequate protection in the event of a 100-year flood event. -25-

34 An administrative draft report prepared by the Sacramento Area Flood Control Agency ( SAFCA ) and presented to the SAFCA board in February 2006 provided preliminary data indicating that approximately 20 of the 26 levee miles that provide protection to the North Natomas basin do not meet current underseepage and erosion criteria. A preliminary estimate of the cost of necessary repairs exceeded $250 million. The cost of such repairs could be assessed against property in the North Natomas area, which could have the effect of increasing the overlapping debt burden on property within the District. This administrative draft report is still being reviewed by the Army Corps of Engineers. Subject to the Corps concurrence with the report s findings, failure to correct the condition of the levees could cause FEMA to remap areas within North Natomas, including property within the District, to be within a 100-year floodplain, which could have the effect, among others, of causing a significant increase in the cost of flood insurance to homeowners. In addition, the City or the State of California Board of Reclamation could be compelled to impose restrictions on planned property development within the North Natomas area that could have an adverse impact on property values within the District. Should there be a levee failure allowing flooding within the District, there could be damage to property within the District which could have an adverse impact on the property values within the District. -26-

35 SPECIAL RISK FACTORS The following information should be considered by prospective investors in evaluating the Bonds. However, the following does not purport to be an exhaustive listing of risks and other considerations which may be relevant to investing in the Bonds. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such risks. General Under the 1913 Act, Reassessment installments, from which funds for the payment of annual installments of principal of and interest on the Bonds are derived, will be billed to properties against which there are unpaid Reassessments on the regular property tax bills sent to owners of such properties. Such Reassessment installments are due and payable, and bear the same penalties and interest for non-payment, as do regular property tax installments. Reassessment installments billed will be in aggregate amounts equal to debt service on the Bonds. See SECURITY FOR THE BONDS. Payments of Reassessment installments made by the owners of parcels will be applied on a pro-rata basis to all Bonds for which the Reassessment installments are due and could result in a lesser amount being applied to the Bonds if the amount paid by the property owners is less than the total Reassessment installment. It should also be noted that the unwillingness or inability of a property owner to pay regular property tax bills as evidenced by property tax delinquencies may also indicate an unwillingness or inability to make regular property tax payments and Reassessment installment payments in the future. In order to pay debt service on the Bonds, it is necessary that unpaid installments of Reassessments on land within the District are paid in a timely manner. Should the installments not be paid on time, the City has established a Debt Service Reserve Fund from the proceeds of the Bonds to cover delinquencies. The Reassessments are secured by a lien on the parcels within the District and the City has covenanted in certain circumstances to institute foreclosure proceedings to sell parcels with delinquent installments to cover such delinquent installments in order to obtain funds to pay debt service on the Bonds. Failure by owners of the parcels to pay installments of Reassessments when due, depletion of the Debt Service Reserve Fund, delay in foreclosure proceedings, or the inability of the City to sell parcels which have been subject to foreclosure proceedings for amounts sufficient to cover the delinquent installments of Reassessments levied against such parcels may result in the inability of the City to make full or punctual payments of debt service on the Bonds and Owners of the Bonds would therefore be adversely affected. Collection of the Reassessment Collections. In order to pay debt service on the Bonds it is necessary that the Reassessment be paid in a timely manner. Should the installments of Reassessments not be paid on time, funds in the Debt Service Reserve Fund and Redemption Account may be utilized to pay debt service on the Bonds to the extent other funds are not available therefor. -27-

36 The Reassessments are to be collected in the same manner as ordinary ad valorem real property taxes are collected and, except as provided in the special covenant for foreclosure described herein and in the 1913 Act, are to be subject to the same penalties and the same procedure, sale and lien priority in case of delinquency as is provided for ad valorem real property taxes. Under these procedures, if taxes are unpaid for a period of five years or more, the property may be sold to recover amounts due. Covenant to Foreclose. Under the 1915 Act, if any delinquency in the payment of the Reassessment occurs, the City may commence an action in superior court to foreclose the lien therefor within specified time limits. In such an action, the real property subject to the unpaid amount may be sold at judicial foreclosure sale. Such judicial foreclosure action is not mandatory. The City has covenanted to commence foreclosure actions under certain circumstances. See SECURITY FOR THE BONDS Covenant to Commence Foreclosure Proceedings. Amendments to the 1915 Act enacted in 1988 and effective January 1, 1989 provide that under certain circumstances property may be sold upon foreclosure at a lesser Minimum Price or without a Minimum Price. Minimum Price as used in the 1915 Act is the amount equal to the delinquent installments of principal or interest of the Reassessment, together with all interest penalties, costs, fees, charges and other amounts more fully detailed in the 1915 Act. The court may authorize a sale at less than the Minimum Price if the court determines that sale at less than the Minimum Price will not result in an ultimate loss to the Owners of the Bonds, or, under certain circumstances, if holders of 75% or more of the outstanding Bonds consent to such sale. Possibility of Foreclosure Delays. There can be no assurance that foreclosure proceedings will occur in a timely manner so as to avoid a delay in payments of debt service on the Bonds. The City has covenanted for the benefit of the owners of the Bonds that under certain circumstances, the City will commence an action in the superior court to foreclose the lien of the delinquent installments of the Reassessment against each parcel of land in the District for which such installment has been billed but has not been paid, and will diligently prosecute and pursue such foreclosure proceedings to judgment and sale. If sales or foreclosures of property are necessary, there could be a delay in payments to holders of the Bonds pending such sales or the prosecution of foreclosure proceedings and receipt by the City of the proceeds of sale if the other sources of payment for the Bonds, as set forth in the Fiscal Agent Agreement, are depleted. See SECURITY FOR THE BONDS Covenant to Commence Foreclosure Proceedings and SPECIAL RISK FACTORS Bankruptcy and Foreclosure. Owners Not Obligated to Pay Bonds or Reassessments Unpaid Reassessments do not constitute a personal indebtedness of the owners of the parcels within the District and the owners have made no commitment to pay the principal of or interest on the Bonds or to support payment of the Bonds in any manner. There is no assurance that the owners have the ability to pay the Reassessment installments or that, even if they have the ability, they will choose to pay such installments. An owner may elect to not pay the Reassessments when due and cannot be legally compelled to do so. If an owner decides that for any other reason it does not want to retain title to the property, such owner may chose not to pay Reassessments and to allow the property to be foreclosed. Such a choice may be made due to a decrease in the market value of the property, or for other reasons. A foreclosure of the property will result in such owner s interest in the property being transferred to another party. Neither the City nor any Owner of the Bonds will have the ability at any time to seek payment from the owners of property within the District of any Reassessment or -28-

37 any principal or interest due on the Bonds, or the ability to control who becomes a subsequent owner of any property within the District. Bankruptcy and Foreclosure Delays The payment of Reassessments and the ability of the City to foreclose the lien of a delinquent unpaid Reassessment, as discussed in SECURITY FOR THE BONDS - Covenant to Commence Foreclosure Proceedings, may be limited by bankruptcy, insolvency, or other laws generally affecting creditors rights or by State law relating to judicial foreclosure. In addition, the prosecution of a foreclosure could be delayed due to lengthy local court calendars or procedural delays. The various legal opinions to be delivered concurrently with the delivery of the Bonds (including Bond Counsel s approving legal opinion) will be qualified as to the enforceability of the various legal instruments by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally. Although bankruptcy proceedings would not cause the Reassessments to become extinguished, bankruptcy of a property owner, or anyone else who claims an interest in the property, could result in a delay in prosecuting superior court foreclosure proceedings and could result in delinquent Reassessment installments not being paid in full. Such a delay would increase the likelihood of a delay or default in payment of the principal of and interest on the Bonds. Availability of Funds to Pay Delinquent Reassessment Installments The City will establish a Debt Service Reserve Fund to be held by the Fiscal Agent and deposit and maintain therein a portion of Bond proceeds in the amount required under the Fiscal Agent Agreement. There is no assurance that the balance in the Debt Service Reserve Fund will be adequate to pay the debt service on the Bonds in the event of delinquent Reassessment installments. If, during the period of delinquency, there are insufficient funds in the Debt Service Reserve Fund to pay delinquent installments, a delay may occur in payments to the owners of the Bonds. Limited Obligation upon Delinquency As discussed in the section herein entitled SECURITY FOR THE BONDS, if a delinquency occurs in the payment of any Reassessment, the City has the duty to cause the transfer of the amount of such delinquent Reassessment from the Debt Service Reserve Fund into the Redemption Account. If there are additional delinquencies after depletion of the Debt Service Reserve Fund, the City has no direct or contingent liability for payment of the Bonds in the event of default in the payment of a Reassessment installment, but has covenanted to commence judicial foreclosure actions under certain circumstances. See Collection of the Reassessment above. The City s obligation to advance monies to pay Bond debt service in the event of delinquent Reassessment installments will not exceed the balance in the Debt Service Reserve Fund. During the period of delinquency if there are insufficient funds in the Debt Service Reserve Fund, a delay may occur in payments to Owners of the Bonds. -29-

38 Property Values and Property Development The value of the Reassessment Parcels is a critical factor in determining the investment quality of the Bonds. If a property owner defaults in the payment of the Reassessments, the City s only remedy is to foreclose on the delinquent property in an attempt to obtain funds with which to pay the delinquent Reassessments. Land development and land values could be adversely affected by economic and other factors beyond the City s control, such as a general economic downturn, adverse judgments in future litigation that could affect the scope, timing or viability of development, stricter land use regulations, shortages of water, electricity, natural gas or other utilities, destruction of property caused by earthquake, flood or other natural disasters, environmental pollution or contamination, or unfavorable economic conditions. The City has not evaluated development risks. Since these are largely business risks of the type that property owners customarily evaluate individually, and inasmuch as changes in land ownership may well mean changes in the evaluation with respect to any particular parcel, the City is issuing the Bonds without regard to any such evaluation. Thus, the creation of the District and the issuance of the Bonds in no way implies that the City has evaluated these risks or the reasonableness of these risks. On the contrary, the City Council has made no such evaluation and is undertaking the refunding even though these risks may be serious and may ultimately halt or slow the progress of land development and forestall the realization of the estimated values of the Reassessment Parcels in the event of delinquency and foreclosure. The following is a discussion of specific risk factors that could affect the value of property in the District. Natural Disasters. The value of the Reassessment Parcels in the future can be adversely affected by a variety of natural occurrences, particularly those that may affect infrastructure and other public improvements and private improvements on the Reassessment Parcels and the continued habitability and enjoyment of such private improvements. The areas surrounding the District, like those in much of California, may be subject to unpredictable seismic activity. In addition, portions of the District are located within an area that may be subject to flooding risks. See PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT Environmental Conditions and - Flood Plain Hazards. Other natural disasters could include, without limitation, landslides, floods, droughts or wildfires. One or more natural disasters could occur and could result in damage to improvements of varying seriousness. The damage may entail significant repair or replacement costs and repair or replacement may never occur either because of the cost, or because repair or replacement will not facilitate habitability or other use, or because other considerations preclude such repair or replacement. Under any of these circumstances there could be significant delinquencies in the payment of Reassessments, and the value of the Reassessment Parcels may well depreciate or disappear. Hazardous Substances. One of the most serious risks in terms of the potential reduction in the value of the Reassessment Parcels is a claim with regard to a hazardous substance. In general, the owners and operators of Reassessment Parcels may be required by law to remedy conditions of the parcel relating to releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERCLA or the Superfund Act, is the most well-known and widely applicable of these laws, but California laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner or operator is obligated to remedy a -30-

39 hazardous substance condition of property whether or not the owner or operator has anything to do with creating or handling the hazardous substance. The effect, therefore, should any of the Reassessment Parcels be affected by a hazardous substance, is to reduce the marketability and value of the parcel by the costs of remedying the condition, because the purchaser, upon becoming owner, will become obligated to remedy the condition just as is the seller. The assessed values set forth in this Official Statement do not take into account the possible reduction in marketability and value of any of the Reassessment Parcels by reason of the possible liability of the owner or operator for the remedy of a hazardous substance condition of the parcel. Although the City is not aware of any such potential liability, it is possible that other environmental liabilities currently exist and that the City is not aware of them. Further, it is possible that liabilities may arise in the future with respect to any of the Reassessment Parcels resulting from the existence, currently, on the parcel of a substance presently classified as hazardous but that has not been released or the release of which is not presently threatened, or may arise in the future resulting from the existence, currently, on the parcel of a substance not presently classified as hazardous but that may in the future be so classified. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly affect the value of Reassessment Parcels that is realizable upon a delinquency. See PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT Environmental Conditions. Future Overlapping Indebtedness The ability of an owner of land within the District to pay the Reassessments could be affected by the existence of other taxes and assessments imposed upon the property subsequent to the date of issuance of the Bonds. In addition, other public agencies whose boundaries overlap those of the District could, without the consent of the City, and in certain cases without the consent of the owners of the land within the District, impose additional taxes or assessment liens on the property within the District to finance public improvements to be located inside of or outside of the District. The Reassessments and each installment thereof and any interest and penalties thereon constitute a lien against the parcels on which they were imposed until paid. Such lien is subordinate to all fixed special assessment liens previously imposed upon the same property, but has priority over all private liens and over all fixed special assessment liens which may thereafter be created against the property. Such lien is co-equal to and independent of the lien for general taxes and any lien imposed under the Mello-Roos Community Facilities Act of 1982, as amended. No Acceleration Provision The Fiscal Agent Agreement does not contain a provision allowing for the acceleration of the principal of the Bonds in the event of a payment default or other default under the terms of the Bonds or the Fiscal Agent Agreement. -31-

40 Proposition 218 Under the California Constitution, the power of initiative is reserved to the voters for the purpose of enacting statutes and constitutional amendments. Over past years, the voters have exercised this power through the adoption of Proposition 13 and similar measures, including the approval of Proposition 218 in the general election held on November 5, Proposition 218 added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. Proposition 218 states that all taxes imposed by local governments shall be deemed to be either general taxes or special taxes. Special purpose districts, including school districts, have no power to levy general taxes. No local government may impose, extend or increase any general tax unless and until such tax is submitted to the electorate and approved by a majority vote. No local government may impose, extend or increase any special tax unless and until such tax is submitted to the electorate and approved by a two-thirds vote. Proposition 218 also provides that no tax, assessment, fee or charge shall be assessed by any agency upon any parcel of property or upon any person as an incident of property ownership except: (i) the ad valorem property tax imposed pursuant to Article XIII and Article XIIIA of the California Constitution, (ii) any special tax receiving a two-third vote pursuant to the California Constitution, and (iii) assessments, fees and charges for property related services as provided in Proposition 218. Proposition 218 then goes on to add voter requirements for assessments and fees and charges imposed as an incident of property ownership, other than fees and charges for sewer, water, and refuse collection services. Proposition 218 also removed any constitutional or other limitation on the exercise of the initiative power to reduce or repeal any local taxes, assessments, fees and charges. This provision with respect to the initiative power is not limited to taxes imposed on or after November 6, 1996, the effective date of Proposition 218, and could result in retroactive repeal or reduction in any existing taxes, assessments, fees and charges, subject to overriding federal constitutional principles relating to the impairments of contracts. The foregoing discussion of Proposition 218 should not be considered an exhaustive or authoritative treatment of the issues. The City does not expect to be in a position to control the consideration or disposition of these issues and cannot predict the timing or outcome of any judicial or legislative activity in this regard. Interim rulings, final decisions, legislative proposals and legislative enactments may all affect the impact of Proposition 218 on the Bonds as well as the market for the Bonds. Legislative and court calendar delays and other factors may prolong any uncertainty regarding the effects of Proposition 218. The interpretation and application of Proposition 218 may ultimately be determined by the courts with respect to a number of the matters discussed above, and it is not possible at this time to predict with certainly the outcome of such determination. -32-

41 CONCLUDING INFORMATION Litigation Habitat Conservation Plan Litigation. Background. The Natomas Basin is inhabited by species listed as "endangered" or threatened under the federal and state endangered species acts. Because development within the basin will cause the "incidental take of these species, the acts require that the City have incidental-take permits based on an approved habitat conservation plan ( HCP ). The City Council initially adopted an HCP on August 17, 1997 ( 1997 HCP ). The 1997 HCP supported the issuance of incidental-take permits by both the U.S. Fish & Wildlife Service ("FWS") and the California Department of Fish & Game ("DFG"). The 1997 HCP and the permits regulated the incidental take of the Giant Garter Snake and Swainson s Hawk, the principal species it covered. Among other mitigation measures, the 1997 HCP required that one-half acre of preserve land be acquired for each gross acre of land graded for development. In April 1998 and February 1999, several environmental organizations challenged the incidental-take permits in state and federal courts. The federal court invalidated the FWS permit in August 2000, ruling that findings made in support of the permit were not supported by adequate evidence. This ruling became final in January The City prevailed in state court on the challenge to the DFG permit, and the plaintiffs appealed. In May 2001, the City settled both lawsuits, entering into an agreement with the environmental organizations that allowed limited development to proceed while the City, the FWS, and the DFG prepared a revised HCP and conducted NEPA and CEQA review in the form of a combined environmental-impact report and environmental-impact statement (EIR/EIS). The settlement did not prevent the environmental organizations from challenging the validity of the revised HCP or any incidental-take permits based on it. Working with the FWS and DFG, and joined by Sutter County, the City subsequently prepared a revised HCP and an EIR/EIS. The City approved the revised HCP and certified the EIR/EIS on May 13, 2003 ( 2003 HCP ). Like the 1997 HCP, the 2003 HCP requires several mitigation measures, including the acquisition of one-half acre of preserve land for each gross acre of land graded for development. The FWS issued the City a new federal incidental-take permit on June 27, 2003, and the DFG amended the City's existing state permit on July 10, The Pending Litigation in State Court. On June 13, 2003, the Environmental Council of Sacramento and the Friends of the Swainson s Hawk filed a petition in Sacramento County Superior Court challenging the City s actions. They subsequently amended the petition to add the Sierra Club as a petitioner, to name the DFG as a respondent, and to challenge the DFG's approval of the 2003 HCP and amendment of existing incidental-take permits. The petitioners claim that the EIR/EIS is inadequate under CEQA, and they ask that the court suspend all approvals based on the EIR/EIS and order the City to prepare and circulate a new EIR/EIS. Specifically, the petitioners seek a court order suspending all activities that could result in any change or alteration to the physical environment within the Permit Areas of City of Sacramento and Sutter County, except for those permitted and completed under the former 1997 NBHCP prior to the decision of the Federal District Court in NWF v. Babbitt, (August 15, 2000), Civ S DFL JFM, or permitted under the Amendment to Judgment in NWF v. Babbitt, supra, filed May 16, The "Amendment to Judgment" approved the settlement agreement under which limited -33-

42 development has been permitted pending completion of the revised HCP and the new incidentaltake permits. On January 10, 2005, the Superior Court issued a ruling rejecting the petitioners' claims. The court found that the petitioners have not established that approval of the 2003 HCP and the EIR/EIS and amendment of the existing incidental-take permits violated either CEQA or the California Endangered Species Act. The petitioners subsequently appealed, and the appeal is now pending before the Third Appellate District of the California Court of Appeal. Were the petitioners to prevail on appeal, the court could restrict or prohibit further development pending adoption of a revised HCP and DFG's issuance of new incidental-take permits. Litigation in Federal Court. In March 2004, the National Wildlife Federation, the Environmental Council of Sacramento, the Friends of the Swainson s Hawk, the Planning and Conservation League, and the Sierra Club filed a complaint in the United States District Court, Eastern District of California, naming Secretary of the Interior Gale A. Norton as the sole defendant. The plaintiffs sought a declaratory judgment that the FWS's approval of the 2003 HCP and issuance of incidental-take permits violated the federal Endangered Species Act and Administrative Procedures Act. The plaintiffs also requested that the court vacate and set aside FWS s approval of the 2003 HCP and issuance of permits. Among other things, the complaint alleged (1) that the 2003 HCP fails to minimize and mitigate the impacts of any incidental take to the maximum extent practicable, (2) that the record does not support the FWS s finding that adequate funding to implement the mitigation measures is ensured, and (3) that the record does not support the FWS s finding that the take of protected species will not appreciably reduce the likelihood of the species' survival and recovery in the wild. A hearing on the complaint took place on May 6, 2005, and on September 7, 2005, the U.S. District Court issued its ruling rejecting all of the plaintiffs allegations. In so ruling, the court expressly found that the 2003 HCP satisfies the requirements of the Endangered Species Act. Plaintiffs have not appealed this ruling, and the time for filing an appeal has passed. Risks Related to Pending Litigation. As in all cases where development may be halted by litigation, there is the potential risk that land development and land values could be adversely affected, which under certain circumstances could lead to defaults in the payment of the Special Taxes by affected property owners in the Community Facilities District. See SPECIAL RISK FACTORS Property Values and Property Development. No Other Material Litigation. At the time of delivery of the Bonds, the City will certify that the City has not been served with process in, or overtly threatened with, any action, suit, proceeding, inquiry, or investigation, at law or in equity, before or by any court or public board or body, that in any material and adverse way does any of the following: questions the powers of the City Council, or questions the validity of any proceeding taken by the City Council in connection with the formation of the District or the issuance of the Bonds, or could affect the transactions contemplated by the Bond Purchase Agreement were an unfavorable decision, ruling or finding rendered, or -34-

43 Tax Matters could affect the validity or enforceability of the Resolution, the Bonds, the Fiscal Agent Agreement, the Refunding Escrow Agreement, the Issuer Continuing Disclosure Certificate or the Bond Purchase Agreement, or questions in any way (to the knowledge of the City) the exclusion from gross income of the recipients thereof of the interest on the Bonds for federal income tax purposes, or questions in any other way the status of the Bonds under State tax laws or regulations. In the opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel to the City, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the "Code") and is exempt from State of California personal income taxes. Bond Counsel is also of the opinion that such interest is not a specific preference item for purposes of federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expects to deliver an opinion at the time of issuance of the Bonds substantially in the form set forth in APPENDIX D hereto, subject to the matters discussed below. To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes "original issue discount," the accrual of which, to the extent properly allocable to each owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of purchasers who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public. Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ("Premium Bonds") will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of taxexempt interest received, and a purchaser's basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such purchaser. Owners of Premium -35-

44 Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal tax purposes of interest on obligations such as the Bonds. The City made certain representations and has covenanted to comply with certain restrictions designed to ensure that interest on the Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring) after the date of issuance of the Bonds, or any other matters coming to Bond Counsel s attention after the date of issuance of the Bonds, may adversely affect the value of, or the tax status of interest on, the Bonds. Certain requirements and procedures contained or referred to in the Resolution, the Tax Certificate and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Bond Counsel express no opinion as to any Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of bond counsel other than Orrick, Herrington & Sutcliffe LLP. Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a Bondowner's federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Bondowner or the Bondowner's other items of income or deduction. Bond Counsel express no opinion regarding any such other tax consequences. Future legislation, if enacted into law, or clarification of the Code may cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation, or otherwise prevent Bond Owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislation or clarification of the Code may also affect the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisers regarding any pending or proposed federal tax legislation, as to which Bond Counsel expresses no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel s judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service ("IRS") or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the City or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City has covenanted, however, to comply with the requirements of the Code. Bond Counsel s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the City or the Bond Owners regarding the tax-exempt status of the Bonds in the event of an audit examination -36-

45 by the IRS. Under current procedures, parties other than the City and its appointed counsel, including the Bond Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the City legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the City or the Bond Owners to incur significant expense. Approval of Legality The legal opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel, approving the validity of the Bonds, will be made available to purchasers at the time of original delivery and is attached as APPENDIX D. A copy of the legal opinion will be attached to each Bond. Bond Counsel undertakes no responsibility for the accuracy, completeness, or fairness of this Official Statement. Certain matters will be passed upon for the City by the City Attorney of the City of Sacramento, and for the Underwriter by Jones Hall, A Professional Law Corporation, San Francisco, California. Underwriting Stone & Youngberg LLC (the "Underwriter") has agreed to purchase the Bonds (if and when issued) under at a purchase price of $18,759, (consisting of the principal amount of the Bonds ($19,025,000.00), plus a net original issue premium of $3,004.40, less an Underwriter s discount of $268, The purchase contract under which the Underwriter is purchasing the Bonds provides that the Underwriter will purchase all of the Bonds if any are purchased. The obligation of the Underwriter to make such purchase is subject to certain terms and conditions set forth in such contract of purchase. The Underwriter may offer and sell the Bonds to certain dealers and others at prices different from the prices stated on the cover page of this Official Statement. The offering prices may be changed from time to time by the Underwriter. No Rating The City has not made, and does not contemplate making, an application to any rating agency for the assignment of a rating for the Bonds. Continuing Disclosure The City will covenant for the benefit of the holders and beneficial owners of the Bonds to provide certain financial information and operating data relating to the District by not later than February 1 of each year (the Annual Report ), commencing on February 1, 2007, and to provide notices of the occurrence of certain enumerated events, if material. The Annual Reports will be filed with each Nationally Recognized Municipal Securities Information Repository and with the State Repository, if any. The notices of material events will be filed with the Municipal Securities Rulemaking Board. -37-

46 The specific nature of the information to be contained in the Annual Reports or the notices of material events is set forth in APPENDIX E Form of Issuer Continuing Disclosure Certificate." These covenants have been made in order to assist the Underwriter in complying with S.E.C. Rule 15c2-12(b)(5) (the Rule ). The City has never failed to comply in all material respects with its prior continuing disclosure undertakings under the Rule. Verification of Mathematical Computations Upon delivery of the Bonds, the Verification Agent will verify the arithmetical accuracy of certain computations included in the schedules provided by the City relating to: (i) the adequacy of forecasted receipts of principal and interest on the governmental obligations and cash to be held under the Refunding Escrow Agreement; (ii) forecasted payments of principal and interest with respect to the Prior Bonds on and prior to their projected maturity or redemption date; and (iii) yields with respect to the Bonds and on the governmental obligations to be deposited under the Refunding Escrow Agreement upon the delivery of the Bonds. Such verification will be based solely upon information and assumptions supplied to the Verification Agent by the City. The Verification Agent will not make a study or evaluation of the information and assumptions on which such computations are based and, accordingly, will not express an opinion on the data used, the reasonableness of the assumptions or the achievability of the forecasted outcome. Professional Fees The following professionals involved in the offering of the Bonds will receive compensation from the City contingent upon the sale and delivery of the Bonds: Bond Counsel, the Fiscal Agent, and the Underwriter. In addition, Underwriter s Counsel will receive its compensation from the Underwriter contingent upon the sale and delivery of the Bonds. EXECUTION The execution and delivery of this Official Statement has been duly authorized by the City. CITY OF SACRAMENTO By: /s/ Thomas P. Friery Thomas P. Friery, City Treasurer -38-

47 APPENDIX A EXCERPTS FROM ENGINEER S REPORT Attached are portions of the Engineer s Report, a full copy of which is available upon request to the City Treasurer s office.

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49 Reassessment Engineer's Report for Reassessment District II No (Willowcreek II AD No and North Natomas AD No ) Prepared under the provisions of the Refunding Act of 1984 For the City of Sacramento Sacramento County, California Prepared by: March 10, 2006