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Chapter 08 SUPPLEMENT TO OFFICIAL STATEMENT DATED NOVEMBER 4,2014 ENCINITAS PUBLIC FINANCING AUTHORITY 2014 LEASE REVENUE BONDS (PACIFIC VIEW PROPERTY AND MOONLIGHT BEACH LIFEGUARD TOWER) $3,095,000 $10,365,000 Series A Bonds Series B Bonds (Tax-Exempt) (Taxable) Except as expressly supplemented hereby, the Official Statement dated November 4, 2014 has not been amended or supplemented. This Supplement to Official Statement (the "Supplement") supplements the Official Statement dated November 4, 2014 (the "Official Statement") relating to the above-captioned bonds (the "Bonds"). This Supplement provides corrected information about the Bonds. Capitalized terms used herein and not otherwise defined have the meanings given such terms in the Official Statement. CONTINUING DISCLOSURE In addition to the listed incomplete filings of annual disclosure reports, the City has outstanding Assessment District No. 93-1 (Requeza Street/Bracero Road) Limited Obligation Improvement Bonds, Series A and Subordinate Series B. The City has timely filed the annual reports for the Assessment District Bonds, however the City has not included the City's Audited Financial Statements with the annual reports. The City has since posted the audited financial statements of the City as of the date of this Supplement. Dated: November 26, 2014 ENCINITAS PUBLIC FINANCING AUTHORITY By: /S/Tim Nash Treasurer CITY OF ENCINITAS By: /S/Tim Nash Finance Director NEW ISSUE -BOOK ENTRY ONLY RATINGS: S&P:"AA+" See"RATINGS"herein. In the opinion ofBest Best&Krieger LLP,Riverside, California,Bond Counsel,subject,however, to certain qualifications described herein,under existing law, the interest on the Series A Bonds is excluded from gross income for federal income tax purposes, and such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations,although for the purpose of computing the federal alternative minimum tax imposed on certain corporations,such interest is taken into account in determining certain income and earnings Interest payable on the Series B Bonds is subject to all applicable Federal income taxation. Interest on the Series A Bonds and the Series B Bonds is exempt from State of California personal income taxes. See the caption"TAX MATTERS." ENCINITAS PUBLIC FINANCING AUTHORITY 2014 LEASE REVENUE BONDS (PACIFIC VIEW PROPERTY AND MOONLIGHT BEACH LIFEGUARD TOWER) $3,095,000 $10,365,000 Series A Bonds Series B Bonds (Tax-Exempt) (Taxable) Dated: Date of Delivery Due: October 1,as shown on inside cover The 2014 Lease Revenue Bonds,(Pacific View Property and Moonlight Beach Lifeguard Tower)issued as Series A Bonds(Tax- Exempt) (the"Series A Bonds")and as Series B Bonds(Taxable)(the"Series B Bonds,"and together with the Series A Bonds,the "Bonds")of the Encinitas Public Financing Authority(the"Authority")will be issued as fully registered bonds in book-entry form only,initially registered in the name of Cede&Co.,as nominee of The Depository Trust Company("DTC"),New York,New York. Purchasers will not receive certificates representing their interest in the Bonds. Individual purchases will be in principal amounts of$5,000 or in any integral multiple of$5,000. Interest payable on the Bonds will be payable on October 1 and April 1 of each year, commencing April 1,2015,and principal payable on the Bonds will be paid by MUFG Union Bank,N.A.,Los Angeles,California,as trustee for the Bonds(the"Trustee"),to DTC for subsequent disbursement to DTC Participants who will remit such payments to the beneficial owners of the Bonds. The Bonds are being issued by the Authority for the purpose of financing the acquisition of aproperty known as the Pacific View Property,and improving the Moonlight Beach Lifeguard Tower(the"Project"). The Bonds are limited obligations of the Authority payable primarily from and secured by certain revenues(the"Revenues") consisting of certain Lease Payments with respect to the Leased Premises(as described herein)by the City of Encinitas(the"City") pursuant to a Lease Agreement, dated as of November 1, 2014(the"Lease Agreement")between the City and the Authority. The Lease Payments are structured to produce Revenues sufficient to pay principal of and interest on the Bonds when due. The City has covenanted in the Lease Agreement to make all Lease Payments provided for therein,to include all such payments in its annual budgets,and to make the necessary annual appropriations for such Lease Payments. The City's obligation to make Lease Payments is subject to abatement in the event of damage to,destruction or condemnation of,or title defects relating to,the Leased Premises described herein. See"SECURITY FOR THE BONDS"and"RISK FACTORS"herein. The City has the right to incur other obligations payable from its general revenues without the consent of the Owners of the Bonds. The Revenues are to be received by the Authority and deposited pursuant to an Indenture of Trust,dated as of November 1,2014(the "Indenture")between the City and the Trustee. The Bonds are subject to redemption prior to maturity as described herein. See"THE BONDS-Redemption"herein. This cover page contains information for general reference only. It is not a summary of the security or terms of this issue. Investors must read the entire Official Statement,including the section entitled"RISK FACTORS,"for a discussion of special factors which should be considered,in addition to the other matters set forth herein,in considering the investment quality of the Bonds. Capitalized terms used on this cover page and not otherwise defined shall have the meanings set forth herein. THE BONDS ARE LIMITED OBLIGATIONS OF THE AUTHORITY PAYABLE SOLELY FROM REVENUES AND OTHER FUNDS HELD UNDER THE INDENTURE. THE BONDS ARE NOT A DEBT,OBLIGATION OR LIABILITY OF THE CITY,THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS (OTHER THAN THE AUTHORITY), NOR DO THEY CONSTITUTE A PLEDGE OF THE FAITH AND CREDIT OR THE TAXING POWER OF ANY OF THE FOREGOING(INCLUDING THE AUTHORITY AND THE CITY). THE AUTHORITY DOES NOT HAVE ANY TAXING POWER. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. THE CITY'S OBLIGATION TO MAKE LEASE PAYMENTS IS AN OBLIGATION PAYABLE FROM THE CITY'S GENERAL FUND OR ANY OTHER SOURCE OF FUNDS LEGALLY AVAILABLE TO THE CITY TO MAKE LEASE PAYMENTS. THE OBLIGATION OF THE CITY TO MAKE LEASE PAYMENTS DOES NOT CONSTITUTE A DEBT OF THE CITY WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION OR ANY OBLIGATION FOR WHICH THE CITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION,OR FOR WHICH THE CITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. The Bonds are offered,when,as and if issued and received by the Underwriter,subject to the approval of legality by Best Best& Krieger LLP,Riverside,California,Bond Counsel. Certain legal matters will be passed upon for the Authority and the City by the City Attorney and Best Best&Krieger LLP, Disclosure Counsel. Stradling Yocca Carlson&Rauth,a Professional Corporation,Newport Beach,California,will act as Underwriter's Counsel. It is expected that the Bonds,in book-entry form,will be available through the facilities of DTC in New York,New York for delivery on or about November 18,2014. STIFEL Dated: November 4,2014 MATURITY SCHEDULE Series A Bonds $1,175,000 Serial Bonds Maturity Date Principal Interest (October 1) Amount Rate Yield Price CUSIP® 2015 $65,000 2.000% 0.250% 101.518 292521 DR9 2016 65,000 2.000 0.530 102.730 292521 DS7 2017 65,000 2.000 0.820 103.339 292521 DT5 2018 70,000 2.000 1.100 103.399 292521 DU2 2019 70,000 2.000 1.390 102.861 292521 DVO 2020 70,000 3.000 1.710 107.173 292521 DW8 2021 75,000 4.000 2.020 112.638 292521 DX6 2022 75,000 4.000 2.280 112.324 292521 DY4 2023 80,000 4.000 2.450 112.286 292521 DZ1 2024 85,000 2.500 2.600 99.132 292521 EA5 2025 85,000 2.500 2.750 97.663 292521 EB3 2026 90,000 2.750 2.950 98.007 292521 EC1 2027 90,000 3.000 3.120 98.733 292521 ED9 2028 95,000 3.000 3.280 96.897 292521 EE7 2029 95,000 3.125 3.380 97.036 292521 EF4 $530,000 3.500%Term Bond Due October 1, 2034,Yield 3.650%Price 97.890 CUSIP 292521 EG2 $630,000 3.625%Term Bond Due October 1, 2039,Yield 3.860%Price 96.261 CUSIP 292521 EHO $760,000 3.750%Term Bond Due October 1, 2044,Yield 3.960%Price 96.337 CUSIP 292521 EJ6 Series B Bonds $2,175,000 Serial Bonds Maturity Date Principal Interest (October 1) Amount Rate Yield Price CUSIP® 2015 $200,000 0.600% 0.600% 100.000 292521 EK3 2016 200,000 0.900 0.900 100.000 292521 ELI 2017 205,000 1.500 1.500 100.000 292521 EM9 2018 205,000 2.000 2.000 100.000 292521 EN7 2019 210,000 2.400 2.450 99.770 292521 EP2 2020 215,000 2.750 2.850 99.461 292521 EQO 2021 225,000 3.000 3.050 99.690 292521 ER8 2022 230,000 3.250 3.350 99.310 292521 ES6 2023 240,000 3.250 3.470 98.330 292521 ET4 2024 245,000 3.500 3.670 98.599 292521 EU1 $1,390,000 4.125%Term Bond Due October 1, 2029,Yield 4.300%Price 98.087 CUSIP 292521 EV9 $1,735,000 4.750%Term Bond Due October 1, 2034,Yield 4.850%Price 98.728 CUSIP 292521 EW7 $2,215,000 5.000%Term Bond Due October 1, 2039,Yield 5.100%Price 98.593 CUSIP 292521 EX5 $2,850,000 5.000%Term Bond Due October 1, 2044,Yield 5.150%Price 97.719 CUSIP 292521 EY3 ® Copyright 2014. CUSIP Global Services. All rights reserved. CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services(CGS) is managed on behalf of the American Bankers Association by S&P Capital IQ. CUSIP numbers herein are provided by CGS, and are set forth herein for the convenience of reference only. None of the Authority, the City,nor the Underwriter take any responsibility for the selection or accuracy of such numbers set forth herein Y`n a IiWy,Y ., --� � ��"� r � Encinitas Ranch CFD V r Municipal Boundary �mm " Freeways ®� Major Roads as � to g �I 6,A 9 I1 Y { % ?' G y ',&6 �w»�nm»mmmm je PT u ii w Yo a d x➢ ee' II " I u � n A mm fY No„ a as ...... m Miles ,.. 0 1 2 4 n _ / ENCINITAS PUBLIC FINANCING AUTHORITY AUTHORITY BOARD OF DIRECTORS Kristin Gaspar, Chairperson Tony Kranz,Vice Chairperson Teresa Arballo Barth,Member Mark Muir, Member Lisa Shaffer, Member ENCINITAS CITY COUNCIL Kristin Gaspar, Mayor Tony Kranz,Deputy Mayor Teresa Arballo Barth, Council Member Mark Muir, Council Member Lisa Shaffer, Council Member AUTHORITY/CITY STAFF Gus Vina, Executive Director/City Manager Tim Nash,Treasurer/Finance Director Jay Lembach, Finance Manager Kathy Hollywood, Secretary/City Clerk Glenn Sabine,Authority Counsel/City Attorney SPECIAL SERVICES Bond Counsel & Disclosure Counsel Financial Advisor Best Best&Krieger LLP Fieldman, Rolapp &Associates Riverside, California Irvine, California Trustee MUFG Union Bank,N.A. Los Angeles, California No dealer, broker, salesperson or other person has been authorized by the City, the Authority or the Underwriter to give any information or to make any representations, other than those contained in this Official Statement, and if given or made, such information or representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, 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 offer, solicitation or sale. The information and expressions of opinion in this Official Statement are subject to change without notice, and neither the delivery of this Official Statement nor any sale of the Bonds shall under any circumstances create any implication that there has been no change in the affairs of the City or the Authority or other matters described in this Official Statement since the date hereof. CERTAIN STATEMENTS CONTAINED IN THIS OFFICIAL STATEMENT REFLECT NOT HISTORICAL FACTS BUT FORECASTS AND "FORWARD-LOOKING STATEMENTS." NO ASSURANCE CAN BE GIVEN THAT THE FUTURE RESULTS DISCUSSED IN THIS OFFICIAL STATEMENT WILL BE ACHIEVED, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE FORECASTS DESCRIBED HEREIN. IN THIS RESPECT, THE WORDS "ESTIMATE," "PROJECT," "ANTICIPATE," "EXPECT," "INTEND," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ALL PROJECTIONS, FORECASTS, ASSUMPTIONS, EXPRESSIONS OF OPINIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT. THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. This Official Statement and the information contained herein are subject to completion or amendment without notice. These securities may not be sold nor may an offer to buy be accepted prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Official Statement constitute an offer to sell or the solicitation of an offer to buy,nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction,but the Underwriter does not guarantee the accuracy or completeness of such information. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS THAT 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. THE UNDERWRITER MAY OFFER AND SELL THE BONDS TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AT PRICES LOWER THAN THE PUBLIC OFFERING PRICE STATED ON THE INSIDE FRONT COVER PAGE OF THIS OFFICIAL STATEMENT AND SAID PUBLIC OFFERING PRICE MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER. The City maintains a website, with certain information relating to the Authority contained therein. However, the information presented on such website is not part of this Official Statement and should not be relied upon in making an investment decision with respect to the Bonds. TABLE OF CONTENTS INTRODUCTION............................................. 1 Risk of Uninsured Loss..............................20 General......................................................... 1 Property Tax Allocation by the State; The Authority and the City.......................... 1 Changes in Law.....................................21 Security for the Bonds .................................2 Bankruptcy and Foreclosure.......................21 Abatement....................................................2 Federal Tax-Exempt Status of the Series Redemption..................................................2 A Bonds.................................................22 Continuing Disclosure ................................. 3 Secondary Market Risk..............................22 Forward-Looking Statements....................... 3 Substitution and Removal of Leased Summary of Terms ...................................... 3 Premises ................................................22 THE AUTHORITY........................................... 3 No Liability of Authority to the Owners....22 THE CITY......................................................... 3 CONSTITUTIONAL AND STATUTORY THE FINANCING PLAN................................. 5 LIMITATIONS ON TAXES AND Acquisition and Construction of APPROPRIATIONS .......................................23 Improvements......................................... 5 Limitations on Revenues............................23 Environmental Compliance ......................... 5 Expenditures and Appropriations...............24 SOURCES AND USES OF BOND Voter Initiatives..........................................25 PROCEEDS ...................................................... 6 Unitary Property.........................................26 Sources and Uses of Funds.......................... 6 Future Initiatives.........................................26 Debt Service Schedule................................. 7 TAX MATTERS .............................................27 THE LEASED PREMISES............................... 8 CONTINUING DISCLOSURE.......................28 The Leased Premises.................................... 8 CERTAIN LEGAL MATTERS ......................29 Substitution of Leased Premises.................. 8 LITIGATION ..................................................29 THE BONDS .................................................. 10 FINANCIAL ADVISOR.................................29 Description of the Bonds ........................... 10 PROFESSIONAL FEES..................................29 Redemption................................................ 10 FINANCIAL STATEMENTS.........................30 Book-Entry System.................................... 13 RATINGS........................................................30 SECURITY FOR THE BONDS ..................... 14 UNDERWRITING..........................................30 General....................................................... 14 MISCELLANEOUS........................................31 Lease Payments.......................................... 14 Additional Bonds....................................... 15 APPENDIX A— CITY FINANCIAL, Appropriation; Use of Leased Premises..... 15 ECONOMIC AND DEMOGRAPHIC Abatement.................................................. 16 INFORMATION ......................................A-1 Action on Default....................................... 16 APPENDIX B—CITY'S AUDITED Miscellaneous Rent.................................... 16 FINANCIAL STATEMENTS FOR Insurance.................................................... 17 FISCAL YEAR 2012/13...........................B-1 No Reserve Account.................................. 17 APPENDIX C— SUMMARY OF PRINCIPAL RISK FACTORS............................................. 18 LEGAL DOCUMENTS ...........................C-1 No Tax Pledge............................................ 18 APPENDIX D—FORMS OF OPINIONS OF Appropriation............................................. 18 BOND COUNSEL....................................D-1 No Limit on Additional General Fund APPENDIX E—FORM OF CONTINUING Obligations............................................ 18 DISCLOSURE AGREEMENT................E-1 Abatement and Eminent Domain............... 18 APPENDIX F—BOOK ENTRY No Reserve Fund........................................ 19 PROVISIONS............................................F-1 Sufficiency of Lease Payments.................. 19 Limitation on Enforcement of Remedies;No Acceleration.................. 19 Seismic, Topographic and Climatic Conditions............................................. 19 Hazardous Substances................................ 20 Public Debt Burden on Leased Premises...20 -i- OFFICIAL STATEMENT ENCINITAS PUBLIC FINANCING AUTHORITY 2014 LEASE REVENUE BONDS (PACIFIC VIEW PROPERTY ACQUISITION AND MOONLIGHT BEACH LIFEGUARD TOWER) $3,095,000 $10,365,000 Series A Bonds Series B Bonds (Tax-Exempt) (Taxable) INTRODUCTION General This Official Statement, including the cover page and appendices, is provided to furnish information in connection with the sale by the Encinitas Public Financing Authority (the "Authority") of 2014 Lease Revenue Bonds, Series A (Pacific View Property and Moonlight Beach Lifeguard Tower) issued as $3,095,000 aggregate principal amount Series A Bonds (Tax-Exempt) (the "Series A Bonds") and as $10,365,000 aggregate principal amount Series B Bonds (Taxable) (the "Series B Bonds" and together with the "Series A Bonds,"the "Bonds"). The Bonds are being issued pursuant to the Constitution and laws of the State of California (the "State"), including Articles 1 through 4 (commencing with Section 6500) of Chapter 5 of Division 7 of Title 1 of the Government Code of the State of California(the "JPA Law"). The Bonds are issued pursuant to an Indenture of Trust, dated as of November 1, 2014 (the "Indenture"), between the Authority and MUFG Union Bank, N.A. (the "Trustee"). Proceeds of the Series A Bonds will be used to finance improvements to the Lifeguard Tower located on Moonlight Beach (the "Series A Project") and to pay costs of issuance of the Series A Bonds. Proceeds of the Series B Bonds will be used to finance the acquisition of a property known as the Pacific View Property (the "Series B Project" and together with the Series A Project, the "Project") and to pay costs of issuance of the Series B Bonds. See "THE FINANCING PLAN," "THE LEASED PREMISES" and "SOURCES AND USES OF BOND PROCEEDS"herein. The Bonds are limited obligations of the Authority payable primarily from and secured by certain revenues (the "Revenues") consisting of certain Lease Payments to be paid by the City pursuant to a Lease Agreement (the "Lease Agreement"), dated as of November 1, 2014, between the City and the Authority, for certain real property and the improvements thereon (the "Leased Premises"). See "THE LEASED PREMISES" herein. The City is also required to pay any taxes, assessment charges, utility charges, maintenance and repair costs of the Leased Premises. The Lease Payments are structured to produce Revenues sufficient to pay principal of and interest on the Bonds when due. The City has covenanted in the Lease Agreement to make all Lease Payments provided for therein, to include all such payments in its annual budgets, and to make the necessary annual appropriations for such rental payments. The City's obligations to make Lease Payments is subject to abatement in the event of damage to, destruction or condemnation of, or title defects relating to, the Leased Premises, as described herein. (See "SECURITY FOR THE BONDS"herein). The Revenues are to be received by the Authority and deposited pursuant to the Indenture. Terms used in this Official Statement and not otherwise defined shall have the meaning given to them in APPENDIX C attached hereto. The Authority and the City The City is located in the northern coastal area of San Diego County (the "County") overlooking the Pacific Ocean. The City encompasses approximately 21.4 square miles and is located 30 miles north of the City of San Diego. The California Department of Finance has estimated that the City has a population of approximately 61,204, as of January 1, 2014. For other selected information concerning the City, see "THE CITY" herein and APPENDIX A — "CITY FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION" and APPENDIX B — "AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2012/13"attached hereto. The Authority was established pursuant to a Joint Exercise of Powers Agreement dated November 6, 1991, between the City, the Encinitas Fire Protection District, the Encinitas Sanitation District (both of which have since been absorbed into the City),the Cardiff Sanitation District and the San Dieguito Water District(the "Members"). The Authority was created for the purpose of providing financing for public capital improvements for the Members, including by issuing its obligations and making loans to the Members. See "THE CITY" herein. Security for the Bonds The Bonds are payable solely from, and are secured by, the Revenues (as defined under "SECURITY FOR THE BONDS" herein), which primarily consist of the Lease Payments. The Lease Payments are payable for the use of the Leased Premises, together with the capital improvements located thereon, leased to the City pursuant to the Lease Agreement, from any legally available funds of the City. The City has covenanted in the Lease Agreement to include the Lease Payments in its annual budgets. The City has further covenanted to make the necessary annual appropriations for all such Lease Payments, and said covenants have been deemed to be duties imposed by law. Any legislative enactment or State constitutional amendment having the effect of reducing the property tax rate would necessarily reduce the amount of general revenues available to the City to pay the Lease Payments. Likewise, broadened property tax exemptions could have a similar effect. See "RISK FACTORS" and "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS" herein for discussion of certain other matters which may affect the collection of Revenues. The Authority does not have any power to levy and collect taxes. The City has the right to incur other obligations payable from its general revenues without the consent of the Owners of the Bonds. In addition, the Indenture allows the Authority to issue certain additional obligations secured by the Revenues, and the Lease Agreement allows the City to incur other obligations secured by excess value of the Leased Premises. See "SECURITY FOR THE BONDS"herein. THE BONDS ARE NOT A DEBT OF THE CITY, THE STATE OR ANY OF THEIR POLITICAL SUBDIVISIONS (OTHER THAN THE AUTHORITY). THE BONDS ARE SPECIAL OBLIGATIONS OF THE AUTHORITY AND ARE NOT OBLIGATIONS OF THE CITY. NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY, THE STATE OR ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BONDS. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. Abatement Except to the extent of amounts on deposit in the Bond Fund, or otherwise available from an insurance or eminent domain award, the Lease Payments due under the Lease Agreement and, correspondingly, the amount available to pay the principal of and interest on the Bonds, will be subject to abatement during any period in which,by reason of damage or destruction or eminent domain,there is substantial interference with the use and possession by the City of the Leased Premises. See "RISK FACTORS - Abatement and Eminent Domain" herein. Amounts on deposit in the Bond Fund constitute a special fund for payment of Lease Payments, and shall be available for such Lease Payments in the event there is substantial interference with the use and possession of the Leased Premises. Redemption The Bonds are subject to optional redemption, mandatory sinking fund redemption, and special mandatory redemption as described herein. 2 Continuing Disclosure The City has covenanted for the benefit of owners of the Bonds, on behalf of itself and the Authority,to provide certain financial information and operating data relating to the City and the Authority by not later than March 1 of each year, commencing with the report for the 2013/14 Fiscal Year (the "Annual Report") and to provide notices of the occurrence of certain enumerated events. The Annual Report and notices of material events will be filed by the City with the Municipal Securities Rulemaking Board (the "MSRB") These covenants have been made in order to assist the Underwriter in complying with Securities Exchange Commission Rule 15c2-12(b)(5) (the "Rule"). The specific nature of the information to be contained in the Annual Report or the notices of material events by the City is summarized in APPENDIX E — "FORM OF CONTINUING DISCLOSURE AGREEMENT." The City and its related entities are currently in compliance with all continuing disclosure obligations, however, prior instances of non-compliance are described herein under"CONTINUING DISCLOSURE." Forward-Looking Statements This Official Statement (including the appendices hereto) contains certain forward-looking statements (collectively, the "Forward-Looking Statements"). All statements other than statements of historical facts included in this Official Statement, are Forward-Looking Statements. Although the Authority and the City believe that the expectations reflected in such Forward-Looking Statements are reasonable, no one can be given assurance that such statements will prove to be correct. Important factors which could cause actual results to differ materially from expectations of the Authority or the City (collectively, the "Cautionary Statements") are disclosed in this Official Statement. All Forward-Looking Statements attributable to the Authority or the City are expressly qualified in their entirety by the Cautionary Statements. Summary of Terms Brief descriptions of the Bonds, the Indenture, the Lease Agreement, the Authority, the City and the Leased Premises are included in this Official Statement. Such descriptions do not purport to be comprehensive or definitive. All references herein to the Indenture,the JPA Law and the Constitution and the laws of the State, as well as the proceedings of the City with respect to the Leased Premises and the Bonds, are qualified in their entirety by reference to such documents. References herein to the Bonds are qualified in their entirety by reference to the form thereof included in the Indenture. Copies of the documents described herein will be available at the office of the City Financial Services Manager, 505 South Vulcan Avenue, Encinitas, California 92024. THE AUTHORITY The Encinitas Public Financing Authority was established pursuant to a Joint Exercise of Powers Agreement dated November 6, 1991, by and among the City, the Cardiff Sanitation District, the Encinitas Fire Protection District, the Encinitas Sanitary District and the San Dieguito Water District in accordance with the provisions of the JPA Law. The Authority was created for the purpose of providing financing for public capital improvements for the City and the Members through the acquisition by the Authority of such public capital improvements and/or the purchase by the Authority of local obligations within the meaning of the JPA Law. Under the JPA Law, the Authority has the power to issue bonds to pay the costs of any public capital improvement. The Cardiff Sanitation District,the Encinitas Fire Protection District and the Encinitas Sanitation District have since been absorbed by the City and are treated as separate accounting divisions, the current members of the Authority are the City and the San Dieguito Water District. THE CITY The City was incorporated in October, 1986. Topography of the surrounding area varies from broad coastal plains to fertile inland valleys backed up by mountain ranges to the east. The climate is equable in the 3 coastal and valley regions. The community has long, dry summers and mild temperatures, with mean temperatures of 70 degrees and an average annual rainfall of 10.36 inches. The City is the ninth largest in population in the County. Most of the land in the City is zoned residential. The City is a general law city and operates under a council-manager form of government. The City maintains a website at www.cityofencinitas.org. However, the information presented there is not part of this Official Statement, is not incorporated by reference herein and should not be relied upon in making an investment decision with respect to the Bonds. For other selected information concerning the City, see "THE CITY" herein and APPENDIX A — "CITY FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION" and APPENDIX B — "AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2012/13"attached hereto. 4 THE FINANCING PLAN Acquisition and Construction of Improvements Moonlight Beach Marine Safety Center The existing Lifeguard Headquarters at Moonlight Beach serves all surrounding beaches and is the hub of Marine Safety rescue and operations. This building is the only year-round operationally staffed rescue and medical aid facility for the City of Encinitas coastline and is open from 8:OOAM to sunset each day. The current facility is of two-story steel, wood, and block construction. It requires updated capacity for patients, repair of degraded framing and walls,new roofing,updated communications capabilities. The planned rebuild of the Marine Safety Center will include the upgrades necessary to ensure safety and service to the public as well as care and safety of staff for the next 50 years. Upgrades will focus on: First Aid room size, observation room, and dispatching communication capabilities. A new treatment area design will have a better area of access for gurney transfer of emergency patients to paramedic ambulances for hospital transport and overall patient capacity. The observation room/deck will be freed of blind spots to increase the capability of staff seeing the beach and surf line areas to the north, south, and west, thereby increasing the facility's effectiveness of observations and prevention of injuries and drownings in the surf line and outer water areas. The dispatching communications capabilities will be upgraded to current and efficient communications - tying into the 911 Fire and Paramedic Dispatch Center's automated system. The project is estimated to cost $3 million. Pacific View Property The City has opened escrow to purchase approximately 2.8 acres and existing structures. The site is known as Pacific View Elementary School (the "Pacific View Property") and is being sold by the Encinitas Union School District. The property is located on Third Street in Encinitas, between E Street and F Street. Five school structures exist on the property, including an 1883 school building currently in use by the Encinitas Historical Society. The City is evaluating different uses for the site, which may include cultural facilities such as performing arts and fine arts purposes. The purchase price for the property is $10,000,000, with escrow expected to close in November 2014. Environmental Compliance The Project is subject to the California Environmental Quality Act("CEQA"). Under CEQA, a project which may have a significant effect on the environment and which is to be carried out or approved by a public agency must comply with a comprehensive environmental review process, including the preparation of an Environmental Impact Report ("EIR"). Contents of an EIR include a detailed statement of the project's significant environmental effects; any such effects which cannot be avoided if the project is implemented; mitigation measures proposed to minimize such effects; alternatives to the proposed project; any significant irreversible environmental changes which would result from the project; the project's growth-inducing impacts; and a brief statement setting forth the agency's reasons for determining that certain effects are not significant and hence do not require discussion in an EIR. If the agency determines that the project itself will not have a significant effect on the environment, it may adopt a negative declaration to that effect and need not prepare an EIR. Construction of the Moonlight Beach Safety Center is in the early planning and architectural process. The City intends to proceed with a mitigated negative declaration under CEQA. Additionally, the City will issue a local coastal development permit in compliance with the City's local coastal program. This action is appealable through the California Coastal Commission. The purchase of the Pacific View Property was not subject to CEQA, however, any future uses on the site will require the City to comply with local zoning ordinances,the local coastal program, and CEQA. 5 SOURCES AND USES OF BOND PROCEEDS Sources and Uses of Funds The table below sets forth the estimated sources and uses of funds with respect to the Bonds. Source of Funds Series A Bonds Series B Bonds Total Principal Amount of Bonds $3,095,000.00 $10,365,000.00 $13,460,000.00 Less: Original Issue Discount (31,114.45) (156,200.25) (187,314.70) Total $3,063,885.55 $10,208,799.75 $13,272,685.30 Uses of Funds Acquisition and Construction Fund $3,000,000.00 $10,000,000.00 $13,000,000.00 Underwriter's Discount 24,026.28 74,286.22 98,312.50 Costs of Issuance Fund') 39,859.27 134,573.53 174,372.80 Total $3,063,885.55 $10,208,799.75 $13,272,685.30 ' Costs of Issuance includes printing costs,fees of financial advisor,bond counsel and disclosure counsel, trustee's fees and expenses and other costs relating to the issuance of the Bonds. 6 Debt Service Schedule The following table presents the debt service schedule for the Bonds based on the maturity date and interest rate set forth on the cover of this Official Statement, assuming no redemptions other than mandatory sinking fund redemptions are made. ENCINITAS PUBLIC FINANCING AUTHORITY DEBT SERVICE SCHEDULE Bond Year Ending Series A Bonds Series A Bonds Series B Bonds Series B Bonds Total Annual (October 1) Principal Interest Principal Interest Debt Service 2015 $ 65,000 $ 89,666.90 $ 200,000 $ 386,665.85 $ 741,332.75 2016 65,000 101,831.26 200,000 443,527.50 810,358.76 2017 65,000 100,531.26 205,000 441,727.50 812,258.76 2018 70,000 99,231.26 205,000 438,652.50 812,883.76 2019 70,000 97,831.26 210,000 434,552.50 812,383.76 2020 70,000 96,431.26 215,000 429,512.50 810,943.76 2021 75,000 94,331.26 225,000 423,600.00 817,931.26 2022 75,000 91,331.26 230,000 416,850.00 813,181.26 2023 80,000 88,331.26 240,000 409,375.00 817,706.26 2024 85,000 85,131.26 245,000 401,575.00 816,706.26 2025 85,000 83,006.26 255,000 393,000.00 816,006.26 2026 90,000 80,881.26 265,000 382,481.26 818,362.52 2027 90,000 78,406.26 280,000 371,550.00 819,956.26 2028 95,000 75,706.26 290,000 360,000.00 820,706.26 2029 95,000 72,856.26 300,000 348,037.50 815,893.76 2030 100,000 69,887.50 315,000 335,662.50 820,550.00 2031 100,000 66,387.50 330,000 320,700.00 817,087.50 2032 105,000 62,887.50 345,000 305,025.00 817,912.50 2033 110,000 59,212.50 365,000 288,637.50 822,850.00 2034 115,000 55,362.50 380,000 271,300.00 821,662.50 2035 120,000 51,337.50 400,000 253,250.00 824,587.50 2036 120,000 46,987.50 420,000 233,250.00 820,237.50 2037 125,000 42,637.50 440,000 212,250.00 819,887.50 2038 130,000 38,106.26 465,000 190,250.00 823,356.26 2039 135,000 33,393.76 490,000 167,000.00 825,393.76 2040 140,000 28,500.00 515,000 142,500.00 826,000.00 2041 145,000 23,250.00 540,000 116,750.00 825,000.00 2042 150,000 17,812.50 570,000 89,750.00 827,562.50 2043 160,000 12,187.50 595,000 61,250.00 828,437.50 2044 165,000 6,187.50 630,000 31,500.00 832,687.50 Total $3,095,000 $1,949,642.06 $10,365,000 $9,100,182.11 $24,509,824.17 7 THE LEASED PREMISES The Leased Premises Fire Station No. 5. Fire Station No. 5 is located on approximately 1.0 acres located on Balour Drive in Encinitas. The fire station is two stories and is approximately 6,811 square feet and was constructed in 2001. The building has a 2-bay apparatus garage with roll up doors. The City conducted an appraisal of all of its Fire Stations dated September 20, 2014, which concluded that the value of Fire Station No. 5 and the land on which it is situated is $5,150,000. Community Center. The Encinitas Community and Senior Center located at 1140 Oakcrest Park Dr., and is approximately 36,000 square feet. The Community Center was built in 2002 and has been operated continuously by the City. The Center includes a banquet hall, kitchen, gymnasium/auditorium, arts and crafts room, activity room, conference and meeting rooms, senior game room, library/computer room, dance room, senior outreach and administration offices, Community Center information counter and lobby areas for browsing and enjoying the art displays. The Community Center also serves the City as an evacuation center and as an emergency operations center to compliment the operations at City Hall. The City conducted an appraisal of the Community Center and the land on which it is situated on September 30, 2014,which concluded that its value is $9,120,000. Substitution of Leased Premises Pursuant to the Lease Agreement, the City has the option at any time to substitute other land, facilities or improvements (the "Substitute Leased Premises") for the Leased Premises or any portion thereof (the "Former Leased Premises") or to release a portion of the Leased Premises (the "Released Leased Premises") from the lien of the Lease Agreement,provided that the City shall satisfy all of the following requirements: (a) The City shall provide written notification of such substitution or release to the Trustee and the Authority; (b) The City shall take all actions and shall execute all documents required to subject the Substitute Leased Premises to the terms and provisions of the Lease Agreement, including the filing with the Authority and the Trustee of an amended Exhibit A to the Lease Agreement which adds thereto a description of the Substitute Leased Premises and deletes therefrom the description of the Former Leased Premises or the Released Leased Premises, as applicable; (c) (i) In the case of a substitution, the City shall determine and certify to the Authority and the Trustee that the fair rental value of the Substitute Leased Premises is at least equal to the fair rental value of the Former Leased Premises and that the Substitute Leased Premises is essential to the governmental functions of the City; (ii) In the case of a release,the City shall determine and certify to the Authority and the Trustee that the fair rental value of the remaining Leased Premises after removal of the Released Leased Premises is at least equal to the then remaining Lease Payments; (d) In the case of a substitution, the City shall certify in writing to the Authority and the Trustee that the Substitute Leased Premises are essential to the governmental function of the City and constitute property which the City is permitted to lease under the laws of the State; (e) In the case of a substitution, the City shall certify in writing to the Authority and the Trustee that the estimated useful life of the Substitute Leased Premises at least extends to the date on which the final Lease Payment becomes due and payable; (f) In the case of a substitution,the City shall obtain a CLTA policy of title insurance with respect to any real property portion of the Substitute Leased Premises; 8 (g) In the case of a substitution, the substitution of the Substitute Leased Premises shall not cause the City to violate any of its covenants, representations and warranties made in the Lease Agreement; and (h) The City shall obtain and cause to be filed with the Trustee and the Authority an opinion of Bond Counsel stating that such substitution or release is permitted and does not cause interest on the Series A Bonds to become includable in the gross income of the Bond Owners for federal income tax purposes. From and after the date on which all of the foregoing conditions precedent to such substitution or release are satisfied, the Lease Agreement shall cease with respect to the Former Leased Premises or Released Leased Premises, as applicable, and shall be continued with respect to the Substitute Leased Premises and the remaining Leased Premises. The City shall not be entitled to any reduction, diminution, extension or other modification of the Lease Payments whatsoever as a result of such substitution or release. In addition, the Lease Agreement may be amended to allow the City to pay additional rental payments for the purpose of securing additional obligations of the Authority, to the extent of excess value of the Leased Premises. See "SECURITY FOR THE BONDS"herein. 9 THE BONDS Description of the Bonds The Bonds will be issued only in the form of fully registered Bonds without coupons, in denominations of$5,000 or any integral multiple thereof The Bonds will be dated the date of delivery to the Underwriter, will mature on October 1 in the years and in the respective principal amounts, and will bear interest at the respective rates per annum, all as set forth on the inside front cover hereof. Interest on the Bonds will be paid on April 1 and October 1 of each year, commencing April 1, 2015, by check mailed on the Interest Payment Date to the registered owners of the Bonds as of the applicable Record Date (the fifteenth day of the month preceding each Interest Payment Date); provided however, that payment of interest may be by wire transfer in immediately available funds to an account in the United States of America to any Owner of Bonds in the aggregate principal amount of$1,000,000 or more who shall furnish written wire instructions to the Trustee at least five (5) days before the applicable Record Date. The principal of each Bond will be payable upon the surrender of such Bond, at maturity or upon redemption prior to maturity, at the principal corporate trust office of the Trustee in Los Angeles, California. Redemption Optional Redemption. The Series A Bonds maturing on or before October 1, 2024 shall not be subject to redemption prior to their respective stated maturities. The Series A Bonds maturing on or after October 1, 2025, shall be subject to redemption at the option of the Authority as a whole or in part, on any date on or after October 1, 2024, from any available source of funds, at a redemption price equal to the principal amount of the Bonds to be redeemed,together with accrued interest thereon to the date fixed for redemption, without premium. The Series B Bonds maturing on or before October 1, 2022 shall not be subject to redemption prior to their respective stated maturities. The Series B Bonds maturing on or after October 1, 2023, shall be subject to redemption at the option of the Authority as a whole or in part, on any date on or after October 1, 2022, from any available source of funds, at a redemption price equal to the principal amount of the Bonds to be redeemed, together with accrued interest thereon to the date fixed for redemption,without premium. Sinking Account Redemption. The Series A Term Bonds are subject to mandatory redemption, in part by lot, from Sinking Account payments set forth in the following schedules commencing on October 1, 2030 with respect to Series A Term Bonds maturing October 1, 2034, October 1, 2035, with respect to Series A Term Bonds maturing October 1, 2039, and October 1, 2040 with respect to Series A Term Bonds maturing October 1, 2044, and each respective October 1 thereafter at a redemption price equal to the principal amount thereof to be redeemed (without premium),together with interest accrued thereon to the date fixed for redemption; provided, however, that if some but not all of the Series A Term Bonds have been redeemed pursuant to optional or special mandatory redemption, the total amount of Sinking Account payments to be made subsequent to such redemption shall be reduced in an amount equal to the principal amount of the Series A Term Bonds so redeemed by reducing each such future Sinking Account payment on a pro rata basis (as nearly as practicable) in integral multiples of$5,000, as shall be designated pursuant to written notice filed by the Authority with the Trustee. 10 Series A Term Bonds Maturing October 1,2034 Mandatory Sinking Fund Principal Redemption Date Amount (October 1) to Be Redeemed 2030 $100,000 2031 100,000 2032 105,000 2033 110,000 2034 115,000 (maturity) Series A Term Bonds Maturing October 1,2039 Mandatory Sinking Fund Principal Redemption Date Amount (October 1) to Be Redeemed 2035 $120,000 2036 120,000 2037 125,000 2038 130,000 2039 135,000 (maturity) Series A Term Bonds Maturing October 1,2044 Mandatory Sinking Fund Principal Redemption Date Amount (October 1) to Be Redeemed 2040 $140,000 2041 145,000 2042 150,000 2043 160,000 2044 165,000 (final maturity) The Series B Term Bonds are subject to mandatory redemption, in part by lot, from Sinking Account payments set forth in the following schedules commencing on October 1, 2025 with respect to Series B Term Bonds maturing October 1, 2029, October 1, 2030 with respect to Series B Term Bonds maturing October 1, 2034, October 1, 2035, with respect to the Series B Term Bonds maturing October 1, 2039, and October 1, 2040 with respect to Series B Term Bonds maturing October 1, 2044, and each respective October 1 thereafter at a redemption price equal to the principal amount thereof to be redeemed(without premium),together with interest accrued thereon to the date fixed for redemption; provided, however, that if some but not all of the Series B Term Bonds have been redeemed pursuant to optional or special mandatory redemption, the total amount of Sinking Account payments to be made subsequent to such redemption shall be reduced in an amount equal to the principal amount of the Series B Term Bonds so redeemed by reducing each such future Sinking Account payment on a pro rata basis (as nearly as practicable) in integral multiples of $5,000, as shall be designated pursuant to written notice filed by the Authority with the Trustee. 11 Series B Term Bonds Maturing October 1,2029 Mandatory Sinking Fund Principal Redemption Date Amount (October 1) to Be Redeemed 2025 $255,000 2026 265,000 2027 280,000 2028 290,000 2029 300,000 (maturity) Series B Term Bonds Maturing October 1,2034 Mandatory Sinking Fund Principal Redemption Date Amount (October 1) to Be Redeemed 2030 $315,000 2031 330,000 2032 345,000 2033 365,000 2034 380,000 (maturity) Series B Term Bonds Maturing October 1,2039 Mandatory Sinking Fund Principal Redemption Date Amount (October 1) to Be Redeemed 2035 $400,000 2036 420,000 2037 440,000 2038 465,000 2039 490,000 (maturity) Series B Term Bonds Maturing October 1,2044 Mandatory Sinking Fund Principal Redemption Date Amount (October 1) to Be Redeemed 2040 $515,000 2041 540,000 2042 570,000 2043 595,000 2044 630,000 (final maturity) In lieu of such redemption, the Trustee may apply amounts in the Sinking Account to the purchase of Term Bonds at public or private sale, as and when and at such prices (including brokerage and other charges,but excluding accrued interest, which is payable from the Interest Account) as may be directed by the Authority prior to the selection of Bonds for redemption, except that the purchase price (exclusive of accrued interest) may not exceed the redemption price then applicable to the Term Bonds, as set forth in a Written Request of the Authority. 12 Special Mandatory Redemption From Insurance or Condemnation Proceeds. The Bonds shall also be subject to redemption as a whole or in part on any date, from Net Proceeds required to be used for such purpose as provided in the Indenture, at a redemption price equal to the principal amount thereof plus interest accrued thereon to the date fixed for redemption, without premium. SEE, APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS," for information regarding the use of insurance or condemnation proceeds to prepay lease payments. Selection of Bonds for Redemption. Whenever provision is made for the redemption of less than all of the Bonds, the Trustee shall select the Bonds to be redeemed from all Bonds or such given portion thereof not previously called for redemption from such series and maturities as shall be set forth in a Written Request of the Authority filed with the Trustee, or in the absence of such designation of maturities by the Authority, then on a pro rata basis among maturities, and in any case, by lot within a maturity in any manner which the Trustee in its sole discretion shall deem appropriate and fair. Notice of Redemption. Notice of redemption shall be mailed by first class mail, postage prepaid, not less than thirty (30) nor more than sixty (60) days before any redemption date,to the respective Owners of any Bonds designated for redemption at their addresses appearing on the Registration Books. Each notice of redemption shall state the date of the notice,the redemption date,the place or places of redemption,the series of Bonds to be redeemed, whether less than all of the Bonds (of such series and maturity or all Bonds of a single maturity) are to be redeemed, the CUSIP numbers and, if less than all of the Bonds of a maturity are to be redeemed, Bond numbers of the Bonds to be redeemed, the maturity or maturities of the Bonds to be redeemed and in the case of Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. Notice of redemption shall be given only if moneys sufficient to pay the Redemption Price are on deposit with the Trustee or available for such purpose on the date that notice of redemption is given or if such notice expressly states that such redemption is conditional on receipt by the Trustee of such sufficient moneys. Each such notice shall also state that on the redemption date there will become due and payable on each of said Bonds the redemption price thereof, and that from and after such redemption date interest thereon shall cease to accrue, and shall require that such Bonds be then surrendered. Neither the failure to receive any notice nor any defect therein shall affect the proceedings for such redemption or the cessation of accrual of interest from and after the redemption date. See "Book-Entry System"below. Effect of Redemption. Notice of redemption having been duly given, and moneys for payment of the redemption price of, together with interest accrued to the date fixed for redemption on, the Bonds (or portions thereof) so called for redemption being held by the Trustee, on the redemption date designated in such notice, the Bonds (or portions thereof) so called for redemption shall become due and payable, interest on the Bonds so called for redemption shall cease to accrue, said Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture, and the Owners of said Bonds shall have no rights in respect thereof except to receive payment of the redemption price thereof. Book-Entry System So long as Cede & Co. is the registered owner of the Bonds, transfer or exchange of Certificates may only be through the facilities of DTC. See APPENDIX F with respect to DTC procedures for transfer and exchange of ownership interests in the Bonds. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered bonds registered in the name of Cede & Co., (DTC's partnership nominee). One fully-registered Bond will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. See APPENDIX F — "BOOK ENTRY PROVISIONS" herein. The Authority, the City and the Trustee cannot and do not give any assurances that DTC, DTC Participants or others will distribute payments of principal, interest or premium with respect to the Bonds paid to DTC or its nominee as the registered owner, or will distribute any redemption notices or other notices, to the Beneficial Owners, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The Authority, the City and the Trustee are not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner with respect to the Bonds or an error or delay relating thereto. 13 SECURITY FOR THE BONDS General The Indenture provides that, subject to certain rights of the Trustee, the Bonds are equally and ratably payable from and secured by a first lien on and pledge of all Revenues and a pledge of all of the moneys held in the Interest Account, the Principal Account and the Sinking Account, including all amounts derived from the investment of such moneys. "Revenues," as defined in the Indenture, generally means (a) all amounts received by the Authority or the Trustee pursuant to or with respect to the Lease Agreement, including, without limiting the generality of the foregoing, all of the Lease Payments (including both timely and delinquent payments, any late charges, and whether paid from any source),but excluding any amounts payable under Section 4.8(d) of the Lease Agreement; and (b) all interest, profits or other income derived from the investment of amounts in any fund or account established pursuant to the Indenture. The principal payable with respect to the Lease Payments is 13,460,000. The City is obligated to pay Lease Payments under the Lease Agreement from any legally available moneys, including its General Fund. Under California law, the obligation of the City to make Lease Payments is contingent upon the availability of the Leased Premises for use and occupancy by the City. See "Abatement" below. See "THE LEASED PREMISES"herein. Under the Indenture, the Authority is authorized under certain conditions to issue additional obligations secured by the Revenues. See "Additional Bonds" below. Under the Lease Agreement, the City is allowed to incur other obligations secured by excess value of the Leased Premises. The Revenues and other funds pledged under the Indenture are the sole security for the Bonds, and the Authority has no other source of funds, other than the Lease Payments,to pay debt service on the Bonds. See APPENDIX C hereto for a summary of the terms of the Indenture and the Lease Agreement. THE BONDS ARE NOT A DEBT OF THE CITY, THE STATE OR ANY OF ITS POLITICAL SUBDIVISIONS, AND NEITHER THE CITY, THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS, OTHER THAN THE AUTHORITY, IS LIABLE THEREFOR. THE PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE BONDS ARE PAYABLE SOLELY FROM THE REVENUES. THE CITY'S OBLIGATIONS UNDER THE LEASE AGREEMENT ARE UNSECURED OBLIGATIONS PAYABLE FROM ANY LEGALLY AVAILABLE FUNDS OF THE CITY. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION AND DO NOT CONSTITUTE AN OBLIGATION FOR WHICH THE CITY OR THE STATE IS OBLIGATED TO LEVEY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY OF THE STATE HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. Lease Payments The City has covenanted under the Lease Agreement to make Lease Payments for the use and possession of the Leased Premises. So long as the Leased Premises are available for the City's use,the City has covenanted to take such action each year as may be necessary to include all Lease Payments in its annual budget and annually to appropriate an amount necessary to make such Lease Payments (see "Abatement"below). The amounts payable to the Trustee as Lease Payments are to be used to make the payments of principal and interest on the Bonds. The obligation of the City to make Lease Payments (other than to the extent that funds to make Lease Payments are available in the Bond Fund or otherwise available from an insurance or eminent domain award)may be abated in whole or in part if the City does not have use and possession of the Leased Premises. Lease Payments are required to be made by the City under the Lease Agreement at least fifteen (15) days prior to each Interest Payment Date (individually, a "Lease Payment Date"), for use and possession of the 14 Leased Premises to the next occurring Lease Payment Date. The amount of such Lease Payment shall be credited with amounts on deposit in the Bond Fund on such Lease Payment Date. Lease Payments due on each Lease Payment Date shall also be reduced by the amount of earnings received by the Trustee as of such Lease Payment Date from the investment of certain funds held by the Trustee. Lease Payments are required to be deposited in the Bond Fund maintained by the Trustee. Pursuant to the Indenture, on each Interest Payment Date the Trustee will withdraw from the Bond Fund amounts to make principal and interest payments on the Bonds. The Lease Payments are structured to produce Revenues sufficient to pay principal of and interest on the Bonds when due. While the Lease Payments are subject to optional prepayment, Revenues resulting from such action will be used to redeem a corresponding amount of the Bonds, so that the remaining Lease Payments will be sufficient to pay the scheduled principal and interest payments on the Bonds. Scheduled Lease Payments relating to the Bonds are set forth herein under the heading "SOURCES AND USES OF BOND PROCEEDS—Debt Service Schedule." Additional Bonds The Authority is authorized, without the consent of the Bondholders, in the Indenture to issue additional obligations secured by a pledge of the Revenues on a parity to the pledge securing the outstanding Bonds, provided the Lease Agreement is amended to obligate the City to pay additional amounts of rental thereunder for the use and occupancy of the Leased Premises, provided that (A) no Event of Default has occurred and is continuing under the Lease Agreement, (B) such additional amounts of rental do not cause the total rental payments made by the City thereunder to exceed the fair rental value of the Leased Premises, as set forth in a certificate of a City Representative filed with the Trustee and the Authority, (C)the City shall have obtained and filed with the Trustee and the Authority a Written Certificate of an Authorized Representative of the City showing that the fair rental value of the Leased Premises is not less than the sum of the aggregate unpaid principal components of the Lease Payments and the aggregate principal components of such additional amounts of rental, (D) such additional amounts of rental are pledged or assigned for the payment of any bonds, notes, leases or other obligations the proceeds of which shall be applied to finance the construction or acquisition of land, facilities or other improvements which are authorized pursuant to the laws of the State, and (E) such additional rental is not at variable rates. Appropriation; Use of Leased Premises The City has covenanted to take such action as may be necessary to include all Lease Payments due under the Lease Agreement in each of its proposed annual budgets and its final adopted annual budgets and to make the necessary appropriations for such Lease Payments and Additional Payments, except to the extent such payments are abated (see "Abatement"below). The foregoing covenant on the part of the City shall be deemed to be and shall be construed to be a duty imposed by law and it shall be the duty of each and every public official of the City to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform its covenants and agreements in the Lease Agreement. The obligation of the City to pay Lease Payments shall constitute a current expense of the City and shall not in any way be construed to be a debt of the City, or the State, or any political subdivision thereof, in contravention of any applicable constitutional or statutory limitation or requirements concerning the creation of indebtedness by the City, the State, or any political subdivision thereof, nor shall such obligations constitute a pledge of general revenues, funds or moneys of the City beyond the Fiscal Year for which the City has appropriated funds to pay Lease Payments or an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. 15 Abatement Except to the extent that proceeds of the type described in the following paragraph are available, the amount of Lease Payments and Additional Payments shall be abated during any period in which there is substantial interference with the use or possession of all or a portion of the Leased Premises by the City by condemnation, damage, destruction or title defect. The amount of such abatement shall be such that the resulting Lease Payments, exclusive of the amounts described in the following paragraph, do not exceed the fair rental value for the use and possession of the portion of the Leased Premises for which no substantial interference has occurred. Such abatement shall continue for the period of the substantial interference with the use or possession of the Leased Premises. Except as provided in the Lease Agreement, in the event of any such interference with use or possession, the Lease Agreement shall continue in full force and effect and the City waives the benefits of Civil Code Sections 1932(1), 1932(2) and 1933(4) any right to terminate the Lease Agreement by virtue of any such interference. See "Insurance" below for a discussion of rental interruption insurance to be provided by, or on behalf of,the City. Notwithstanding a substantial interference with the use or possession of all or a portion of the Leased Premises, the City shall remain obligated to make Lease Payments (i) in an amount not to exceed the fair rental value during each Fiscal Year for the portion of the Leased Premises not damaged, destroyed, interfered with or taken; (ii) to the extent that moneys derived from any source as a result of any delay in the reconstruction, replacement or repair of the Leased Premises, or any portion thereof, are available to pay the amount which would otherwise be abated; or (iii) to the extent that moneys are available in the Bond Fund to pay the amount which would otherwise be abated, in which event the Lease Payments shall be payable from such amounts as an obligation of the City payable from a special fund. Notwithstanding these efforts, the moneys legally available to the Trustee following the occurrence of an event which gives rise to an abatement of Lease Payments, including proceeds of rental interruption insurance, if any, may not be sufficient to pay principal of and interest on the Bonds in the amounts and at the rates set forth thereon. In such event, all Bondowners would forfeit interest attributable to abated Lease Payments payable during the period of abatement and, to the extent Bonds mature or are to be subject to mandatory redemption during a period of abatement,the Bondowners would forfeit principal attributable to such abated Lease Payments. The failure to make such payments of principal and interest would not under such circumstances constitute a default under the Indenture,the Lease Agreement or the Bonds. Action on Default Should the City default under the Lease Agreement, the Trustee, as assignee of the Authority under the Lease Agreement may exercise any and all remedies available pursuant to law. However, the Trustee may not accelerate the Lease Payments or otherwise declare any Lease Payments not then in default to be immediately due and payable or terminate the Lease or cause the leasehold interest of the Authority or the sub-leasehold interest of the City in the Leased Premises to be sold, assigned or otherwise alienated. The City expressly agrees that in the event of any default it will remain liable for the payment of all Lease Payments and the performance of all conditions contained in the Lease Agreement and will reimburse the Authority for any deficiency arising out of the re-leasing of the Leased Premises or, in the event the Authority is unable to re-lease the Leased Premises, then for the full amount of all Lease Payments to the end of the term of the Lease Agreement. See "RISK FACTORS"herein. For a description of the events of default and permitted remedies of the Trustee (as assignee of the Authority) contained in the Lease Agreement and the Indenture, see APPENDIX C hereto. Miscellaneous Rent For the right to the use and occupancy of the Leased Premises,the Lease Agreement requires the City to pay, in addition to the Lease Payments, the reasonable expenses of the Authority, and any reimbursement of amounts advanced and owing in connection with the Lease Agreement and the Indenture or in connection with the issuance of the Bonds. 16 Insurance The Lease Agreement contains the insurance covenants described below. No assurance can be given that insurance proceeds will be available or, if available, adequate in an amount sufficient to avoid an interruption of Lease Payments. Under such a situation, an abatement of Lease Payments is likely to occur. See "Abatement"above. The Lease Agreement requires the City to obtain a standard comprehensive general liability insurance policy or policies in protection of the Authority and the City, including their respective members, officers, agents, employees and assigns. Said policy or policies must provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of$150,000 for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy in the amount of$3,000,000 (subject to a deductible clause of not to exceed $150,000) covering all such risks. The Lease Agreement also requires the City to maintain, or cause to be maintained, casualty insurance insuring the facilities on the Leased Premises against loss or damage by fire and lightning, with extended coverage and vandalism and malicious mischief insurance and all other risks in an amount equal to the lesser of 100% of the replacement cost of the facilities or the aggregate unpaid principal components of the Lease Payments allocable to the facilities. Such insurance may be subject to such deductibles as the City deems prudent. The Lease Agreement further requires the City to cause to be maintained, throughout the term of the Lease Agreement, rental interruption or use and occupancy insurance to cover loss,total or partial, of the use of the Leased Premises as a result of any of the hazards covered by the insurance in an amount at least equal to the maximum Leased Payments allocable to the facilities coming due and payable during any future 24 month period. The Lease Agreement allows the City to maintain any such insurance as part of or in conjunction with any other insurance coverage carried by the City or, in whole or in part, in the form of self-insurance by the City or through participation by the City in a joint powers agency or other program providing pooled insurance. The Lease Agreement also requires the City to obtain an CLTA policy of title insurance insuring the City's leasehold estate, subject only to Permitted Encumbrances, in an amount at least equal to the aggregate principal amount of the Bonds. See APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - Lease Agreement — Insurance." Insurance proceeds are required to be applied to the repair of the Leased Premises; or if the proceeds are insufficient to repair or replace the Leased Premises, the City may prepay the related Lease Payments and thereby cause the redemption of outstanding Bonds. The Lease Agreement permits the City to satisfy certain of its insurance requirements through a self-insurance program. No Reserve Account Neither the City nor the Authority will create or maintain a debt service reserve account with respect to the Lease Payments or for the Bonds. 17 RISK FACTORS The following factors, along with other information in this Official Statement, should be considered by potential investors in evaluating the risks in the purchase of the Bonds. However, the following does not purport to be an exhaustive listing of risk factors and other considerations which may be relevant to an investment in the Bonds. Additionally, there can be no assurance that other risk factors will not become evident at any future time. No Tax Pledge The obligation of the City to pay the Lease Payments does not constitute an obligation of the City for which the City has levied or pledged any form of taxation. The obligation of the City to pay Lease Payments does not constitute a debt or indebtedness of the City, the City, the State of California or any of its political subdivisions,within the meaning of any constitutional or statutory debt limit or restriction. Appropriation Although the Lease Agreement does not create a pledge, lien or encumbrance upon the funds of the City, the City is obligated under the Lease Agreement, so long as the Leased Premises are available for its use and possession,to pay Lease Payments from any source of legally available funds (subject to certain exceptions) and has covenanted in the Lease Agreement that, for so long as the Leased Premises is available for its use, it will make the necessary annual appropriations within its budget for all Lease Payments. However, the City is currently liable on other obligations payable from general revenues which may have a priority over the Lease Payments (for example, if the City were to issue tax revenue anticipation notes), and the Lease Agreement does not prohibit the City from incurring additional obligations payable from general revenues. See APPENDIX A— "CITY FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION" herein and the financial statements included in APPENDIX B hereto. In the event the City's revenue sources are less than its total obligations, the City could choose to fund other municipal services before making Lease Payments and other payments due under the Lease Agreement, except from amounts on deposit in the Bond Fund. The City's ability to collect, budget and appropriate various revenues is subject to current and future State laws and constitutional provisions, and it is possible that the interpretation and application of these provisions could result in an inability of the City to pay Lease Payments when due (see "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS"below). No Limit on Additional General Fund Obligations The City has the ability to enter into other obligations which may constitute additional charges against its general revenues. To the extent that such additional obligations are incurred by the City, the funds available to make Lease Payments may be decreased. See also "SECURITY FOR THE BONDS — Additional Bonds" herein. Abatement and Eminent Domain Lease Payments are to be paid by the City in each rental period for and in consideration of the right to use and occupy the Leased Premises during each such period. The obligation of the City to make Lease Payments (other than to the extent that funds to make Lease Payments are available in the Bond Fund created under the Indenture) may be abated in whole or in part if the City does not have use and possession of the Leased Premises. The amount of Lease Payments due under the Lease Agreement will be adjusted or abated during any period in which by reason of damage or destruction or eminent domain there is interference with the use and occupancy by the City of the Leased Premises. Such adjustment or abatement will end with the substantial completion or replacement, repair or reconstruction of the Leased Premises. If damage or destruction or eminent domain proceedings with respect to the Leased Premises result in abatement of Lease Payments and the resulting Lease Payments are insufficient to make all payments of principal and interest due on the Bonds during 18 the period that the Leased Premises is being replaced, repaired or reconstructed,then such payments of principal and interest may not be made and no remedy is available to the Trustee or the Owners of the Bonds, under the Lease Agreement or Indenture, for nonpayment under such circumstances. No Reserve Fund Neither the City nor the Authority will create or maintain a debt service reserve account with respect to the Lease Payments or for the Bonds. Sufficiency of Lease Payments The Lease Payments are structured to produce Revenues sufficient to pay principal of, and interest on, the Bonds when due. While the Lease Payments are subject to optional prepayment, Revenues resulting from such actions will be sufficient to redeem a corresponding amount of the Bonds, so that the remaining Lease Payments will be sufficient to pay remaining debt service on the Bonds. The Authority has no other source of funds available to pay principal of and interest on the Bonds. Limitation on Enforcement of Remedies; No Acceleration The enforcement of any remedies provided in the Lease Agreement and Indenture could prove both expensive and time consuming. Although the Lease Agreement provides that the Trustee may take possession of the Leased Premises and lease it if there is a default by the City, and the Lease Agreement provides that the Trustee may have such rights of access to the Leased Premises as may be necessary to exercise any remedies, portions of such Leased Premises may not be easily subject to reletting and could be of little value to others. Furthermore, it is not certain whether a court would permit the exercise of the remedies of repossession and leasing with respect thereto. IN THE EVENT OF A DEFAULT UNDER THE LEASE AGREEMENT, THERE IS NO AVAILABLE REMEDY OF ACCELERATION OF THE TOTAL LEASE PAYMENTS DUE OVER THE TERM OF THE LEASE AGREEMENT. THE CITY WILL ONLY BE LIABLE FOR LEASE PAYMENTS ON AN ANNUAL BASIS AS THEY COME DUE, AND THE TRUSTEE WOULD BE REQUIRED TO SEEK SEPARATE JUDGMENTS FOR THE LEASE PAYMENTS AS THEY COME DUE. IN ADDITION, ANY SUCH SUIT FOR MONEY DAMAGES COULD BE SUBJECT TO LIMITATIONS ON LEGAL REMEDIES AGAINST PUBLIC AGENCIES IN CALIFORNIA, INCLUDING A LIMITATION ON ENFORCEMENT OF JUDGMENTS AGAINST FUNDS NEEDED TO SERVE THE PUBLIC WELFARE AND INTEREST AND A LIMITATION ON ENFORCEMENT OF JUDGMENTS AGAINST FUNDS OF A FISCAL YEAR OTHER THAN THE FISCAL YEAR IN WHICH THE LEASE PAYMENTS WERE DUE. Seismic, Topographic and Climatic Conditions The value of the Leased Premises, and the financial stability of the City, can be adversely affected by a variety of factors, particularly those which may affect infrastructure and other public improvements and private improvements and the continued habitability and enjoyment of such improvements. Such additional factors include, without limitation, geologic conditions (such as earthquakes), topographic conditions (such as earth movements and floods)and climatic conditions (such as droughts and tornadoes). The area encompassed by the City, like that in much of California, may be subject to unpredictable seismic activity. The City is located within an alluvial plain and liquefaction area. There are no special study zones within the City. Although the City believes that no active or inactive fault lines pass through the City, if there were to be an occurrence of severe seismic activity in the City, there could be an abatement or adverse impact on the City's ability to pay the Lease Payments. The City is not obligated to maintain earthquake insurance with respect to the Leased Premises. Building codes require that some of these factors be taken into account,to a limited extent, in the design of improvements, including improvements of the Leased Premises. Some of these factors may also be taken 19 into account, to a limited extent, in the design of other infrastructure and public improvements neither designed nor subject to design approval by the City. Design criteria in any of these circumstances are established upon the basis of a variety of considerations and may change, leaving previously-designed improvements unaffected by more stringent subsequently established criteria. In general, design criteria reflect a balance at the time of protection and the future costs of lack of protection, based in part upon a present perception of the probability that the condition will occur and the seriousness of the condition should it occur. Conditions may occur and may result in damage to improvements of varying seriousness, such that the damage may entail significant repair or replacement costs and that 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, the actual value of the Leased Premises, as well as public and private improvements within the City in general, may well depreciate or disappear, notwithstanding the establishment of design criteria for any such condition. See "Abatement and Eminent Domain"above. The City is exposed to a variety of wildfire hazard conditions ranging from very low levels of risk along the coastal portions of the City, to more severe hazards in the inland areas. Both portions of the Project are located on the western, or coastal, side of Interstate 5, and are not considered at significant risk. Leased Premises are in the eastern side of Interstate 5 in developed neighborhoods. Currently, fire hazard severity is a function of fuel conditions,historic climate,wind conditions, and topography. Population density or the number of structures in a particular region are not currently used to determine the fire hazard severity for a particular region. The fact that an area is in a low to moderate hazard area does not mean it cannot experience a damaging fire; it means only that the probability is reduced, generally because the number of days a year that the area has "fire weather"is less. Hazardous Substances An environmental condition that may result in the reduction in the assessed value of parcels would be the discovery of any hazardous substance that would limit the beneficial use of a property within the City, or the value of the Leased Premises. In general, the owners and operators of a property may be required by law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as "CERCLA" or the "Superfund Act" is the most well known and widely applicable of these laws, but 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 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 the Leased Premises or any substantial amount of property within the City be affected by a hazardous substance, would be to reduce the marketability and value of the property by the costs of, and any liability incurred by, remedying the condition, since the purchaser, upon becoming an owner, will become obligated to remedy the condition just as is the seller. Such reduction could adversely impact the property tax revenues received by the City and deposited in the General Fund, which could significantly and adversely affect the operations and finances of the City. The City and the Authority do not believe that the use of any of such substances has adversely affected the value of the Leased Premises. Public Debt Burden on Leased Premises The ability of land owners within the City to pay property tax installments as they come due could be affected by the existence of other taxes and assessments, imposed upon the land. In addition, other public agencies whose boundaries overlap those of the City could, without consent of the City, and in certain cases without the consent of the owners of the land within the City, impose additional taxes or assessment liens on the property within the City to finance public improvements to be located inside of or outside of the City. See APPENDIX A hereto for a statement of direct and overlapping debt on property within the City. Risk of Uninsured Loss The City covenants under the Lease Agreement to cause to be maintained certain insurance policies on the Leased Premises. These insurance policies do not cover all types of risk. For instance, the City does not 20 covenant to maintain earthquake insurance. The City may self-insure in certain circumstances. Moreover, the insurance maintained by the City may provide for deductible amounts. The Leased Premises could be damaged or destroyed due to earthquake or other casualty for which the Leased Premises are uninsured. Under these circumstances, an abatement of Lease Payments could occur and could continue indefinitely. There can be no assurance that the providers of the City's liability and rental interruption insurance will in all events be able or willing to make payments under the respective policies for such loss should a claim be made under such policies. Further, there can be no assurances that amounts received as proceeds from insurance or from condemnation of the Leased Premises will be sufficient to prepay the Lease Payments which secure the Bonds. Property Tax Allocation by the State; Changes in Law The responsibility for allocating general property taxes was assigned to the State by Proposition 13, which stated that property taxes were to be allocated "according to law." The formula for such allocation was contained in Assembly Bill 8 ("AB 8"), adopted in 1978, which allocates property taxes among cities, counties, and school districts. The formulas contained in AB 8 were designed to allocate property taxes in proportion to the share of property taxes received by a local entity prior to Proposition 13. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS—Limitations on Revenues." Beginning in its fiscal year 1992-93, in response to its own budgetary shortfalls, the State began to permanently redirect billions of dollars of property taxes Statewide from cities, counties, and certain special districts to schools and community college districts. These redirected funds reduced the State's funding obligation for K-14 school districts by a commensurate amount. In response, Proposition IA of 2004, approved by State voters in November 2004 and generally effective in Fiscal Year 2006-07, provided that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject to certain limitations. However, pursuant to Proposition IA and beginning in Fiscal Year 2008-09, the State could, upon gubernatorial proclamation of fiscal hardship and following approval of two-thirds of both houses of the legislature, and it did, shift to schools and community colleges up to 8% of local government ad valorem property tax revenues, which amount must be repaid, with interest,within three years. The State could also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. In November 2010, State voters approved Proposition 22, which amends the State's constitution to eliminate the State's authority to temporarily shift additional ad valorem property taxes from cities, counties and special districts to schools, among other things. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS, -Voter Initiatives." No assurance can be given that the State,the County's or the City electorate will not at some future time adopt initiatives, or that the State Legislature will not enact legislation that will amend the laws of the State in a manner that could result in a reduction of the City's property tax allocations or its other revenues and therefore a reduction of the funds legally available to the City to pay Lease Payments and other payments due under the Lease Agreement. See, for example, "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS—Article XIIIC and Article XIIID of the State Constitution." Bankruptcy and Foreclosure The enforceability of the rights and remedies of the Owners and the obligations of the Authority and the City may become subject to the following: the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors' rights generally, now or hereafter in effect; usual equitable principles which may limit the specific enforcement under state law of certain remedies; the exercise by the United States of America of the powers delegated to it by the Federal Constitution; and the reasonable and necessary exercise, in certain exceptional situations, of the police power inherent in the sovereignty of the State of California and its governmental bodies in the interest of serving a significant and legitimate public purpose. Bankruptcy proceedings, or the exercising of powers by the federal or state government, if initiated, could subject the Owners to judicial discretion and interpretation of their rights in bankruptcy or otherwise and consequently may entail risks of delay, limitation, or modification of their rights. Additionally, failure by major property owners to pay property taxes when due will have an adverse impact on 21 revenues of the City available to pay Lease Payments, and would increase the likelihood of a delay or default in payment of the principal of and interest on the Bonds. 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. Federal Tax-Exempt Status of the Series A Bonds Tax-Exempt Status of Interest on the Series A Bonds. The Internal Revenue Code of 1986, as amended (the "Code") imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of Series A Bond proceeds, limitations on the investment earnings on Bonds proceeds prior to expenditure, a requirement that certain investment earnings on the Series A Bond proceeds be paid periodically to the United States and a requirement that the issuers file an information report with the Internal Revenue Service (the "IRS"). The Authority and the City have covenanted in certain of the documents referred to herein that they will comply with such requirements. Failure to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of interest on the Series A Bonds as taxable,retroactively to the date of issuance of such Series A Bonds. Audit. As a part of a larger reorganization of the IRS,the IRS commenced operation of its Tax Exempt and Government Entities Division (the "TE/GE Division"), as the successor to its Employee Plans and Exempt Organizations division. The TE/GE Division has a subdivision that is specifically devoted to tax-exempt bond compliance. Public statements by IRS officials indicate that the number of tax-exempt bond examinations is expected to increase significantly under the TE/GE Division. There is no assurance that an IRS examination of the Series A Bonds, if one is undertaken, will not adversely affect the tax-exempt status or market value of such Series A Bonds. Secondary Market Risk There can be no guarantee that there will be a secondary market for the Bonds or, if a secondary market exists, that such Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon then prevailing circumstances. Such prices could be substantially different from the original purchase price. Substitution and Removal of Leased Premises The Authority and the City may, under the terms of the Lease Agreement, substitute alternate real property for any portion of the Leased Premises or release a portion of the Leased Premises from the Lease Agreement,upon compliance with all of the conditions set forth in the Lease Agreement. After a substitution or release, the portion of the Leased Premises for which the substitution or release has been effected shall be released from the leasehold encumbrance of the Lease Agreement. See "THE LEASED PREMISES - Substitution of Leased Premises"herein. No Liability of Authority to the Owners Except as expressly provided in the Indenture, the Authority will not have any obligation or liability to the Owners of the Bonds with respect to the payment when due of the Lease Payments by the City, or with respect to the performance by the City of other agreements and covenants required to be performed by it contained in the Lease Agreement or the Indenture, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Indenture. 22 CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS Limitations on Revenues Article XWA of the California Constitution. Article XIIIA of the State Constitution, adopted and known as Proposition 13, was approved by the voters in June 1978. Section 1(a) of Article XIIIA limits the maximum ad valorem tax on real property to one percent of"full cash value,"and provides that such tax shall be collected by the counties and apportioned according to State law. Section 1(b) of Article XIIIA provides that the one-percent limitation does not apply to ad valorem taxes levied to pay interest and redemption charges on (i) indebtedness approved by the voters prior to July 1, 1978, or (ii) bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978, by two-thirds of the votes cast on the proposition, or (iii) bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district, but only if certain accountability measures are included in the proposition. Section 2 of Article XIIIA defines "full cash value" to mean the county assessor's valuation of real property as shown on the fiscal year 1975-76 tax bill, or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed two percent per year, or to reflect a reduction in the consumer price index or comparable data for the area under taxing jurisdiction, or may be reduced in the event of declining property value caused by substantial damage, destruction or other factors. Legislation enacted by the State Legislature to implement Article XIIIA provides that, notwithstanding any other law, local agencies may not levy any ad valorem property tax except the 1%base tax levied by each County and taxes to pay debt service on indebtedness approved by the voters as described above. Since its adoption,Article XIIIA has been amended a number of times. These amendments have created a number of exceptions to the requirement that property be reassessed when purchased, newly constructed or a change in ownership has occurred. These exceptions include certain transfers of real property between family members, certain purchases of replacement dwellings for persons over age 55 and by property owners whose original property has been destroyed in a declared disaster, and certain improvements to accommodate disabled persons and for seismic upgrades to property. These amendments have resulted in marginal reductions in the property tax revenues of the City. Both the California State Supreme Court and the United States Supreme Court have upheld the validity of Article XIIIA. Article XWC and Article XWD of the California Constitution. On November 5, 1996, the voters of the State approved Proposition 218, known as the "Right to Vote on Taxes Act." Proposition 218 adds Articles XIIIC and XIIID to the California Constitution and contains a number of interrelated provisions affecting the ability of the City to levy and collect both existing and future taxes, assessments, fees and charges. On November 2, 2010, California voters approved Proposition 26, entitled the "Supermajority Vote to Pass New Taxes and Fees Act." Section 1 of Proposition 26 declares that Proposition 26 is intended to limit the ability of the State Legislature and local government to circumvent existing restrictions on increasing taxes by defining the new or expanded taxes as "fees." Proposition 26 amended Articles XIIIA and XIIIC of the State Constitution. The amendments to Article XIIIA limit the ability of the State Legislature to impose higher taxes (as defined in Proposition 26) without a two-thirds vote of the Legislature. The amendments to Article XIIIC define "taxes"that are subject to voter approval as "any levy, charge, or exaction of any kind imposed by a local government,"with certain exceptions. Taxes. Article XIIIC requires that all new local taxes be submitted to the electorate before they become effective. Taxes for general governmental purposes of the City ("general taxes") require a majority vote; taxes for specific purposes ("special taxes"), even if deposited in the City's General Fund, require a two-thirds vote. The voter approval requirements of Proposition 218 reduce the flexibility of the City to raise revenues for the 23 General Fund, and no assurance can be given that the City will be able to impose, extend or increase such taxes in the future to meet increased expenditure needs. Property-Related Fees, Charges and Assessments. Article XIIID also adds several provisions making it generally more difficult for local agencies to levy and maintain property-related fees, charges, and assessments for municipal services and programs. These provisions include, among other things, (i) a prohibition against assessments which exceed the reasonable cost of the proportional special benefit conferred on a parcel, (ii) a requirement that assessments must confer a "special benefit," as defined in Article XIIID, over and above any general benefits conferred, (iii) a majority protest procedure for assessments which involves the mailing of notice and a ballot to the record owner of each affected parcel, a public hearing and the tabulation of ballots weighted according to the proportional financial obligation of the affected party, and (iv) a prohibition against fees and charges which are used for general governmental services, including police, fire or library services, where the service is available to the public at large in substantially the same manner as it is to property owners. Reduction or Repeal of Taxes, Fees and Charges. Article XIIIC also removes limitations on the initiative power in matters of reducing or repealing local taxes, assessments, fees or charges. No assurance can be given that the voters of the City will not, in the future, approve an initiative or initiatives which reduce or repeal local taxes, assessments, fees or charges currently comprising a substantial part of the City's General Fund. If such repeal or reduction occurs, the City's ability to pay debt service on the Bonds could be adversely affected. Burden of Proof. Article XIIIC provides that local government "bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax,that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor's burdens on, or benefits received from, the governmental activity." Similarly, Article XIIID provides that in "any legal action contesting the validity of a fee or charge,the burden shall be on the agency to demonstrate compliance"with Article XIIID. Impact on City's General Fund. The approval requirements of Articles XIIIC and XIIID reduce the flexibility of the City to raise revenues for the General Fund, and no assurance can be given that the City will be able to impose, extend or increase the taxes, fees, charges or taxes in the future that it may need to meet increased expenditure needs. The City does not believe that any material source of General Fund revenue is subject to challenge under Articles XIIIC or XIIID. Judicial Interpretation. The interpretation and application of Articles XIIIC and XIIID will ultimately be determined by the courts with respect to a number of the matters discussed below, and it is not possible at this time to predict with certainty the outcome of such determination. Expenditures and Appropriations Article XIIIB of the California Constitution. In addition to the limits Article XIIIA imposes on property taxes that may be collected by local governments, certain other revenues of the State and local governments are subject to an annual "appropriations limit" or "Gann Limit" imposed by Article XIIIB of the State Constitution, which effectively limits the amount of such revenues that government entities are permitted to spend. Article XIIIB, approved by the voters in June 1979, was modified substantially by Proposition 111 in 1990. The appropriations limit of each government entity applies to "proceeds of taxes," which consist of tax revenues, state subventions and certain other funds, including proceeds from regulatory licenses, user charges or other fees to the extent that such proceeds exceed "the cost reasonably borne by such entity in providing the regulation, product or service." "Proceeds of taxes" exclude tax refunds and some benefit payments such as unemployment insurance. No limit is imposed on the appropriation of funds that are not "proceeds of taxes," such as reasonable user charges or fees, and certain other non-tax funds. 24 Article XIIIB also does not limit appropriation of local revenues to pay debt service on bonds existing or authorized by January 1, 1979, or subsequently authorized by the voters, appropriations required to comply with mandates of courts or the federal government, appropriations for qualified capital outlay projects, and appropriation by the State of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990, levels. The appropriations limit may also be exceeded in cases of emergency; however, the appropriations limit for the three years following such emergency appropriation must be reduced to the extent by which it was exceeded, unless the emergency arises from civil disturbance or natural disaster declared by the Governor, and the expenditure is approved by two-thirds of the legislative body of the local government. The State and each local government entity each have their own appropriations limits. Each year, each limit is adjusted to allow for changes, if any, in the cost of living, the population of the jurisdiction, and any transfer to or from another government entity of financial responsibility for providing services. Proposition 111 requires that each agency's actual appropriations be tested against its limit every two years. If the aggregate "proceeds of taxes" for the preceding two-year period exceed the aggregate limit, the excess must be returned to the agency's taxpayers through tax rate or fee reductions over the following two years. If the State's aggregate "proceeds of taxes"for the preceding two-year period exceeds the aggregate limit, 50%of the excess is transferred to fund the State's contribution to school and college districts. Voter Initiatives Under the California Constitution, the power of initiative is reserved to the voters for the purpose of enacting statutes and constitutional amendments. Since 1978, the voters have exercised this power through the adoption of Proposition 13 and similar measures, the most recent of which was approved as Proposition 22 in the general election held on November 2, 2010. Any such initiative may affect the collection of fees,taxes and other types of revenue by local agencies. Subject to overriding federal constitutional principles, such collection may be materially and adversely affected by voter-approved initiatives, possibly to the extent of creating cash-flow problems in the payment of outstanding obligations such as the Lease Payments. Proposition 62. On November 4, 1986, California voters adopted Proposition 62, which requires that(i) any local tax for general governmental purposes (a "general tax") must be approved by a majority vote of the electorate; (ii) any local tax for specific purposes (a"special tax") must be approved by a two-thirds vote of the electorate; (iii) any general tax must be proposed for a vote by two-thirds of the legislative body; and (iv) proceeds of any tax imposed in violation of the vote requirements must be deducted from the local agency's property tax allocation. Most of the provisions of Proposition 62, which was a statutory initiative, were affirmed by the 1995 California Supreme Court decision in Santa Clara County Local Transportation Authority v. Guardino, which invalidated a special sales tax for transportation purposes because less than two-thirds of the voters voting on the measure had approved the tax. Claims for taxpayer relief where a local entity may have violated Proposition 62 are subject to a three-year statute of limitations, created by statute. In the case Howard Jarvis Taxpayers Association v. City of La Habra(2001),the California Supreme Court determined that this statute of limitations begins to run anew every time the city collects the challenged tax. Proposition lA of 2004. Proposition IA of 2004, proposed by the Legislature in connection with the State's Fiscal Year 2004-05 Budget, approved by the voters in November 2004 and generally effective in Fiscal Year 2006-07, provided that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject to certain exceptions. Proposition IA of 2004 generally prohibited the State from shifting to schools or community colleges any share of property tax revenues allocated to local governments for any Fiscal Year , as set forth under the laws in effect as of November 3, 2004. Any change in the allocation of property tax revenues among local governments within a county had to be approved by two-thirds of both houses of the Legislature. 25 Proposition IA of 2004 provided,however,that beginning in Fiscal Year 2008-09,the State may shift to schools and community colleges up to 8% of local government property tax revenues, which amount must be repaid, with interest, within three years, if the Governor proclaimed that the shift is needed due to a severe state financial hardship, the shift was approved by two-thirds of both houses and certain other conditions were met. The State could also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Pending certain State actions, a Prop IA shift could occur in State fiscal year in future fiscal years. See APPENDIX A — CITY FINANCIAL ECONOMIC AND DEMOGRAPHIC INFORMATION - State Budget and its Impact on the City" for information about the State's budgets and shifts of local property revenues under Proposition IA of 2004 (which must be repaid within three years). Proposition 22. Proposition 22, entitled "The Local Taxpayer, Public Safety and Transportation Protection Act,"was approved by the voters of the State in November 2010. Proposition 22 eliminates or reduces the State's authority to (i) temporarily shift property taxes from cities, counties and special districts to schools, (ii) use vehicle license fee revenues to reimburse local governments for State-mandated costs (the State will have to use other revenues to reimburse local governments), (iii) redirect property tax increment from redevelopment agencies to any other local government, (iv) use State fuel tax revenues to pay debt service on State transportation bonds, or (v) borrow or change the distribution of State fuel tax revenues. Unitary Property AB 454 (Chapter 921, Statutes of 1986) provides that revenues derived from most utility property assessed by the State Board of Equalization ("Unitary Property "), commencing with the 1988-89 Fiscal Year, are allocated as follows: (i) each jurisdiction will receive up to 102% of its prior year State-assessed revenue; and (ii) if county-wide revenues generated from Unitary Property are less than the previous year's revenues or greater than 102% of the previous year's revenues, each jurisdiction will share the burden of the shortfall or benefit of the excess revenues by a specified formula. This provision applies to all Unitary Property except railroads,whose valuation will continue to be allocated to individual tax rate areas. The provisions of AB 454 do not constitute an elimination of the assessment of any State-assessed properties nor a revision of the methods of assessing utilities by the State Board of Equalization. Generally, AB 454 allows valuation growth or decline of Unitary Property to be shared by all jurisdictions in a county. Future Initiatives Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID, and Propositions IA of 2004, 22, 26 and 62 were each adopted as measures that qualified for the ballot through California's initiative process. From time to time, other initiative measures could be adopted, further affecting the City or its revenues or the ability of the City to expend revenues. 26 TAX MATTERS In the opinion of Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, compliance with certain covenants, interest on the Series A Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the "Code"). Bond Counsel is of the further opinion that interest on the Series A Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, provided however, that for the purpose of calculating federal corporate alternative minimum tax imposed on corporations (as defined for federal income tax purposes), such interest is taken into account in determining certain income and earnings. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Series A Bonds. The Authority has covenanted to comply with certain restrictions designed to insure that interest on the Series A Bonds will not be included in federal gross income. Failure to comply with these covenants may result in interest on the Series A Bonds being included in federal gross income, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes 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 Series A Bonds may adversely affect the value of, or the tax status of interest on,the Series A Bonds. Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Series A Bonds to be subject, directly or indirectly,to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Bond Owners from realizing the full current benefit of the tax status of such interest. As one example, the Obama Administration recently announced a legislative proposal which, for tax years beginning on or after January 1, 2013, generally would limit the exclusion from gross income of interest on obligations like the Series A Bonds to some extent for taxpayers who are individuals and whose income is subject to higher marginal income tax rates. Other proposals have been made that could significantly reduce the benefit of, or otherwise affect, the exclusion from gross income of interest on obligations like the Series A Bonds. The introduction or enactment of any such legislative proposals, clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Bonds. Prospective purchasers of the Series A Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, and regarding the impact of future legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. Certain requirements and procedures contained or referred to in the Indenture, the Tax Certificate, and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Series A Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Bond Counsel expresses no opinion as to the exclusion from gross income of interest on any Series A Bond if any such change occurs or action is taken or omitted upon the advice or approval of counsel other than Best Best&Krieger LLP. Interest payable on the Series B Bonds is not excluded from gross income for federal income tax purposes. In the further opinion of Bond Counsel, interest on the Bonds is exempt from California personal income taxes. The Internal Revenue Service (the "IRS") has initiated an expanded program for the auditing of tax- exempt bond issues, including both random and targeted audits. It is possible that the Series A Bonds will be selected for audit by the IRS. It is also possible that the market value of the Series A Bonds might be affected as a result of such an audit of the Series A Bonds (or by an audit of other similar bonds). 27 Although Bond Counsel is of the opinion that interest on the Series A Bonds is excluded from gross income for federal income tax purposes and that interest on the Bonds 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 Bond Owner's federal or state tax liability. The nature and extent of these other tax consequences will depend upon the particular tax status of the Bondholder or the Bond Owner's other items of income or deduction, and Bond Counsel expresses no opinion regarding any such other tax consequences. Copies of the proposed forms of opinions of Bond Counsel are attached hereto as Appendix D. Circular 230 Disclosure. To ensure compliance with requirements imposed by the IRS, Bond Counsel informs owners of the Series B Bonds that any U.S. federal tax advice contained in this Official Statement (including any attachments) is not intended or written to be used, and cannot be used, for the purposes of(i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this Official Statement. CONTINUING DISCLOSURE The City has covenanted for the benefit of owners of the Bonds to provide certain financial information and operating data relating to the City by not later than March 1 of each year commencing with the report for the 2013-14 fiscal year (the "Annual Report") and to provide notices of the occurrence of certain enumerated events. The Annual Report and the notices of enumerated events will be filed by the Dissemination Agent with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system ("EMMA") or any successor assigned by the Municipal Securities Rulemaking Board or Securities and Exchange Commission. These covenants have been made in order to assist the Underwriter in complying with Rule 15c2-12 promulgated under the Securities Exchange Act of 1934, as amended (the "Rule"). The specific nature of the information to be contained in the Annual Report or the notices of enumerated events by the District is set forth in APPENDIX E—"FORM OF CONTINUING DISCLOSURE AGREEMENT." During the last five years the City, the Encinitas Public Financing Authority (the "Financing Authority"), the San Elijo Joint Powers Authority (the "JPA"), the San Dieguito Water District (the "District") the Encinitas Ranch Golf Authority (the "Golf Authority") and the R.E. Badger Water Facilities Financing Authority (the "R.E. Badger Authority") failed to comply in certain respects with continuing disclosure obligations related to outstanding bonded indebtedness. The failures to comply primarily include, but are not limited to (i) failure to provide significant event notices with respect to changes in the ratings of outstanding indebtedness, primarily related to changes in the ratings of various bond insurers insuring the indebtedness of City or its related entities; and (ii) incomplete, missing or late filing of annual reports with respect to certain bond issues. The incomplete filings are described below in detail. For its City of Encinitas 1997 Refunding Certificates of Participation, Series A (Civic Center Project), the City (1) omitted from the annual report a physical copy of the audited financial statement for Fiscal Year ending June 30, 2010, and since then, the City has filed past the filing deadline a physical copy of the audited financial statement for Fiscal Year ending June 30, 2010, and (2) filed past the filing deadline its annual report for Fiscal Year ending June 30, 2013 and its audited financial statements for Fiscal Year ending June 30, 2013, and ratings event notices. For its Association of Bay Area Governments Lease Revenue Bonds, Series 2002-1 (California Project), the City (1) filed its annual report past the filing deadline for Fiscal Years ending June 30, 2008 and 2009 and (2)filed ratings event notices past the filing deadlines. Ratings event notices were not filed timely for the Encinitas Public Financing Authority 2001 Lease Revenue Bonds, Series A (Acquisition Project), the San Elijo Joint Powers Authority San Diego County, California 2003 Refunding Revenue Bonds (San Elijo Wastewater Treatment Facilities),the San Dieguito Water District (San Diego County, California) Water Revenue Refunding Bonds, Series 2004, the City of Encinitas Community Facilities District No. 12004 Bonds,the Encinitas Public Financing Authority 2006 Lease Revenue 28 Bonds, Series A (Library Construction Project) and the San Elijo Joint Powers Authority 2011 Refunding Revenue Bonds (San Elijo Water Reclamation Facility). For the R.E. Badger Water Facilities Financing Authority 2007 Water Revenue Refunding Bonds, the R.E. Badger Authority (1)filed past the filing deadline the District's annual reports for Fiscal Years ending June 30, 2011, 2012 and 2013, (2) filed past the filing deadline the District's audited financial statements for Fiscal Years ending June 30, 2012 and 2013, and (3)filed past the filing deadline ratings event notices. For the San Elijo Joint Powers Authority 2011 Refunding Revenue Bonds (San Elijo Water Reclamation Facility),the City filed past the filing deadline the City's annual reports for Fiscal Year ending June 30, 2012. In order to ensure ongoing compliance by the City, on behalf of itself and its related agencies, with the continuing disclosure undertakings, (i) the City will be instituting new procedures to ensure future compliance and coordination by the City and its related agencies; and (ii)the City has contracted with a consultant to assist the City in filing accurate, complete and timely disclosure reports on behalf of the City and its related agencies. The City has been advised by Southwest Securities, Inc. that the City is being reported by Southwest Securities, Inc. under the current Municipalities Continuing Disclosure Cooperation ("MCDC") initiative of the SEC. The reporting relates to the Encinitas Public Financing Authority 2010 Lease Revenue Bonds (the "2010 Authority Bonds") and the statement in the official statement for the 2010 Authority Bonds that the City was in compliance with all continuing disclosure requirements. MCDC is a program allowing issuers and underwriters to voluntarily report non-compliance with disclosure obligations. The deadline for underwriting firms to report was September 10, 2014. The deadline for issuers to report is December 1, 2014. The City is in the process of determining whether it will self-report under MCDC. CERTAIN LEGAL MATTERS Best Best & Krieger LLP, Riverside, California, Bond Counsel, will render an opinion with respect to the validity and enforceability of the Indenture and the Lease Agreement, and as to the validity of the Bonds. Best Best & Krieger LLP, Riverside, California has acted as disclosure counsel for the City and Authority in connection with the issuance of the Bonds. Certain matters will be passed upon for the Authority and the City by the City Attorney. LITIGATION To the best knowledge of the City and the Authority,there is no action, suit or proceeding pending or,to the knowledge of City or Authority officials,threatened, restraining or enjoining the execution or delivery of the Bonds,the Lease Agreement, or the Indenture, or in any way contesting or affecting the validity of the foregoing or any proceedings of the Authority or the City taken with respect to any of the foregoing. FINANCIAL ADVISOR The Authority has retained Fieldman, Rolapp &Associates, Irvine, California, as Financial Advisor(the "Financial Advisor") for the sale of the Bonds. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume any responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. The Financial Advisor is an independent advisory firm and is not engaged in the business of underwriting, trading, or distributing municipal or other public securities. PROFESSIONAL FEES In connection with the issuance of the Bonds, fees payable to Best Best & Krieger LLP, as Bond Counsel and Disclosure Counsel, Fieldman, Rolapp & Associates, as Financial Advisor, and MUFG Union Bank,N.A., as Trustee, are contingent upon the issuance of the Bonds. Certain matters will be passed on for the Underwriter by Stradling Yocca Carlson&Rauth, a Professional Corporation. 29 FINANCIAL STATEMENTS The general purpose financial statements of the City for the Fiscal Year ending June 30, 2013, pertinent sections of which are included in APPENDIX B to this Official Statement, have been audited by Macias Gini & O'Connell LLP, independent certified public accountants, as stated in their report appearing in APPENDIX B. The City has not requested, and the auditor has not provided, any consent to the inclusion of its report herein or any update or review of its report in connection with its inclusion in this Official Statement. See APPENDIX B hereto. RATINGS Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business. ("S&P") has assigned its municipal bond rating of "AA+" to the Bonds. The rating reflects only the views of such organization, and an explanation of the significance of such rating may be obtained from S&P. There is no assurance that any rating will continue for any given period of time for the Bonds or that it will not be revised downward or withdrawn entirely by such rating agency, if, in the judgment of such rating agency, circumstances so warrant. The Authority undertakes no responsibility to oppose any downward revision or withdrawal of any rating obtained. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. UNDERWRITING The Authority has agreed to sell the Bonds to Stifel, Nicolaus & Company, Incorporated (the "Underwriter"), and the Underwriter has agreed, subject to certain conditions, to purchase the Bonds. The purchase price of the Series A Bonds is $3,039,859.27 (the principal amount of the Series A Bonds, less a Underwriter's discount in the amount of$24,026.28, and less net original issue discount of$31,114.45). The purchase price of the Series B Bonds is $10,134,513.53 (the principal amount of the Series B Bonds, less a Underwriter's discount in the amount of$74,286.22, and less a net original issue discount of$156,200.25). The obligations of the Underwriter are subject to certain conditions precedent, and it will be obligated to purchase all such Bonds if any such Bonds are purchased. The public offering prices of the Bonds may be changed from time to time by the Underwriter. The Underwriter reserves the right to join with dealers and other underwriters in offering the Bonds to the public. The Underwriter may offer and sell the Bonds to certain dealers (including dealers depositing Bonds into investment trusts) at prices lower than the public offering prices, and such dealers may reallow any such discounts on sales to other dealers. [BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK] 30 MISCELLANEOUS References are made herein to certain documents and reports which are brief summaries and do not purport to be complete or definitive. Prospective purchasers of the Bonds are advised to refer to such documents and reports for full and complete statements of their contents. Copies of the Indenture, the Lease Agreement and other documents are available, upon request, and upon payment to the City of a charge for copying and mailing, from the City Clerk at the City of Encinitas. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Authority and the purchasers or Owners of any of the Bonds. The execution of this Official Statement and its use in connection with the offering of the Bonds for sale have been authorized by the Authority and the City. ENCINITAS PUBLIC FINANCING AUTHORITY By: /S/Gus Vina Executive Director CITY OF ENCINITAS By: : /S/Gus Vina City Manager 31 MISCELLANEOUS References are made herein to certain documents and reports which are brief summaries and do not purport to be complete or definitive. Prospective purchasers of the Bonds are advised to refer to such documents and reports for full and complete statements of their contents. Copies of the Indenture, the Lease Agreement and other documents are available, upon request, and upon payment to the City of a charge for copying and mailing, from the City Clerk at the City of Encinitas. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Authority and the purchasers or Owners of any of the Bonds. The execution of this Official Statement and its use in connection with the offering of the Bonds for sale have been authorized by the Authority and the City. ENCINITAS PUBLIC FINANCING AUTHORITY By: Executtve Director CITY OF ENCINITAS By. City Manager 31 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX A CITY FINANCIAL,ECONOMIC AND DEMOGRAPHIC INFORMATION The information herein is subject to change without notice, and neither delivery of this Official Statement nor any sale thereafter of the Bonds shall under any circumstances imply that there has not been any change in the affairs of the City or in any other information contained herein since the date of the Official Statement. The Bonds are payable solely from the sources described herein (see "SECURITY FOR THE BONDS"). The taxing power of the City of Encinitas,the County of San Diego,the State of California or any political subdivision thereof is not pledged to the payment of the Bonds. See the information under the caption "THE BONDS." General The City was incorporated in October 1986. The City's incorporation involved a reorganization consisting primarily of the incorporation of the City of Encinitas; the detachment of territory from the Cardiff Sanitation District and annexation of the same territory to the Solana Beach Sanitation District; and the establishment of the Encinitas Fire Protection District, the San Dieguito Water District (the "Water District") and the Encinitas Sanitation District as subsidiary districts of the City. Currently, all of the subsidiary districts, excluding the Water District,have been absorbed by the City as separate accounting divisions. The City is located in the northern coastal area of San Diego County (the "County") overlooking the Pacific Ocean. The City encompasses approximately 21.4 square miles and is located approximately 25 miles north of the City of San Diego and immediately north of the City of Solana Beach. Topography of the surrounding area varies from broad coastal plains to fertile inland valleys backed up by mountain ranges to the east. The climate is equable in the coastal and valley regions. The City maintains a website at www.cityofencinitas.org. However, the information presented there is not part of this Official Statement, is not incorporated by reference herein and should not be relied upon in making an investment decision with respect to the Bonds. City Government The City is a general law city and operates under a council-manager form of government. The City Council consists of five members elected at large, who also serve as the Board of Directors of the three subsidiary districts of the City. Council members serve four-year terms, with elections every two years for either two or three seats. The Mayor is selected by a majority vote of the City Council and serves a one year term. The City Manager is appointed by the City Council and serves as the City Council's administrative head of the City. All other city employees are appointed by and are responsible to the City Manager, except the City Attorney and the City Clerk,who are appointed by the City Council. The City supplies portions of its residents with water and sewer service through its subsidiary districts. The northern portion of the City is provided with sewer service by the independent Leucadia County Wastewater District. The eastern half of the City receives potable water from the Olivenhain Municipal Water District. Power is supplied by San Diego Gas and Electric, and telephone service by Pacific Bell. The City has its own parks and community services departments, but contracts for police service from the County. The current contract with the County for law enforcement services extends through the period July 1, 2012 to June 30, 2017. A-1 Population At incorporation in 1986,there were about 48,558 people in the City limits. As of January 1, 2014,the California Department of Finance estimates that Encinitas has grown to a population of 61,204, and expects to be built out according to general plan estimates at 73,600. Encinitas is a low density community consisting predominately of single family homes. TABLE A-1 CITY OF ENCINITAS POPULATION ESTIMATES Year City of Encinitas San Diego County State of California 2008 59,411 3,032,689 36,399,676 2009 59,453 3,064,436 36,704,375 2010 59,628 3,091,579 36,966,713 2011 59,910 3,118,876 37,510,760 2012 60,346 3,143,429 37,678,563 2013 60,568 3,154,574 37,984,138 2014 61,204 3,194,362 38,340,074 Source: California State Department of Finance. Employees and Labor Relations The City currently employs 216 full-time equivalent employees, including 48 fire safety personnel. The following table presents the number of full-time City employees for the Fiscal Years 2009/10 through 2013/14. TABLE A-2 CITY OF ENCINITAS FULL-TIME CITY EMPLOYEES (Fiscal Years 2009/10 through 2013/14) Fiscal Number of Year Full-Time Employees(l) 2009/10 217 2010/11 212 2011/12 213 2012/13 212 2013/14 216 San Dieguito Water District employees are not included as employees of the City. There are approximately 24 SDWD employees. Source: City of Encinitas Finance Department. A-2 Approximately 73% of regular City employees are represented by various associations, and labor relations have been generally amicable. There has not been any recent major strikes, work stoppages, or other similar incidents. The following table provides a list of employee organizations in the City and the number of employees they represent as of January 1, 2014. TABLE A-3 CITY OF ENCINITAS EMPLOYEE ORGANIZATIONS (As of January 1,2014) Employees Expiration of Organization Represented Contract Service Employees International Union (Local 2028) 125 December 31, 2011(') Encinitas Firefighters Assoc. 48 December 31, 2015 Source: City of Encinitas. No successor agreement has been entered,and the governing agencies adopted"Terms&Conditions of Employment' which has no ending date. Accounting Policies and Financial Reporting The City's accounting records are organized and operated on a "fund" basis, which is the basic fiscal and accounting unit in governmental accounting. The operations of the different funds are accounted for with separate sets of self balancing accounts showing assets, liabilities, fund balance or equity, and revenues and expenses. The basis of accounting for all funds is more fully explained in the "Notes to the City of Encinitas General Purpose Financial Statements"contained in APPENDIX B hereto. The City, all its funds and the Encinitas Public Financing Authority are audited annually by a certified public accounting firm. The firm of Macias Gini &O'Connell, LLP, San Diego, California,is the City's current auditor. The audited financial statements of the City for Fiscal Year 2012/13 are attached hereto as APPENDIX B. The auditor has not been requested to review such audited financial statements prior to inclusion in this Official Statement. Audited financial statements for prior fiscal years are available upon request from the Finance Department of the City or on its website at www.cityofencinitas.org. The City General Fund finances the legally authorized activities of the City not provided for in other restricted funds. General fund revenues are derived from such sources as taxes; licenses and permits, fines, forfeits and penalties; use of money and property; aid from other governmental agencies; charges for current services; and other revenue. General Fund expenditures and encumbrances are classified by the functions of general government, planning and building, public safety, public works, engineering and parks and recreation. Amounts on deposit in the Bond Fund held by the Trustee are pledged to payment of Lease Payments and are not available for other uses by the City. State Budget and its Impact on the City Set forth in the following paragraphs are descriptions of the State budget process, the current State budget situation, and the potential impacts on the City. State Budget Information about the State budget is regularly available at various State-maintained websites. Text of proposed and adopted budgets may be found at the website of the Department of Finance, www.dofca.gov, under the heading "California Budget." An impartial analysis of the budget is posted by the Office of the Legislative Analyst at www.lao.ca.gov. In addition, various State of California official statements, many of which contain a summary of the current and past State budgets and the impact of those budgets on cities in the State, may be found at the website of the State Treasurer, www.treasurer.ca.gov. The information referred to is prepared by the respective State agency maintaining each website and not by the City, and the City can take no A-3 responsibility for the continued accuracy of these internet addresses or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by these references. Proposition 30. The passage of the Governor's November Tax Initiative ("Proposition 30") placed on the November, 2012 ballot resulted in an increase in the State sales tax by a quarter-cent for four years and, for seven years, raising taxes on individuals after their first $250,000 in income and on couples after their first $500,000 in earnings. These increased tax rates will affect approximately 1 percent of California personal income tax filers and went into effect starting in the 2012 tax year, ending at the conclusion of the 2018 tax year. The LAO estimates that, as a result of Proposition 30, additional state tax revenues of about $6 billion annually from 2012-13 through 2016-17 will be received by the State with lesser amounts of additional revenue available in fiscal years 2011-12, 2017-18, and 2018-19. These additional monies fund programs in the State Budget as described above and prevented the "trigger cuts" which were anticipated in the 2012-13 State Budget, thus avoiding spending reductions of about $6 billion in fiscal year 2012-13, mainly to education programs. Proposition 30 also places into the State Constitution certain requirements related to the transfer of certain State program responsibilities to local governments, mostly counties, including incarcerating certain adult offenders, supervising parolees, and providing substance abuse treatment services. California Public Employees'Pension Reform Act. On September 12, 2012, Governor Brown signed Assembly Bill 340, creating the Public Employees' Pension Reform Act ("PEPRA"). Among other things, PEPRA creates a new benefit tier for new employees/members entering public agency employment and public retirement system membership for the first time on or after January 1, 2013. The new tier has a single general member benefit formula and three safety member benefit formulas that must be implemented by all public agency employers unless the formula in existence on December 31, 2012 has both a lower normal cost and a lower benefit factor at normal retirement age. PEPRA requires that all new employees/members, hired on or after January 1, 2013, pay at least 50% of the normal cost contribution. The normal cost contribution is the contribution set by the retirement system's actuary to cover the cost of a current year of service. The City believes that the provisions of PEPRA will help to control its pension benefit liabilities in the future. 2013-14 State Budget. Governor Brown signed the final 2013-14 State Budget(the "2013-14 Budget") into law on June 27, 2013. The centerpiece of the 2013-14 Budget was the restructuring of the State's funding formula for K-12 schools through the implementation of the "Local Control Funding Formula." The 2013-14 Budget allocated $2.1 billion to commence transitioning the State to the new formula, allocating proportionately more money to school districts with high levels of low-income students, those with limited English proficiency and foster children. Overall, the 2013-14 Budget boosted K-12 and community college funding to $55.3 billion while giving the University of California and California State University systems an additional $125 million each. The 2013-14 Budget also restored $63 million to the State court system that was subject to significant budget cuts in recent years and moved forward with the State-based approach to the optional expansion of care allowed under the Federal healthcare reform which significantly increase of health care coverage in the State. The 2013-14 Budget provided county welfare departments up to $120 million in additional State general fund monies to accommodate new workload associated with implementing the Affordable Care Act. In fiscal year 2015-16, the State will implement a new budgeting methodology, developed in consultation with counties, and based on a zero-base review of all Medi-Cal related county administrative activities. Under Federal health care reform, county costs and responsibilities for indigent health care are expected to decrease as uninsured individuals obtain health care coverage. The State, in turn, will bear increased responsibility for providing care to these newly eligible individuals through the Medi-Cal expansion. Significant features of the 2013-14 Budget pertaining to local agencies include the following: Redevelopment Agency Dissolution. As a result of the dissolution of redevelopment agencies process, the Budget anticipated that counties would receive $1.4 billion in new general purpose revenues in fiscal years 2012-13 and 2013-14 combined, with cities receiving $1.1 billion and special districts $500 million. On an ongoing basis, it is estimated that over $675 million annually will be distributed to counties, cities, and special districts. This is a significant amount of unrestricted funding that can be used by local governments to fund police, fire, or other critical public services. A-4 Corrections. The California Community Corrections Performance Incentive Act of 2009 (SB 678) established a system of performance-based funding that shares State general fund savings with county probation departments when they demonstrate success in reducing the number of adult felony probationers going to state prison. The Budget included changes to the SB 678 funding formula to account for county probation departments' success in reducing the number of adult felony probationers incarcerated in county jail. This provided total funding of$106.9 million in fiscal year 2013-14 to continue support for probation efforts targeted at reducing recidivism and encouraging alternatives to incarceration. Veterans Affairs. The 2013-14 Budget included an increase of $3 million State general fund and 36 positions to form Strike Teams in each of the United States Department of Veterans Affairs ("USDVA") Regional Offices. These resources assisted the USDVA in its efforts to eliminate the backlog of claims to ensure veterans receive the federal benefits for which they are eligible. The 2013-14 Budget included a one-time increase of$3 million general fund for County Veterans Service Officers to better provide veterans free USDVA claims assistance and information and referral to local, state, and federal programs. 2014-15 State Budget. On June 20, 2014, Governor Brown approved the 2014-15 Budget Act (the "2014-15 Budget"), projecting $108 billion in general fund revenues, including $7.3 billion more in general fund revenues than in fiscal year 2013-14. The 2014-15 Budget is balanced and projects paying down more than $10 billion in budgetary debt from previous years, including paying down deferral of payments to schools by $5 billion, paying off Economic Recovery Bonds, repaying various special fund loans, and funding $100 million in mandate claims that have been owed to local governments since 2004. The budgetary deficit is projected to be reduced to below $5 billion by the end of 2016-17. The fiscal year begins with a 2014-15 State Budget reserve of$2 billion, including $1.6 billion in the State's Budget Stabilization Account, also known as the State's rainy day fund (the "Rainy Day Fund"). Temporary revenues provided by the passage of Proposition 30 (Sales and Income Tax Revenue Increase approved by State voters at an election held on November 8, 2011) and spending cuts have allowed for continued economic growth in the State. The 2014-15 State Budget also contains triggers allowing for additional spending, if various revenue benchmarks are exceeded. If revenues surpass certain estimates,then the Budget calls for more funds to be applied to higher education and to pay down debt. Significant features of the 2014-15 pertaining to local agencies include the following. Constitutional Amendment. The 2014-15 State Budget includes a proposed constitutional amendment which will be placed before State voters in November, 2014. The measure, upon approval, would alter the State's existing requirements for its Budget Stabilization Account, the State's existing Rainy Day Fund. If approved,this amendment would: (a) require deposits into the Rainy Day Fund whenever capital gains revenues rise to more than 8 percent of general fund tax revenues, and would set the maximum size of the Rainy Day Fund at 10 percent of the general fund revenues; (b) require half of each year's deposit for the next 15 years be used for supplemental payments of debt or other long-term liabilities; (c) allow for withdrawal of funds only for a disaster or if spending remains at or below the highest level of spending from the past three years; (d)provided that the maximum amount that could be withdrawn in the first year of a recession would be limited to half of the Rainy Day Fund's balance; (e) require that the State provide a multiyear budget forecast to better manage the State's long-term finances; and (f) create a Proposition 98 reserve, known as the "Public School System Stabilization Account,"where spikes in funding would be saved for future years. Healthcare and Higher Education. The 2014-15 State Budget includes total funding of $26.2 billion ($14.7 billion general fund and local property tax and $11.5 billion other funds). It also provides for up to a 20 percent increase in general fund appropriations over a four-year period. The 2014-15 Budget includes a 5 percent increase in 2014-15 for each university system, which equals $284 million total. Regarding healthcare, the State's adoption of the optional expansion of Medi-Cal under federal law known as the Affordable Care Act created major new spending commitments. The 2014-15 Budget assumes an additional Medi-Cal caseload of 2.5 million individuals and a rise in costs of$2.4 billion over fiscal year 2012-13. Factors Affecting Budget and Projections. The execution of the 2014-15 State Budget may be affected by numerous factors, including but not limited to: (i) shifts of costs from the federal government to the State, (ii) national, State and international economic conditions, (iii) litigation risk associated with spending reductions, A-5 including the elimination of redevelopment agencies, (iv) rising health care costs, (v) large unfunded liabilities for retired State employee's pensions and healthcare, (vi) deferred maintenance of State's critical infrastructure and (vii) other factors, all or any of which could cause the revenue and spending projections made in 2014-15 State Budget to be unattainable. The City cannot predict the impact that the 2014-15 State Budget, or subsequent budgets, will have on its own finances and operations. Additionally, the City cannot predict the accuracy of any projections made in the State's 2014-15 State Budget. Emergency Drought Response. On January 17, 2014, Governor Brown proclaimed a state of emergency due to the severe drought conditions faced by the State. Legislation was enacted in February which provided $687.4 million to support drought relief The 2014-15 Budget includes additional one—time resources to continue immediate drought-related efforts started in 2014, such as an increase of$53.8 million general fund and $12.2 million other funds for firefighting efforts, and an increase of$18.1 million general fund to aid in assessing water conditions and provide public outreach regarding water conservation. Future State Budgets No prediction can be made by the City as to whether the State will encounter budgetary problems in future fiscal years, and if it were to do so, it is not clear what measures would be taken by the State to balance its budget, as required by law. In addition, the City cannot predict the final outcome of future State budget negotiations, the impact that such budgets will have on City finances and operations or what actions will be taken in the future by the State Legislature and the Governor to deal with changing State revenues and expenditures. There can be no assurance that actions taken by the State to address its financial condition will not materially adversely affect the financial condition of the City. Current and future State budgets will be affected by national and State economic conditions and other factors, including the current economic downturn, over which the City has no control. Budgetary Process and Current Budget The City develops a two-year operating budget for planning purposes and appropriates funds annually for operations and to fund the capital improvement program prior to the start of each fiscal year. The Council conducts a public hearing (workshop) prior to adopting the budget. Supplemental appropriations, where required during the fiscal year, are also approved by the Council. The authority for budgetary control is at the department level. A department head may transfer appropriations within the department. Expenditures may exceed appropriations to the extent that departmental revenues are sufficient to offset the excess. Expenditures in excess of departmental revenues must be approved by the Council. The Council, by the affirmative vote of three members, may amend the budget to add or delete appropriations, transfer between appropriations within a fund or change appropriations transfers between funds. An item of Required Supplementary Information, pursuant to GASB 34, is a Budgetary Comparison Schedule of the Original Adopted Budget and the Final Budget for the General Fund and all major Special Revenue Funds with explanations of the major changes. That schedule is included in the financial report in APPENDIX B for Fiscal Year 2012/13. A-6 00 N .r oc N N O� 00 vl 00 N DD M --� N bq U ^O l� M M DD N O 00 O N N N O 00 - M 00 N — 'ti ('V � U �" •Fw ,may � N N � --� � i--� rte- CC � EA Efj EA Efj U N N nr- �o n "I Ir- Oo� y y �O M l— M O� O��O --i O 00 r- - 00 N M O M ' C,j �. � N r- Mi l�Vl O� M-� '� R i 00 l— l— M � 00 M M N Ef3 EA Ef3 No � � oo� o� 1�0 ooN � �noo o� � +•� d ^O O r- N Vl M Vl M cn oo o0 0 o0 00 o o0 00C,00 l� M v1 DD � DD to EA EA EA �5 -� p ^ N DD O O r '� � 00 M N 00 .cn-i ,,,� � 0 •� �M-I N N N � . j N EA EA EA EA cr F. ate+ v1 DD Vl ml N :; N �O �O '7t 00 M r Vl �c00 �o nN00 n � N N W w ~ � A N F. y O V1 M V1 O O 00 M CC M Vl O �O Vl M l� O l- DD M � � N M O � 00 C oC oo �n 00 r- �•' '� Vl O 00 ,--i Vl ,--i l� 00 l� M 00 N �Q 00 00 N 00 l- l- 00 Vl 00 M �' C N M M t Vl EA _ _ _ d � O 00 00 00 N M 00 M 00 .y w O F+I •"� +' M N M ol N Vl DD M W M �•i cu, '� ICI i N ,--i �..i ,--i M N E!j EA Efj M cd .FJy vl M I- O O O M 00 1- 00 M 00 O O m N 00 O� M M �O MCA �O N M N �O 400 � M m 00 l- O " o O� U � Ga DD DD DD ,C'y � U � •� .--I �/1 � N O� M M M M � O� N w � i � � V � O � U C O N cli � �c7aaawaU � U � U N Chi W c0 The City Council adopted a balanced Fiscal Year 2014/15 budget, which reflects an approximately 3% increase in annual growth of secured property taxes and 11% increase in sales taxes and maintains current spending levels for services, law enforcement, traffic enforcement and fire protection and prevention as compared to Fiscal Year 2013/14 budget. The City has conservatively budgeted expected revenues and the budget does not show any inter-fund transfers. The following table summarizes the Fiscal Year 2014/15 City Budget. The City may make minor mid- year adjustments to the current adopted budget. TABLE A-5 CITY OF ENCINITAS GENERAL FUND BUDGET (Fiscal Year 2014/15) 2014/15 Item Budget Revenues: Taxes $50,739,336 Licenses and Permits 195,057 Intergovernmental 476,978 Charges for services 5,006,577 Fines&Forfeitures 695,558 Use of money and property 466,991 Other 363,721 Total Revenues $57,944,218 Expenditures Current: General Government $ 9,215,450 Public Safety 25,509,706 Public Works 4,175,223 Planning and building 4,876,083 Engineering Services 4,145,575 Parks and Recreation 5,151,298 Capital Outlay 375,000 Total Expenditures $53,448,335 Excess(Deficiency)of Rev.Over Exp. 4.495.883 Debt Service $ 4,776,491 Excess Revenues Over Expenditures after Debt Service (280.6081 Source: City of Encinitas. Historic General Fund Revenues Taxes received by the City include property taxes, sales taxes, franchise fees,property transfer taxes and transient occupancy taxes. Of such taxes, property taxes and sales taxes constitute the major sources of revenues. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS — Voter Initiative," — "Proposition 62" and — Proposition 218" herein for a discussion of certain general taxes imposed by the City that may be affected by initiatives approved by the California voters. A significant revenue source of the City is State of California payments and other payments in-lieu of taxes. The City receives a portion of Department of Motor Vehicles fees collected statewide. Payment of State assistance depends on the adoption by the State of its budget, including the appropriations therein providing for local assistance. These revenues are shown in the accompanying financial statements as "intergovernmental revenues. The State 2004/05 budget included a permanent reduction of vehicle license rate from 2% to 0.65%. Backfill dollars for this reduction have been eliminated and replaced with a like amount of property taxes (property taxes in-lieu of VLF). A-8 cl U � U w - m O\ oo l- \O N d\ !t N U Vl Vl Vl Vl Vl Vl Vl Vl Vl cz v � O � 00 M 00 •--� •--� N O U M — (= M 00 \O M \O M W') O 7t O\ r- 7t v') o0 cC I!t d\ "C a', N N r-- o0 00 00 V') cz v') M v-) 7t bA W M M N oc U � a\ oc 7t `O `O O a O Z \O o0 0o AO O v W CC U 00 cz O Vl N M Vl M 7t 00 V y y oc a\ 7t OSN 00 l-- l-- O O a\ O U W Z yCIO M d v M d O v \O 4 0 O U S•. � � W O Q � O M M � V') M M Vl l� 00 O\ � � 00 00 rl- O N rl- oc `O `O oc v'� O 7t O o0 7t \O 0 oc \O S. y \O o0 M N 7t M N `O v'� O y cz x O o0 00 00 00 l� a O O -- N U U U cz oc Vy OM V') 7t M M \O M A N 01 N O o cz U O v O v 0o M � a oc N N \ U y v� oc O O oo -!t O O a M N + CL y \O oc ll- Wn ll- a\ a\ M `O cz O 00 Vl 00 N M N M cz N M ° ,!t AO ll- oo al O N M 4 O N N N N N N N N N N N W '0 0 O s•. w O � � cC sU. � "�" U � �, N ,��., •�". ,��, •may '� N N cz Q M � O � O O. Property Taxes. Property tax receipts of$35,133,220 provided the largest tax revenue source of the City in Fiscal Year 2014, contributing approximately 59% of General Fund revenues during Fiscal Year 2014. Property in the State which is subject to ad valorem taxes is classified as "secured"or"unsecured." The secured classification includes property on which any property tax levied by a county becomes a lien on that property. A tax levied on unsecured property does not become a lien against the taxed unsecured property, but may become a lien on certain other property owned by the taxpayer. Every tax which becomes a lien on secured property has priority over all other liens, arising pursuant to State law, on the secured property, regardless of the time of the creation of other liens. The valuation of property is determined as of January 1 each year, and installments of taxes levied upon secured property become delinquent on the following December 10th and April 10th of the subsequent calendar year. Taxes on unsecured property are due July 1 and become delinquent August 31. Secured and unsecured properties are entered separately on the assessment roll maintained by the county assessor. The method of collecting delinquent taxes is substantially different for the two classifications of property. The exclusive means of forcing the payment of delinquent taxes with respect to property on the secured roll is the sale of the property securing the taxes of the State for the amount of taxes that are delinquent. The taxing authority has four methods of collecting unsecured personal property taxes: (1) filing a civil action against the taxpayer; (2) filing a certificate in the office of the county clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for recording in the county recorder's office in order to obtain a lien on certain property of the taxpayer; and (4) seizing and selling personal property, improvements or possessory interests belonging or taxable to the assessee. The County of San Diego has adopted a Teeter Plan with respect to property tax disbursements, however, the City has elected not to participate. A 10% penalty is added to delinquent taxes which have been levied with respect to property on the secured roll. In addition,beginning on the July 1 following a delinquency, interest begins accruing at the rate of 1.5% per month on the amount delinquent. Such property may thereafter be redeemed by the payment of the delinquent taxes and the 10%penalty, plus interest at the rate of 1.5%per month to the time of redemption. If taxes are unpaid for a period of five years or more,the property is deeded to the State and then is subject to sale by the county tax collector. A 10% penalty also applies to the delinquent taxes or property on the unsecured roll, and further, an additional penalty of 1.5% per month accrues with respect to such taxes beginning on the varying dates related to the tax billing date. Legislation enacted in 1984 (Section 25 et seq. of the California Revenue and Taxation Code),provides for the supplemental assignment and taxation of property as of the occurrence of a change in ownership or completion of new construction. Previously, statutes enabled the assessment of such changes only as of the next tax lien date following the change and thus delayed the realization of increased property taxes from the new assessment for up to 14 months. Collection of taxes based on supplemental assessments occurs throughout the year. Taxes due are prorated according to the amount of time remaining in the tax year, with the exception of tax bills dated January 1 through May 31, which are calculated on the basis of the remainder of the current Fiscal Year and the full 12 months of the next Fiscal Year. For a number of years, the State Legislature has shifted property taxes from cities, counties and special districts to the Educational Revenue Augmentation Fund ("ERAF"). In Fiscal Years 1993 and 1994, in response to serious budgetary shortfalls, the State Legislature and administration permanently redirected over $3 billion of property taxes from cities, counties, and special districts to schools and community college districts pursuant to ERAF shifts. The City last paid ERAF in 1995 and 1996, but was not required to pay any ERAF in later years when it has been imposed on other agencies. On November 2, 2004, State voters approved Proposition IA, which amended the State Constitution to significantly reduce the State's authority over major local government revenue sources. Under Proposition IA, the State may not: (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes; (ii) shift property taxes from local governments to schools or community colleges; (iii) change how property tax revenues are shared among local governments without two-thirds approval of both houses of the State Legislature; or (iv) decrease Vehicle License Fee revenues without providing local governments with equal replacement funding. See, "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES A-10 AND APPROPRIATIONS — Voter Initiatives." Beginning in Fiscal Year 2009, the State may shift to schools and community colleges a limited amount of local government property tax revenue if certain conditions are met, including: (a) a proclamation by the Governor that the shift is needed due to a severe financial hardship of the State; and (b) approval of the shift by the State Legislature with a two-thirds vote of both houses. Under such a shift, the State must repay local governments for their property tax losses, with interest, within three years. Proposition IA does allow the State to approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Sales and Use Tax. The sales tax is an excise tax imposed on retailers for the privilege of selling or leasing tangible personal property. The use tax is an excise tax imposed for the storage, use, or other consumption of tangible personal property purchased from any retailer. The total sales tax rate within the City is currently 8.75%. The proceeds of sales and uses taxes imposed within the City are distributed by the State to various agencies, with the City receiving 1.0% of the amount collected less 0.25% shifted to the State pursuant to a mechanism commonly known as "Triple Flip." The 0.25% reduction in local sales tax is used to pay State economic recovery bonds, but cities and counties are then provided with ad valorem property tax revenues in lieu of these revenues. The California State Board of Equalization administers collection of the sales and use tax. Under its procedures, the State Board of Equalization projects receipts of the sales and use tax on a quarterly basis and remits an advance of the receipts of the sales and use tax to the City on a monthly basis. The amount of each monthly advance is based upon the State Board of Equalization's quarterly projection. During the last month of each quarter, the State Board of Equalization adjusts the amount remitted to reflect the actual receipts of the sales and use tax for the previous quarter. The Board of Equalization receives an administrative fee based on the cost of services provided by the Board to the City in administering the City's sales tax, which is deducted from revenue generated by the sales and use tax before it is distributed to the City. Factors that have historically affected sales tax revenues include the overall economic growth of the San Diego County Area, competition from neighboring cities, the growth of specific industries within the City, the City's business attraction and retention efforts, and catalog and Internet sales. In fiscal year 2013-14, revenues from sales and use taxes increased by 4.16%from Fiscal Year 2012-13. Other Taxes and Fees Franchise Fees. The City levies a franchise fee on its cable television, trash collection and utility franchises. Transient Occupancy Taxes. The City levies a 10%, voter-approved transient occupancy tax on hotel and motel bills, and short-term residential vacation rentals. Property Transfer Taxes. A documentary stamp tax is assessed by the County and remitted to the City for recordation of real property transfers. Documentary Transfer Tax. The County imposes a $1.10 per $1,000 of value of any documented sale or transfer of real property within the City. The tax is due when the transfer is recorded with the County. Title companies collect the tax as part of the sale closing process and remit the funds to the County when sales or transfers are finalized. The County remits the amounts due monthly, and the amounts are credited to the general fund. City Investment Policy The City may invest public funds until such time as the funds are needed to pay the obligations of the City. The City maintains an Investment Policy which sets forth guidelines of the City Treasurer's investment of such funds. The Treasurer is a trustee and therefore a fiduciary subject to the prudent investor standards, and the primary objective shall be to safeguard the principal of the funds under its control. The secondary objective shall be to meet liquidity needs, and the third objective shall be to achieve a market rate of return. A-11 The City matches its investments with anticipated cash flow requirements. Pursuant to the California Government Code, maximum maturities shall not exceed five (5) years, without specific approval of the City Council. The City's investment policy limits the investment of the City's funds by specifying term, diversification and credit quality. The requirements of the City's policy regarding these investments are either the same as or more restrictive than the requirements of State law. The City has elected not to permit other types of investments which are permitted by State law. The City's investment portfolio had a market value as of June 30, 2014 of $91,845,227.82. The following table presents a breakdown of the City's investment portfolio by type of security as of that date. Market Investments Value % of Portfolio LAIF $15,027,887.08 16.38% Managed Pool Accounts 1,000,000.00 1.09 Money Market Funds 2,111,178.99 2.30 Certificates of Deposit—Bank 2,982,299.20 3.24 U.S. Treasury Coupon Securities 18,383,820.00 20.00 Federal Agency Coupon Securities 38,432,545.55 41.84 Federal Agency Callable Securities 12,900,327.00 14.06 Corporate Medium Term Notes 1,007,170.00 1.09 TOTALS $91,845,227.82 100.00% Source: City Finance Department. As of June 30, 2014, the average life of the City's investment portfolio was 552 days. Cash on deposit for the City equals $8,665,405.07 Risk Management The City is self-insured for liability claims and losses up to $500,000 per occurrence, and is covered for covered losses between $125,000 and $2,500,000 by the San Diego Pooled Insurance Program Authority ("SANDPIPA") reserve pool. The members share the risk of claims in excess of reserves. Excess liability insurance coverage is provided for losses between $2,500,000 and $47,000,000 via third-parry insurers, and losses in excess of$47,000,000 are not covered and are the responsibility of the City. The City is self-insured for workers compensation claims and losses up to $500,000 per occurrence. The City is covered for claims between $500,000 and $2,500,000 as a member of the California Joint Powers Insurance Authority LACWX. CSAC, EIA also provides excess workers compensation and commercial coverage between $2,500,000 and $45,000,000 through reinsurance arrangements. The City has stated that settled claims have not exceeded commercial coverage in any of the past three fiscal years. The claims liability of$1,048,309 (for both workers compensation and liability) as of June 30, 2013 is based on the requirements of GASB Statement No. 30, which requires that a liability for claims be reported if information prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. With respect to outstanding claims, the City and the General Contractor of the Encinitas Community Park received the Regional Water Quality Control Board (Regional Board) complaint and proposed fine of $430,851 on November 21, 2013. The City is in the process of entering settlement negotiations with the Regional Board for resolution and ultimately will be seeking recovery of a portion of the fine from the General Contractor. There have been no changes to the amount of the proposed fine. Retirement Program The City has entered into a total of three (3) separate defined benefit pension plans covering miscellaneous and safety employees. As of June 30, 2013,the City Fire Safety Plan and the City Lifeguard Plan A-12 were placed into cost sharing pools. The City's Miscellaneous plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. The Plans are part of the Public Agency portion of the California Public Employees Retirement System ("PERS"), a multiple- employer public employee retirement system that acts as a common investment and administrative agent for participating public entities within the State of California. A menu of benefit provisions as well as other requirements are established by State statutes within the Public Employees' Retirement Law. The City selects optional benefit provisions from the benefit menu by contract with PERS and adopts those benefits through local ordinance. PERS issues a separate comprehensive annual financial report. Copies of the PERS annual financial report may be obtained from the PERS Executive Office, Lincoln Plaza North, 400 Q Street, Sacramento, CA 95811. The three City plans are as follows: (1) The Miscellaneous Plan of the City of Encinitas (Miscellaneous Plan) (2) The Safety Fire Department Plan of the City of Encinitas (Fire Plan) (3) The Safety Lifeguard Plan of the City of Encinitas (Lifeguard Plan) The City's Miscellaneous Plan is an agent multiple-employer Plan that is part of the Public Agency's portion of PERS. The Fire and Lifeguard Plans are cost-sharing multiple employer defined benefit plans in which the City participates with other public agencies that each have less than 100 active members and share the same benefit formula. The Miscellaneous Plan provides employees hired before October 13, 2012 with a Tier 1 benefit equal to 2.7% @ 55 years of age, calculated based on the single highest year of qualifying compensation. As of October 13, 2012, the City Council imposed new terms and conditions on the miscellaneous employees which created a new benefit formula for employees hired after the effective date of the change (the "Tier 2 miscellaneous plan".) Employees hired under the Tier 2 miscellaneous plan receive a lower benefit formula, referred to as the 2% at 60 formula. In addition, legislation enacted by the State of California applying to all local units of government, referred to as the Public Employees' Pension Reform Act (PEPRA) which became effective on January 1, 2013, created yet another benefit formula for new hires with no experience or prior service credit with PERS. In the case of the City, this will constitute a "Tier 3 miscellaneous plan" which provides a retirement benefit, referred to as the 2% @ 62 formula. The actual retirement benefit for Tier 2 and Tier 3 miscellaneous employees will be calculated using the average of the highest 36 consecutive months of qualifying compensation. The Safety Fire Department Plan provides employees hired before June 23, 2012 with a Tier 1 benefit equal to 3.0% (a, 55 years of age, calculated based on the single highest year of qualifying compensation. Effective June 23, 2012, the Encinitas Firefighters Association executed a new four year Memorandum of Understanding (MOU) with the City that provides for modifications to the pension benefit formula for employees hired on or after the effective date (the "Tier 2 fire safety plan".) The 3.0% � 55 formula is maintained, but the actual retirement benefit will be calculated using the average of the highest 36 consecutive months of qualifying compensation. In addition, the PEPRA legislation, created yet another benefit formula for new hires with no experience or prior service credit with PERS. In the case of the City, this will constitute a "Tier 3 fire safety plan" which provides a retirement benefit, referred to as the 2.7% � 57 formula. This plan also utilizes the mandated method of calculation based on the average of the highest 36 consecutive months of qualifying compensation. The Safety Lifeguard Plan provides employees hired before October 13, 2012 with a Tier 1 benefit equal to 3.0% � 55 years of age, calculated based on the single highest year of qualifying compensation. The lifeguards have Tier II and Tier III plans which are identical to the Fire Safety Plan described above. A-13 Funding Policy: Employee Contributions: Active Tier 1 miscellaneous members are required to contribute 8% of their annual covered salary (the "employee contribution"). Effective October 13, 2012, all Tier 1 miscellaneous members contribute the full 8%, which is credited to their individual accounts. Members receiving the Tier 2 or Tier 3 benefits are required to contribute 7% of their annual covered salary. Safety lifeguard members are also now required to contribute the full 9%of their annual covered salary as their employee contribution. The funding of the employee contribution of 9% for fire safety members is in transition, based on the provisions of the June 23, 2012 MOU. In the first year, employees are required to contribute 3%towards the employee contribution,with the employer picking up the balance of 6%. After the third year, the employees will be required to contribute the full required 9%. The employee contribution requirements are established by State statute. Employer Contributions: The City is required to contribute the actuarially determined remaining amounts necessary to fund the benefits for its members (the "employer contributions"). The employer contribution rates for fiscal year 2012- 2013, 2013-14, and 2014-15 each range from approximately 18%-19% for miscellaneous members to 23% for safety members. With respect to miscellaneous members,the rates are blended to cover Tiers I, II, and III. The employer contribution rates are calculated and established annually by PERS, based on the actuarial methods and assumptions as adopted by the PERS Board of Administration. Annual Pension Costs: The annual pension cost (APC), which is equivalent to the actual annual required employer contributions made to PERS, is based on the actuarially determined rates in effect for that fiscal year. These amounts do not include any payments made by the City on behalf of the employees for employee contributions. A summary of the annual pension costs and the percentage of the required APC contributed for the last three fiscal years is presented below: Miscellaneous Plan Fire Plan Lifeguard Plan Percentage of Percentage of Percentage of Annual APC Annual APC Annual APC Year Ended Pension Cost Contributed Pension Cost Contributed Pension Cost Contributed June 30, 2011 $2,198,184 100% $962,019 100% 67,974 100% June 30, 2012 2,525,786 100% 1,160,826 100% 85,924 100% June 30, 2013 2,247,251 100% 1,035,753 100% 81,503 100% The following table summarizes the City's Miscellaneous Plan's funding status for the most recent actuarial valuation(latest available data): Actuarial Actuarial Actuarial Accrued Unfunded UAAL as a Valuation Value of Liability AAL Covered %of Covered Date Assets (AAL) UAAL Funded Ratio Pam Pam June 30, 2011 $50,482,359 $67,942,601 $17,460,242 74.3% $13,791,815 126.6% Unfunded accrued actuarial liability as of June 30, 2011 for the Fire Plan was $12,647,914. Annual Covered Payroll equals $5,127,438 and the Funded Ratio is 80.3°/x. The unfunded liability for the Lifeguard Plan is very small. A-14 The actuarial assumptions in the June 30, 2010 actuarial valuation for the City's Miscellaneous Plan, which was used to determine the fiscal year 2012-2013 annual required contribution, included (1) 7.75% investment rate of return (net of administrative expenses), (b) projected salary increases that vary by duration of service ranging from 3.55%to 14.45, and (c) a 3.25%growth in payroll. Both (a) and (b) included an inflation component of 3.00%. The actuarial assumptions in the June 30, 2011 actuarial valuation for the City's Miscellaneous Plan included (1) 7.50%investment rate of return (net of administrative expenses), (b)projected salary increases that vary by duration of service ranging from 3.30%to 14.20%, and (c) a 3.25%growth in payroll. Both (a) and (b) included an inflation component of 3.00%. The actuarial value of the Miscellaneous Plan assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a fifteen-year period (smoothed market value). PERS' unfunded actuarial accrued liabilities (or excess assets) are being amortized as a level percentage of projected payroll on a closed basis,depending on the size of investment gains and/or losses. Post Retirement Health Benefits The City provides postretirement health care benefits through the PERS healthcare program (PEMHCA) to eligible employees who retire directly from the City. The City pays the cost for lifetime retiree and dependent medical benefits (average premium for PERS health plans available in San Diego County) for fire department employees hired before March 16, 1995. Other City retirees receive the PEMHCA minimum benefit, as determined by PERS. The City does not provide a retiree contribution for dental, vision, or life insurance benefits. The City's OPEB plan does not issue a separate stand-alone report. The City has elected to join the California Employers' Retiree Benefit Trust(the "Trust") in accordance with GASB Statement No. 45, which provides a means to fund the annual OPEB costs, referred to as the Annual Required Contribution (ARC). The City makes an annual contribution to the Trust, pays benefits either directly to retirees or through PEMHCA during the year, and then seeks reimbursement for these "pay-as-you-go expenses"from the Trust. The actual contributions of the City to the Trust were established by City Council action. The contribution requirements are established via an actuarial valuation of the City's Retiree Healthcare Plan as of June 30, 2011, performed in conformance with the requirements of GASB Statement No. 45. The required contribution is measured on an accrual basis rather than on a pay-as-you-go basis. The actuarial cost method used to determine the benefit obligations is the entry-age cost method. The valuation is determined using a discount rate of 7.61%, which is the discount rate established for the Trust by PERS. Other key assumptions include: (1) health care cost trend rate of 5.0%to 7.5%depending on type of plan and (2) an average retirement age of 60. The unfunded actuarial accrued liability is being amortized over a closed thirty-year period. The Annual Required Contribution ("ARC") for fiscal year 2012-13 of$760,000 represents a level of funding that, if paid on an ongoing basis, is projected to cover normal costs each year and to amortize any unfunded actuarial liability over a maximum of 30 years. The City contributed its ARC of$760,000 to the Trust, and received reimbursement for actual pay-as-you-expenses incurred during the year. The ARC for 2014-15 is $544,000. The City's annual OPEB costs,the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation as of and for the year ended June 30, 2013 and the preceding two years were as follows: Fiscal Percentage of Net Year Annual Annual OPEB Cost OPEB Ended OPEB Cost Contributed Obligation 6/30/11 $781,000 100% - 6/30/12 803,000 100% - 6/30/13 760,000 100% - A-15 The latest information available on the funding status comes from the actuarial study dated June 30, 2011. Information is in thousands (000's): Actuarial accrued liability (AAL) $ 10,506 Actuarial value of Plan assets 1,960 Unfunded actuarial accrued liability (UAAL) 8 546 Funded ratio (actuarial value of plan assets/AAL) 18.66% Covered payroll(active Plan members) $ 18,252 UAAL as a percentage of covered payroll 46.82% As of June 30, 2014,the unfunded actuarial accrued liability of the City is $6.3 million. Outstanding Lease Debt The City has executed a number of capital lease and other obligations payable from the City General Fund (see APPENDIX B hereto). See "DEBT SERVICE SCHEDULE" above for the annual debt service requirements of the Bonds. The following table shows the City's debt service requirements to maturity for prior certificates of participation and capital lease obligations payable from the City General Fund. The table below does not include the expected payments for the Bonds. TABLE A-7 CITY OF ENCINITAS CURRENT OUTSTANDING PRINCIPAL REQUIREMENTS TO MATURITY (UNAUDITED GENERAL FUND)(" Balance at Balance at Due Within July 1,2013 Additions Deletions June 30,2014 One Year Capital Leases: 2007 Storm Drain Equipment $ 37,789 $ - $ (37,789) $ - - 2008 Civic Center Roof Replacement 1,523,397 - (128,518) 1,394,879 $ 133,304 2011 Fire Apparatus 810,359 - (154,183) 656,176 158,030 2012 Fire Apparatus 519,447 - (81,950) 437,497 83,747 2013 Fire Apparatus 555,384 - (79,537) 475,847 75,605 Bonded Debt: 1997 Civic Center COP's(2) 2,185,000 - (505,000) 1,680,000 530,000 2002 ABAG Financing(3) 1,325,000 - (240,000) 1,085,000 255,000 2006 Public Library Bonds 17,920,000 - (465,000) 17,455,000 480,000 less:original issue discount (240,000) 10,000 (230,000) - 20 10 Community Park Bonds 17,365,000 - (665,000) 16,700,000 700,000 add: original issue premium 184,983 (10,775) 174,208 - 2013 Community Park Bonds 7,865,000 - (305,000) 7,560,000 315,000 add: original issue premium 131,400 - (8,760) 122,640 - Total $50,182,759 $ $(2,671,512) $47,511,247 $2,730,686 (1) Does not include Bonds. (2) Matures in 2017. (3) Matures in 2018. Source: City Finance Department. A-16 City Financial Data The following tables provide a five-year history of the City's Comparative Balance Sheets, and summarize General Fund revenues, expenditures, transfers, and ending fund balances for the City for Fiscal Years 2009/10 through 2013/14. See also `Budgetary Process and Current Budget" above for estimated revenues and expenses for the current Fiscal Year. TABLE A-8 CITY OF ENCINITAS GENERAL FUND COMPARATIVE BALANCE SHEET (As of June 30) 2009/10 2010/11 2011/121" 2012/13 2014121 Assets: Cash and investments $46,257,467 $43,967,292 $38,401,869 $32,529,851 $35,529,453 Receivables 2,721,917 3,097,889 2,703,356 2,671,298 2,983,757 Due from other funds 1,086,249 1,910,749 994,310 992,653 801,707 Other assets 3,327,632 2,026,537 2,218,533 1,345,062 997,556 Long-term receivable - - 650,000 650,000 650,000 Sales tax receivable 650,907 650,000 - - Cash and investments with fiscal agent 627,827 633,245 - 8,020,468 - Total Assets $53,671,999 $52,285,712 $44,968,068 $46,209,332 $41,371,246 Liabilities and Fund Equity: Liabilities: Accounts payable&accrued liabilities $ 4,225,759 $ 2,664,356 $3,414,452 $ 3,060,496 $ 3,762,589 Deferred revenue 348,965 346,932 - - - Due to other governments 710,470 627,986 Deposits and other liabilities 1,397,571 1,239,946 1,348,524 1,602,058 1,702,549 Total Liabilities $ 6,682,705 $ 4,879,220 $ 4,762,976 $ 4,662,554 $ 5,465,138 Fund Equity: Reserved $ 4,286,026 $ 3,281,583 $ 2,868,533 $ 1,980,075 $ 1,647,556 Unreserved Designated 36,913,369 42,274,327 19,371,624 18,405,881 8,698,648 Undesignated 5,789,899 1,850,000 17,964,935 21,160,822 25,559,904 Total Fund Equity $46,989,294 $47,406,492 $40,205,092 $41,546,778 $35,906,108 Total Liabilities and Fund Equity $53.671 999 $52285,712 $44,968,068 $46209,332 $41,371246 Source: City Audited Financial Statements Reclassification of Self Insurance from General Fund to an internal service fund of$3,384,000. General Fund balance of approximately$3.8 million transferred out for construction of public capital project,and reclassification of funds due to GASB 54. For years after Fiscal Year 2011,undesignated funds include all funds not previously committed or appropriated. (2) Unaudited. A-17 TABLE A-9 CITY OF ENCINITAS STATEMENT OF GENERAL FUND REVENUES,EXPENDITURES AND BALANCES (Fiscal Year Ending June 30) 2009/10 2010/11 2011/12 2012/13 2013/14(5) Revenues: Taxes and assessments $44,586,411 $45,679,536 $46,677,085 $49,140,365 $51,166,669 Licenses and permits 212,736 205,031 207,993 219,288 289,102 Intergovernmental 567,405 747,582 522,931 522,865 479,025 Charges for service 5,164,315 6,376,261 4,406,737 4,450,756 5,479,847 Fines,forfeitures and penalties 761,202 856,392 657,364 611,029 632,776 Use of money and property 945,056 546,051 523,630 452,386 457,135 Other 1,413,138 807,105 979,120 1,022,653 713,832 Total Revenues $53,650,263 $55,217,958 $53,974,860 $56,419,342 $59,218,387 Expenditures: Current: General government $10,437,750 $10,092,490 $ 9,233,423 $9,364,941 $8,974,270 Public safety 21,858,528 21,991,208 22,739,268 543,342 24,047,239 Public works 2,492,736 2,400,158 3,483,137 3,597,216 3,705,395 Planning and building 3,549,257 3,684,504 3,873,138 3,825,996 4,294,094 Engineering services 3,842,284 3,646,306 3,804,813 3,716,994 3,949,351 Parks and recreation 5,482,578 5,187,256 4,228,808 4,260,368 4,543,449 Capital Outlay - - 599,639 559,653 - Debt Service: Bond issuance costs 395,404 243,987 Total Expenditures $47,663,133 $47,397,326 $ 47,962,226 $ 49,112,497 $49,513,798 Excess(Deficiency)of Rev.Over Exp. $ 5,987,130 $ 7,820,632 $ 6,012,634 $ 7,306,845 $ 9,704,589 Other Financial Sources(Uses): Issuance of debt(2) - $19,530,000 $ 599,639 $ 8,420,384 - Premium on debt - 215,515 - 131,400 - Payment to refunded bond escrow agent - (19,040,000) - - - Transfers In(3) 183,813 333,846 1,061,378 1,121,181 $ 1,295,818 Transfers Out(4) (6,716,933) (8,442,795) (11,490,139) (15,638,124) (16,641,076) Total Other Financing Sources(Uses) ($6,533,120) ($7,403,434) ($9,829,122) ($5,965,159) ($15,345,258) Net Change in Fund Balances (545,990) 417,198 ( 3,816,488) 1,341,686 (5,640,670) Fund Balances,Beginning $47,535,284 $46,989,294 $47,406,492 $ 40,205,092 $41,546,778 Restatement-fund reclassification(n - - (3,384,912) - - Fund Balances-beginning of year,as restated - - 44,021,580 - - Fund Balances,Ending $46,989,294 $47,406,492 $40,205,092 $ 41,546,778 $35,906,108 Source: City Audited Financial Statements. (1) Reclassification of$3,384,912 set aside for Self Insurance from General Fund to an internal service fund. (Z) Includes capital lease financing. (3) Includes operating,capital and debt services transfers in. (4) Includes operating,capital and debt service transfer out. (5) Unaudited. A-18 Direct and Overlapping Debt Contained within the City are numerous overlapping local agencies providing public services. These local agencies have outstanding obligations issued in the form of general obligation, lease, revenue and special assessment bonds. The following is a listing of direct and overlapping bonded debt on property in the City together with lease obligation debt of agencies in the area, as of October 1,2014. TABLE A-10 DIRECT AND OVERLAPPING DEBT CITY OF ENCINITAS 2014-15 Assessed Valuation: $12,871,872,103 OVERLAPPING TAX AND ASSESSMENT DEBT: %Applicable Debt 10/1/14 Metropolitan Water District 0.556% $ 735,449 San Dieguito Union High School District 24.375 36,502,781 Cardiff School District 100. 5,23 5,198 Encinitas Union School District 67.819 21,246,679 San Dieguito Union High School District Community Facilities District 1.840-100. 11,157,242 City of Encinitas Community Facilities District No. 1 100. 29,755,000 City of Encinitas 1915 Act Bonds 100. 165,000 Olivenhain Municipal Water District,Assessment District No. 96-1 31.054 4,120,866 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $108,918,215 DIRECT AND OVERLAPPING GENERAL FUND DEBT: San Diego County General Fund Obligations 3.075% $ 11,532,634 San Diego County Pension Obligation Bonds 3.075 20,990,417 San Diego County Superintendent of Schools Obligations 3.075 491,308 Mira Costa Community College district Certificates of Participation 15.089 257,267 San Dieguito Union High School District General Fund Obligations 24.375 3,172,406 City of Encinitas Certificates of Participation 100. 43,430,0002' TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $79,874,032 COMBINED TOTAL DEBT $188,792,2473' (1) Based on 2013-14 ratios. (Z) Excludes issue to be sold. (3) Excludes tax and revenue anticipation notes,enterprise revenue,mortgage revenue and non-bonded capital lease obligations. Ratios to 2014-15 Assessed Valuation: Total Overlapping Tax and Assessment Debt: 0.85% Total Direct Debt($43,430,000): 0.34% Combined Total Debt: 1.47% A-19 Assessed Valuations As discussed under"Property Taxes" above,the City receives a share of ad valorem taxes levied on real property within its boundaries. The basic levy is equal to 1% of the assessed value of secured and unsecured property. The City receives approximately 26% of the basic levy. The following table shows the assessed valuation of the City from Fiscal Year 1998/99 through Fiscal Year 2014/15. TABLE A-11 CITY OF ENCINITAS SCHEDULE OF ASSESSED PROPERTY (As of June 30) Year Secured Utili (l) Unsecured Total 1999 $ 4,598,429,761 $3,248,989 $107,869,719 $ 4,709,548,469 2000 5,029,321,477 3,539,663 120,050,833 5,152,911,973 2001 5,555,651,747 3,615,230 124,132,927 5,683,399,904 2002 6,094,943,187 3,687,679 121,710,903 6,220,341,769 2003 6,671,155,770 3,321,931 122,276,356 6,796,754,057 2004 7,380,752,536 2,870,543 129,666,206 7,513,289,285 2005 8,166,719,411 2,732,083 130,170,382 8,299,621,876 2006 9,012,953,568 2,785,704 137,229,829 9,152,959,101 2007 9,874,321,949 2,609,179 142,971,280 10,019,902,408 2008 10,539,452,529 0 149,460,274 10,688,912,803 2009 11,097,895,097 0 160,815,739 11,258,710,836 2010 11,175,029,435 0 163,857,938 11,338,887,373 2011 11,186,889,197 0 157,142,326 11,344,031,523 2012 11,388,978,126 0 138,583,972 11,527,562,098 2013 11,581,761,879 0 143,523,614 11,725,285,493 2014 11,997,858,077 0 151,308,388 12,149,166,465 2015 12,715,936,309 0 155,935,794 12,871,872,103 Source: California Municipal Statistics,Inc. ' Change in 2008 reflects legislative alteration of how certain rail property,including property owned by North San Diego County Transit Development Authority,is allocated between the agency where such property is located and other taxing entities in the surrounding jurisdictions. A-20 Set forth in Table A-12 are property tax collections and delinquencies in the City as of June 30 for Fiscal Years 2004 through 2013. The County of San Diego (the "County") operates under a statutory program entitled the Alternate Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the "Teeter Plan"). Under the Teeter Plan local taxing entities receive 100%of their tax levies net of delinquencies, but do not receive interest or penalties on delinquent taxes collected by the County. The City elected not to enroll in the Teeter Plan; accordingly, the City's receipt of its property tax revenues is impacted by delinquencies in payment, as well as by the collection of interest and penalties on past delinquencies. TABLE A-12 CITY OF ENCINITAS PROPERTY TAX LEVIES AND COLLECTIONS (As of June 30,2013) Fiscal Taxes Levied Year Ended for the Percent of June 30 Fiscal Year(i) Amount Collected Lew Collected 2004 $19,685,171 $19,145,685 97.26% 2005 22,082,262 21,269,966 96.32 2006 24,285,772 23,360,483 96.19 2007 25,857,065 24,741,077 95.68 2008 26,950,803 25,584,630 94.93 2009 27,441,558 26,326,996 95.94 2010 27,421,386 26,490,783 96.61 2011 27,541,487 26,888,921 97.63 2012 28,100,611 27,540,858 98.01 2013 29,207,237 28,712,036 98.30 Source: San Diego County Assessor Combined Tax Rolls. City of Encinitas general fund. A-21 Largest Taxpayers A list of the principal property taxpayers in the City is set forth below: TABLE A-13 CITY OF ENCINITAS PRINCIPAL SECURED PROPERTY TAXPAYERS(') (Fiscal Year 2014/15) 2014-15 Percent of Property Owner Primary Land Use Assessed Valuation Total") 1. TRC Encinitas Village LLC Shopping Center $80,009,822 0.63% 2. Collwood Pines Apartments LP Apartments 65,993,312 0.52 3. Belmont Village Tenant 2 LLC 3535 Convalescent Home 55,191,737 0.43 4. SSL Landlord LLC Convalescent Home 34,862,180 0.27 5. NCHC 3 LLC Professional Buildings 34,068,015 0.27 6. Encinitas Town Center Associates LLC Shopping Center 34,063,960 0.27 7. WRI El Camino LP Shopping Center 33,420,431 0.26 8. PK III Encinatas Marketplace LP Shopping Center 31,560,000 0.25 9. Home Depot USA Inc. Commercial 29,189,639 0.23 10. Shea Homes LP Residential Development 27,958,374 0.22 11. ASN Encinitas LLC Apartments 27,665,031 0.22 12. Urschel Holdings LP Apartments 23,455,949 0.18 13. Vons Companies Inc. Shopping Center 22,632,195 0.18 14. Loja Pacific Station LLC Commercial 20,084,971 0.16 15. Keith B. and Sara S.Harrison Residential and Commercial 19,999,498 0.16 16. Quail Pointe Apartments LP Apartments 19,517,683 0.15 17. UCSD Garden View LLC Professional Buildings 18,443,353 0.15 18. Sterling Family Trust Apartments 17,995,127 0.14 19. LA Fitness International LLC Fitness Club 17,795,490 0.14 20. Plenc El Camino LLC Shopping Center 17,651,034 0.14 Total $631,557,801 4.97% Source: California Municipal Statistics,Inc. 2014-15 Local Secured Assessed Valuation: $12,715,936,309. A-22 Retail and Total Taxable Sales The following table presents the retail taxable transactions of the City of Encinitas for the calendar years 2007 through 2013. TABLE A-14 CITY OF ENCINITAS TAXABLE RETAIL SALES ($in thousands) 2007 2008 2009 2010 2011 2012 2013 Autos and Transportation $1,388,222 $1,304,574 $1,138,428 $1,189,413 $1,330,270 $1,427,132 $ 1,446,737 Building and Construction 1,410,031 1,334,408 1,057,851 818,484 774,109 868,790 820,467 Business and Industry 537,220 580,488 520,656 461,247 537,840 518,699 560,723 Food and Drugs 1.011.095 1,039,216 979,585 931,937 945,542 995,511 1,003,491 Fuel and Service Stations 1,014,251 1,182,908 1,085,758 1,146,372 1,351,288 1,569,265 1,577,783 General Consumer Goods 3,224,175 3,042,340 2,949,625 2,836,989 2,818,809 3,117,547 3,165,746 Restaurants and Hotels 1,402,707 1,425,305 1,448,867 1,388,570 1,442,976 1,624,007 1,699,705 Total $9,987,701 $9,909,239 $9,180,770 $8,773,012 $9,200,834 $10,120,951 $10,274,652 Source: State of California,Board of Equalization and The HdL Companies. Note: Due to confidentiality issues,the names of the ten largest revenue payers are not available. Building Activity The following table summarizes the number of residential building permits issued in the City from Fiscal Year 2004/05 through 2011/12. TABLE A-15 CITY OF ENCINITAS NEW BUILDING PERMITS (As of June 30) Fiscal Year Single Family June 30 Residential Permits 2005 159 2006 145 2007 107 2008 98 2009 86 2010 39 2011 51 2012 121 Source: City of Encinitas. Income Levels The City of Encinitas is primarily a bedroom community with primary employment in nearby cities. Encinitas median household income is $74,950, which is 145% of the National average of $51,579 and 28% higher than the State of California average of$58,504. Average Effective Buying Income is $82,181, which is 41%higher than the National average of$58,111, and higher than the State of California average of$66,034. A-23 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX B CITY'S AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2012/13 [THIS PAGE INTENTIONALLY LEFT BLANK] v s �I pp r �Wb i/rr'��,� � ;' r u u� ✓ , �JVy rr� �m r a� r ru rnNn( 9Yl/ l r ! "! r � %rp ✓ ul r� � � r mwr %fir/ � 1u r v B B I I 0 0 po City of Encinitas California ✓t �ll ,,,,, l ✓is�✓✓%ii✓rr'ray � k Comprehensive Annual Financial Deport For the Fiscal Year Ended June 30, 2013 Issued by the Finance Department 505 South Vulcan Avenue Encinitas,CA 92024 a 760-633-2600 www.encinitasea.gov r ABOUT THE CITY OF ENCINITAS The City of Encinitas was incorporated as a general law city in 1986, merging the existing communities of New and Old Encinitas, Cardiff-by-the-Sea, Leucadia,and OIivenhain. The City of Encinitas has a population of approximately 65,000 and is located along six miles of Pacific coastline in the northern half of San Diego County. Approximately 21 square miles in area, Encinitas is characterized by coastal beaches, cliffs, flat-topped coastal areas, steep mesa bluffs, and rolling hills. Encinitas is the center of a significant flower growing industry and is often referred to as the Flower Capital of the World. CITY COUNCIL KEY STRATEGIC PLAN DOCUMENT ELEMENTS: VISION STATEMENT "Encinitas is five unique communities thriving as ONE great city." MISSION STATEMENT "Preserve,protect and provide innovative services that enhance the quality of life for residents, visitors,businesses and our communities." ABOUT THE COVERS On the front cover is a collage representing public art located in Encinitas, On the back cover is a photo of the Self Realization Fellowship(SRF) Garden with a view of the Pacific Ocean, Photography: Front cover photography are courtesy of the following: San Diego Botanical Garden by Rachel Cobb and artwork by James Hubbell; photo of Magic Carpet Ride by Union Tribune's Crissy Pascual and artwork by Matthew Antichevich; photo of Encinitas Child by North County Times and artwork by Manuelita Brown; and photo of the Swami's Easter Island Head by city staff and artwork by Tim Richards. The back cover photography of the Self Realization Fellowship(SRF)Garden is courtesy of Jan Thompson. Copies of this report are available at the City of Encinitas, 505 South Vulcan Avenue, Encinitas,California 92024. CITY OF0NCINITAS Table ofContents For the Year Ended June 30,2013 INTRODUCTORY SECTION: Transmittal Letter........................... --�-------�--�--------------�--.---'--i GF0ACertificate.................................................................................................................... ----'v Listu/City Officials ......................................................................................................... ....... _....... vi OrganizationChart...............................................................................................................................vii FINANCIAIL SECTION: IndependentAuditor's Report................................................................................................................ l Management's Discussionand Analysis(Required Supplementary Information—Unaudited).,..........4 Basic Financial Statements: Government-wide Financial Statements: Statementof Net Position........................................ ................ ................................................ l5 Statementof Activities........................................................................................................ ...... |b Fund Financial Statements: Balance Sheet—Governmental Funds........................................................................................ |g Reconciliation*ythe Bu1uuoe Sheet of Governmental Funds tuthe Statementof Net Position................................................................................................. |4 Statement o{Revenues,Expenditures and Changes iu Fund Balances—Governmental Funds....................................___..................................20 Reconciliation u[the Statement of Revenues,Expenditures and Changes io Fund Balances of Governmental Funds mthe Statement of Activities— ....... ................................................................ .......................2l Statement o{Net Position—Proprietary Funds.............................................. ...........................22 Statement oy Revenues,Expenses and Changes 1u Net Position— ProprietaryFunds..............................................................................................................26 StoteueutofCumbF[omm—Proprietary Funds..................................... . ............... ..................28 Statement o[Fiduciary Net Position—Agency Funds................................................................]2 Notes to the Basic Financial Statements.....................................................................................]] Required Supplementary Information(Dluoditm): Budgetary Comparison Schedule—General Fund....................................— .............................73 Budgetary Comparison Schedule—Infrastructure Improvements Special Revenue Fund............................................................................ ............... —......75 Note w Required Supplementary Information...........................................................................7h Other yvuunoployouou1Benefits Schedules of funding Progress..............................................77 Scbedneuf Funding Progress oyCaIPERS................................................................................78 Supplementary Information: Combining Balance Sheet—Nonouajor Governmental Funds.................................................... 7o Combining Statement of Revenues,Expenditures and Changes ioFund CITY OF ENCINITAS Table of Contents For the Year Ended June 30,2013 Supplementary Information(Continued) Budgetary Comparison Schedule--Grants and Housing Special Revenue Fund....................... 83 Budgetary Comparison Schedule• Development Impact Special Revenue Fund.....................84 Budgetary Comparison Schedule—Lighting and Landscaping SpecialRevenue Fund......................................................................................................85 Combining Statement of Net Position—Internal Service Funds................................................ 86 Combining Statement of Revenues, Expenses and Changes in Net Position—Internal Service Funds.....................................................87 Combining Statement of Cash Flows—Internal Service Funds.................................................88 Combining Statement of Net Position Agency Funds ......................... 89 Combining Statement of Changes in Assets and Liabilities - Agency Funds............................90 STATISTICAL SECTION(Unaudited): Net Position by Component,,,,,Last Ten Fiscal Years...........................................................................93 Changes in Net Position—Last Ten Fiscal Years................................................................................95 Fund Balances of Governmental Funds—Last Ten Fiscal Years........................................................99 Changes in Fund Balances of Governmental Funds—Last Ten Fiscal Years.................................... 101 Assessed Value and Estimated Actual Value of Taxable Property— LastTen Fiscal Years............................................................................................................... 103 Principal Property Taxpayers—Current Fiscal Year and Nine Years Ago........................................ 104 Direct and Overlapping Property Tax Rates—Last Ten Fiscal Years................................................ 105 Property Tax Levies and Collections—Last Ten Fiscal Years.......................................................... 109 Ratio of Outstanding Debt by Type—Last Ten Fiscal Years............................................................. 111 Ratios of General Bonded Debt Outstanding—Last Teri Fiscal Years.............................................. 113 Schedule of Direct and Overlapping Bonded Debt............................................................................ 114 Legal Debt Margin Information—Last Ten Fiscal Years.................................................................. 115 Historical Debt Service CoverageLast Five Fiscal Years.............................................................. 117 Demographic and Economic Statistics—Last Ten Fiscal Years........................................................ 118 Taxable Sales By Business Type—Last Nine Calendar Years.......................................................... 119 Full-Time and Part-Time Employees by Function—Last Five Years................................................ 120 Operating Indicators by Function—Last Five Fiscal Years............................................................... 121 Capital Asset Statistics by Function—Last Five Fiscal Years........................................................... 122 San Dieguito Water District Schedule of Water Rates....................................................................... 125 San Dieguito Water District Bi-Monthly Meter Service Availability Charges.................................. 125 San Dieguito Water District Historic Potable Water System Revenues— LastTen Fiscal Years............ .................................................................................................. 126 San Dieguito Water District Historic Recycled Water System Revenues LastTen Fiscal Years............................................................................................................... 126 San Dieguito Water District Suimnary of Water Production By Source— LastTen Fiscal Years............................................................................................................... 127 San Dieguito Water District Sunnnaiy of Water Deliveries By Source— LastTen Fiscal Years................................................................................................... ........... 127 San Dieguito Water District Ten Largest Customers......................................................................... 128 CITY OF ENCINITAS Table of Contents For the Year Ended June 30,2013 San Dieguito Water District Total Service Connections By Category— LastTen Fiscal Years...........................................................................„.......,..................,.....,., 128 Cardiff Sanitary Division Rate Schedule for Annual Sewer Charges.............................„„,„,,,,,..,,,,,,,,,,,,,, 131 Cardiff Sanitary Division historical Service Charges Bill ed..........................................................„.. 132 Cardiff Sanitary Division Ten Largest Customers....................„..,..,.,....................................,........... 133 Cardiff Sanitary Division Historical Service Connectors„.,.,„ ................ 133 INTRODUCTORY SECTION C"ST H"If City of Encinitas 101 505 South Vulcan Avenue *Encinitas CA 92024 760-633-2600 • www.encinitasca.gov TRANSMITTAL LETTER+ INTRODUCTORY SECTION �wwmrmu i 000w�0000000im�im�000i�mmimi�mim i �Nml December 16, 2013 Honorable Mayor,City Council and Citizens of the City of Encinitas,California, We are pleased to present the 2012-13 Comprehensive Annual Financial Report(CAFR) for the City of Encinitas and its related entities. This report was prepared by the City's Finance Department to assist those interested in understanding the financial condition and results of the operations of the City for the fiscal year ended June 30, 2013 and includes financial information for the City of Encinitas, the San Dieguito Water District, the Encinitas I lousing Authority, and the Encinitas Public Financing Authority. This CAFR fulfills a number of different reporting requirements, including Federal and State law and the covenants of many of the City's long-term debt issues. It has been prepared in conformance with generally accepted accounting principles for local governments, and is being submitted to the Government Finance Officers Association for consideration of an award for excellence in financial reporting. Management assumes full responsibility for the completeness and reliability of the information contained in this report. To the best of our knowledge, the data is accurate in all material respects and is reported in a manner designed to fairly present the financial position and results of the operations of the City, and that all relevant and material disclosures are included. Management's Discussion and Analysis (MD&A) provides a narrative introduction, overview, and analysis of the basic financial statements and can be found immediately following the independent auditor's report. MD&A complements this letter of transmittal and should be read in conjunction with it. CITY PROFILE AND BACKGROUND The City of Encinitas was incorporated in October 1986 as a general law city, bringing together the communities of New and Old Encinitas, Cardiff-by-the-Sea, Lcucadia, and Olivenhain. Encinitas is located in northern San Diego County approximately 25 miles north of the City of San Diego on the Southern California coast. The City with an estimated population of 61,000 covers approximately 21 square miles and is predominately residential with two major commercial corridors. GOVERNANCE The City is governed by a five-member City Council under the Council-Manager form of goverment. The City Council is elected at large, on staggered four-year terms. The Mayor is selected annually by a majority of the City Council. Beginning with the November 2014 election the Mayor will be elected at large every two years. The City Council appoints the City Manager and City Attorney. All other staff positions are appointed by the City Manager or his designee. The City Council acts as the Board of Directors for the San Dieguito Water District,the Encinitas Housing Authority,and the Encinitas Public Financing Authority. i TRANSMITTAL LETTER+ INTRODUCTORY SECTION MUNICIPAL SERVICES The City provides a full range of municipal services such as: Law enforcement(San Diego County Sheriff) Fire and paramedic services Marine safety Planning and development services Water services Wastewater services Parks and trails Recreation services Street maintenance and construction Traffic control CITY FACILITIES City Hall is located on Vulcan Avenue between D and E Streets, adjacent to the Encinitas Train Station and downtown. The City maintains a full-service Public Library, which is located just above City Hall overlooking downtown Encinitas and the Pacific Ocean. The City also maintains an active Community and Senior Center located at Encinitas Boulevard and Balour Drive. There are six fire stations located throughout the city, as well as one sheriff substation which is owned and operated by the County of San Diego, BUDGETING OVERVIEW The City develops and adopts both an operating and a capital budget on a two-year budgeting cycle. Amounts are appropriated for the first year only, with the amounts for the second year subject to revision before being appropriated for the second year. Any changes to the operating or capital budgets must be approved by the City Council. The City also publishes a six-year capital improvement/work project program and financial plan which is generally updated annually. This document provides management and the City Council with long-term financial planning information and tools. FACTORS AFFECTING FINANCIAL CONDITION OF THE CITY Local Economy — The University of Sari Indexof Leading Economic indicators Diego Burnham-Moores Center for Real San Diego rOuMy,2009.2013 Estate (USD) prepares an index of X30 leading economic indicators for San Diego County on a monthly basis. The 125 index is calculated using six economic indicators: building permits, initial - unemployment claims, local stock prices, consumer confidence, help wanted 15 advertising and the national economy. The economy of the City of Encinitas tends to track closely with the economy of San Diego County.The USD index has shown a generally positive trend since early in 2009.This trend has been true for km J32 113 the City of Encinitas as well. Assessed property values, which determine property tax revenue levels, have remained relatively stable during the last five years growing 4.5% between FY2008/09 and FY2012/13. Property tax revenues, which account for about 60% of the City's general fund revenue, have increased 7% since FY2008/09. Sales tax revenues, the City's second largest revenue source accounting for ii TRANSMITTAL LETTER INTRODUCTORY SECT NI �� about 19%of general fund revenue, initially declined rather significantly in 2007 and 2008. Sales tax revenue has increased over 14% since .�e}n,r="�� I FY2008/09 and has returned to above 1.35,000X0 J pre-recession levels. Other revenue 130,000,o-o0 sources have remained relatively stable, 125,000,000 - although revenues from the State of 120,000,000 California are still considered to be 315,000,a(N vulnerable to State actions. Fortunately, sio,o0o,000 State revenues arc no longer a significant -- portion of the overall budget, zoos-ce zcc9ieo 20sa.11 2011!712 201 2/13 Financial Strength and Sustainahility The City of Encinitas is well positioned to weather these economic storms and has been evaluated and rated by internationally recognized third party reviewers. On February 13, 2013 Standard & Poor's Rating Services (S&P) assigned its `AAA' issuer credit rating(ICR) to the City of Encinitas. According to S&P the `AAA' ICR reflects the City's; • Large and diverse tax base, which benefits from access to the broader San Diego County economy; • Very strong income levels; • Very strong financial performance and fund balance positions,strengthened by an official policy of maintaining a contingency reserve equal to 20%of expenditures; and • Low to moderate debt levels Under S&P's financial management assessment (FMA) methodology the City of Encinitas is considered "strong". An FMA of "strong" indicates that financial practices are strong, well imbedded,and likely sustainable. The City had approximately $50.2 million of general fund bonded debt and equipment leases outstanding at June 30, 2013,with scheduled payments of principal and interest of$4.0 million in FY2012/13. This translates to a debt ratio of 7.6%, which is consistent with the City's goal to maintain a debt service ratio of less than 10%. Development and Maintenance of Financial Reserves — The City has an established financial policy regarding maintenance of adequate financial reserves. The City sets aside 20% of operating expenses for contingencies (unanticipated events that could negatively impact the City's financial condition.) The City has never had occasion to draw on this reserve, since its inception in the early 1990's. The City also maintains a budget stabilization reserve, which was established in 2007 in anticipation of the ensuing recession. This reserve is funded at a minimum of 2% of operating revenues. The City has not had any need to draw on this reserve, despite the decline in operating revenues experienced during the recession, Any amounts remaining after these two reserves are fully funded are considered available for City Council directed use, primarily for future funding of capital improvements, Total General Fund reserves were $22 million as of June 30, 2013. iii TRANSMITTAL LETTER•INTRODUCTORY SECTION AWARDS AND ACKNOWLEDGEMENTS The Government Finance Officers Association(GFOA)awarded their Certificate of Achievement for Excellence in Financial Reporting to the City of Encinitas for its comprehensive annual financial report for the fiscal year ended June 30, 2012. The City feels the FY 2012113 comprehensive annual financial report continues to meet the GFOA criteria for the award. The completion of this report could not have been accomplished without the dedication and hard work of many of the City staff in the Finance Department. Lastly, we deeply appreciate the dedication and leadership of the Mayor and Council Members who have consistently supported our goal of excellence in all aspects of financial management. Respectfully submitted, 6Z—��4A-� etin4a Tim Nash City Manager Finance Director iv (D. Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting Presented to City of Encinitas California For its Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2012 *OPW AO O- Aoj:�.w Executive Director/CEO v LIST OF CITY OFFICIALS As of June 30, 2013 CITY COUNCIL: Mayor Teresa Barth Deputy Mayor Lisa Shaffer Councilmember Kristin Gaspar Councilmember Tony Kranz Cou ncilmember Mark Muir CABINET TEAM MEMBERS: City Manager Gras Vina Deputy City Manager Richard Phillips City Clerk/Legislative Services Director Kathy Hollywood Engineedng/Public Works Director Glenn Pruim Finance Director Tim Nash Fire Chief Michael Daigle Human Resources Department Manager Courtney Barnett IT/GIS Department Manager Lynn Tufts Law Enforcement Services Director Captain Robert Haley Parks&Recreation Department Director Lisa Rudloff Planning&Building Director Jeff Murphy Risk Management Department Director Jace Schwarm Vi ol rj FA co LU r Er FINANCIAL. SECTION szCity of Encinit as , 505 South Vulcan Avenue •Encinitas CA 92024 760-633-2600 • www.encinitasca.gov San Diego 225 Broadway,Suite.1750 Certified Public Accountants. 5,n Diann, 92101 619.5731112 Sacramento Walnut Creek Oakland Independent Auditor's Report WCentury City The Honorable City Council of Newport Beach the City of Encinitas, California Seattle Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities,the business-type activities, each major fund, and the aggregate remaining fund information of the City of Encinitas, California (City), as of and for the year ended June 30, 2013, an the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the table of contents. Management Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraad or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements,whether due to fraud or error. In making those risk assessments,the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Encinitas, California, as of June 30, 2013, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. www,mgocpa.coni I Emphasis of'Matter As described in Note 2 to the financial statements, the City adopted the provisions of Governmental Accounting Standards Board{GASB} Statement No. 60,Accounting and Financial Reporting for Service Concession Arrangement; GASB Statement No. 61, The Financial Reporting Entity — Omnibus — an Amendment of'GASR Statement No. 14 and Nn. 34; GASB Statement No. 62, Codification ofAccounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements; GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources; and Net Position; and GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. fn connection with the implementation of GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, and as further described in Note 15 to the financial statements,the City restated its beginning net position as of June 30, 2012, due to the recognition of debt issuance costs as expenses.Our opinion was not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, the Budgetary Comparison Schedule—General Fund, the Other Postemployment Benefits Schedules of Funding Progress, and the Schedule of Funding Progress of Ca1PERS, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquuries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The accompanying introductory section, the combining and individual nonmajor fund financial statements and schedules, listed as supplementary information in the table of contents, and the statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual nonmajor fund financial statements and schedules are fairly stated,in all material respects,in relation to the basic financial statements as a whole. 2 The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 16, 2013, on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters.The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City's internal control over financial reporting and compliance. � rj,-� � D San Diego,California December 16, 2013 3 MANAGEMENT'S DISCUSSION AND ANALYSIS MANAGEMENT'S DISCUSSION AND ANALYSIS • FINANCIAL SECTION USING THIS ANNUAL REPORT This section of the Comprehensive Annual Financial Report(CAFR) issued by the City of Encinitas(the "City") presents an overview and analysis of the financial activities of the City for the fiscal year ended June 30, 2011 The City's financial statements include the accounts of the City, the Encinitas Public Financing Authority (EPFA), the Encinitas Housing Authority (EHA), and the San Dieguito Water District (the "Water District"). The City presents its financial statements under the reporting model required by the Governmental Accounting Standards Board Statement No. 34,Basic Financial Statements —and Management's Discussion and Analysis—fnr State and Local Governments (GASB 34),which the City adopted in 2002. This annual report consists of a series of financial statements. The Government—Wide Financial Statements consist of the Statement of Net Position and the Statement of'Activities, which provide information about the government-wide activities of the City as a whole and present a lodger-term view of the City's finances. Fund Financial Statements report the City's operations in more detail by providing information about the City's most significant funds, how services were financed in the short term, and what remains for future spending. The remaining statements provide financial information about activities for which the City acts solely as a trustee or agent for the benefit of those outside the government. Government—Wide Financial Statements Analysis of the City's financial position as a whole begins with the Statement of Net Position and the Statement of Activities. One of the most important questions asked about the City's finances is: "Are the City's finances better or worse off as a result of this year's activities?" These statements can help to answer this question. The Statement of Net Position includes all of the assets and liabilities of the City using the accrual basis of accounting similar to most private-sector companies. The Statement of Activities depicts all of the current year's revenues and expenses, also utilizing the accrual basis of accounting. These two statements report the City's net position, the difference between assets and liabilities,which is one way to measure the City's financial health. Over time, increases or decreases in the City's net position are one indicator of whether its financial health is improving or deteriorating. The reader will also need to consider other non-financial factors, such as changes in the City's property tax base and the condition of the City's roads,to assess the overall health of the City. In the Statement of Net Position and Statement of Activities,two types of activities are depicted: • Governmental Activities - Most of the City's basic services are reported here, including law enforcement, fire suppression,public works,planning and building, engineering,parks and recreation departments, and general administration. Property and sales taxes, franchise fees, and state and federal grants finance most of these activities. • Business-Type Activities - The City charges a fee to customers to help cover all or most of the cost of certain services it provides. These activities include the water and wastewater operations,a portion of the City's affordable housing program,and certain fee-for-service recreation programs. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS • FINANCIAL SECTION Fund Financial Statements The fund financial statements provide detailed information about the City's most significant funds, not the City as a whole. Some funds are required by State law and by bond covenants. The City Council has also established other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes and other monies. The City's two primary types of funds,governmental and proprietary,use different accounting methodologies: • Governmental Funds-Most of the City's basic services are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can be readily converted to cash. The governmental fund statements provide a detailed short-term view of the City's general government operations and the basic services it provides. Governmental fund information helps to determine whether there are more or fewer financial resources that can be spent in the near future to finance the City's programs. The relationship (or differences) between the governmental activities reported in the Statement of Net Position and the Statement of'Activities and the various governmental funds is included in the pages following the respective statements. • Proprietary Funds - When the City charges customers for the services it provides, whether to outside customers or to other units of the City, these services are generally reported in proprietary funds. Proprietary funds are reported in the same manner as the governmental activities are reported in Statement of Net Position and the Statement of Activities. The City's enterprise funds (one component of the proprietary funds) are the same as the business-type activities reported in the government-wide financial statements, but provide more detail and additional information such as cash flows for proprietary funds. Internal service funds (the other component of the proprietary funds)report activities that provide supplies and services to other City's programs and activities. The City as Trustee-Reporting of the City's Agency Funds The City acts as an agent for the Community Facilities District No. 1 (the Encinitas Ranch Development), and the Requeza Street Assessment District No. 93-1. These activities are reported in the Statement of Fiduciary Net Position —Agency Funds, and are not a part of the City's financial activities because the City cannot use these assets to finance its operations. The City is responsible for ensuring that the assets in these funds are used for their intended purposes. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS • FINANCIAL SECTION REPORTING THE CITY AS A WHOLE Table 1 Summarized Statement of Net Position (Millions of Dollars) Governmental Business-Type Total Primary Activities Activities Government 2013 2012* 2013 2012 2013 2012 Current assets 55.5 $ 60.4 $ 42.0 43.4 97.5 103. Capital assets(net) 196.5 183.7 51.7 47.3 248.2 231.0 Other non-current assets 13.1 6.6 41.9 42.6 55.0 49.2 Total Assets 265.1 250.7 135.6 133.3 400.7 384.0 Current liabilities 12.6 11.7 4.7 4.4 17.3 16.1 Long-term liabilities 47.5 41.6 18.6 20.5 66.1 62.1 Total Liabilities 60.1 53.3 23.3 24.9 83A 78.2 Deferred inflows of resources - - 0.2 - 0.2 - Net Position; Net investment in capital assets 157.4 140.0 38.4 25.1 195.8 165.1 Restricted 10.0 10.0 - - 10.0 10.0 Unrestricted 37.6 46.9 73.7 83.3 111.3 130.2 Total Net Position $ 205.0 $ 196.9 $ 112.1 $ 108.4 $ 317.1 $ 305.3 *Het position of governmental activities for FY 2012 has been restated from $197.4 million, as previously reported, to$196.9 million, to reflect the City's implementation of GASB Statement No. 65. In accordance with GASB Statement Ito. 65, bond issuance costs previously reported as an Other Assets and amortized over the life of the related bonds, were expensed, thereby reducing the City's net position for governmental activities. DISCUSSION AND ANALYSIS Summarized Statement of Net Position(Table 1) The City's Total Net Position improved by$11.8 million,from$305.3 million to$317.1 million. The Governmental Activities portion improved by $8.1 million (net), primarily due to an increase in the net investment in capital assets of$17.4 million. Of that amount, approximately $1.8 million can be attributed to the reclassification of the value of land easements which were transferred from the Cardiff and Encinitas Sanitary funds to general government capital assets during the fiscal year. The increase in capital assets was offset to some degree, by the issuance of$7.9 million of long-term debt during the fiscal year to partially finance construction of the improvements to the Encinitas Community Park. The net proceeds of that bond issue were on deposit with the bond trustee at June 30, 2013, and make up the majority of the increase in other non-current assets. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS • FINANCIAL SECTION The Business-Type Activities portion improved by $3.7 million (net). These activities include the operations of the San Dieguito Water District, the Cardiff and Encinitas Sanitary WasteWater divisions, as well as a portion of the City's affordable housing program(s) and City recreational activities that operate primarily on a fee-for-service basis. • The San Dieguito Water District showed an increase in its net position of$3.2 million for this fiscal year. This included net operating income of$2.I million, which is primarily derived from sales of potable water and meter service charges. The majority of the remaining increase was derived from capital contributions(customer connection fees,donated infrastructure,and land easements acquired). The District paid down $1 million of long-term debt during the fiscal year, including the final installment of $95,000 related to its 2002 advances from the City of Encinitas, which funded the District's Meter Replacement and Automation Project. • The Cardiff Sanitary division showed a very modest increase in its net position of$0.2 million for this fiscal year. This included net operating income of $1.5 trillion and capital contributions (connection fees) of$120,000. These increases were offset by the transfer of$1.4 million in land easements to the City during the year. • The Encinitas Sanitary Division showed a modest increase in its net position of$0.5 million for this fiscal year. This included net operating income of$0.9 million and capital contributions (connection fees) of$15,000. These increases were offset by the transfer of$0.4 million in land easements to the City during the year. • The City's Affordable Housing program, which is comprised of the operation of 16 affordable housing units in the Pacific Pines condominium complex, showed an overall decrease in its net position of$0.2 million. This decrease is due to charges for depreciation on the existing housing stock and modest negative cash flows from operations,which are subsidized by Federal monies from the City's Section$ housing choice vouchers program. • Recreation activities showed a small decrease in its net position of $0.1 million, due to program expenses exceeding program revenues for the fiscal year. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS • FINANCIAL SECTION REPORTING ThIE CITY AS A WHOLE Table 2 Summarized Statement of Activities (Millions of Dollars) Governmental Business-Type Total Primary Activities Activities Goverrurtent 2013 2012 2013 2012 2013 2012 Program Revenues: Charges for services $ 4.8 $ 4.8 $ 22.6 $ 22.3 $ 27.4 $ 27.1 Operating grants 3.8 5.9 1.1 1.1 4.9 7.0 Capital grants 6.5 3.6 1.0 0.5 7.5 4.1 General Revenues: Property taxes 35.0 32.8 0.8 0.7 35.8 33.5 Sales and use taxes 11.6 10.6 - - 11.6 10.6 Other takes 3.8 3.5 - - 3.8 3.5 InteW,vernnental 0.5 0.6 - - 0.5 0.6 Other general revenue 2.0 2.2 0.2 0.2 2.2 2.4 Total Revenues 680 64.0 25.7 24.8 93.7 88.8 Program Expenses: C,eneral goverttmeht 10.6 12.1 - - I0.6 12.1 Public safety 24.6 23.1 - - 24.6 23.1 Public v"Is 10.9 8.5 - - 10.9 8.5 Planning and building 4.4 5.0 - - 4.4 5.0 Fngineering services 3.8 5.8 - - 3.8 5.8 Parks and recreation 5.5 5.6 - - 5.5 5.6 Interest on longterm debt 1.9 1.8 - - 1.9 1.8 Cardiff Sanitary Uvision - - 3.4 3.4 3.4 3.4 San Dieguito Water District - - 12.2 12.4 12.2 12A Encinitas Sanitary Division - - 2.0 1.7 2.0 1.7 Affordable Housing - - 1.5 1.5 1.5 1.5 Recreation - - 1.1 1.2 1.1 1.2 Total Menses 617 61.9 20.2 20.2 819 82.1 Change in net position before transfers 6.3 2.1 5.5 4.6 11.8 6.7 Transfers 1.8 (0.6) (1.8) 0.6 0.0 0.0 Increase in Net Position 8.1 1.5 3.7 5.2 11.8 6.7 Be&ming Net Position,as restated 196.9 195A 108A 103.2 305.3 298.6 Ending Net Position $ 205.0 $ 1%.9 $ 1111 $ 108.4 $ 317.1 $ 3053 *Beginning net position of governmental activities for FY 2012 has been restated from$195.9 million,as previously reported,to $195.4 million,to reflect the City's implementation of GASB Statement No. 65. In accordance with GASB Statement No.65, bond issuance costs previously reported as an Other Assets and amortized over the life of the related bonds, were expensed, thereby reducing the City's net position for governmental activities. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS • FINANCIAL SECTION DISCUSSION AND ANALYSIS Summarized Statement of Activities(Table 2) Total Revenues increased by $4.8 million, or about 5.5%, from $88.8 million to $93.6 million. Total program revenues increased by $1.6 million, while general revenues increased $3.2 million. Program expenses decreased by $0.2 million. A breakdown of those results by governmental and business activities is presented below. Governmental Activities Program Revenues- Charges far services were essentially flat year-aver-year, with most sub-categories at or near prior year levels. Operating grants and contributions declined $2.1 million, with decreases in funding for most operating programs. The largest decreases were experienced in State funding for streets and road maintenance and Federal assistance funding for the Commuliity Development Block Grant program and several federal housing assistance programs. Capital grants and contributions increased by $2.9 million, principally due to the recognition of grant revenues for several transportation grants, including the TransNet programs and Federal transportation programs. General Revenues - Property taxes increased by $2.2 million due to a general increase in assessed valuations of 2%, and a significant rise in the median home price to $740,000 (16% increase), which affects supplemental property taxes collected on honnes sold during the period. Sales and use taxes (the City's second largest revenue generator)increased$1 million year-over-year(9%increase). The increase was driven in part by the continuing lease-up of formerly vacant retail establishments and overall increases in several categories due to continuing improvement in overall economic activity. Program Expenses were essentially flat year-over-year, with minor changes in the various functional areas. Cost containment was achieved through savings in personnel costs, related both to vacancies during the fiscal year and the results of labor negotiations completed early in fiscal year 2012-13. During the fiscal year, the Public Works and Engineering functions were combined under one Department Director, and some costs were shifted between the former departments. Overall, departmental expenditures increased only about$400,000(about 3%.) Overall, Total Revenues less Program Expenses for governmental activities added $6.3 million to the City's the total Net Position. The transfer of the value of land easements (discussed above) of $1.8 million made up the balance of the net increase of$8.1 million. The City's beginning Net Position was restated by roughly$467,000 to reflect the City's early implementation of GAS13 Statement No. 65,Items Previously Reported as Assets and Liabilities, which requires that bond issuance costs no longer be deferred and amortized over the life of the related debt, but instead costs are expensed as period costs when incurred. Business-Type Activities • San Dieguito Water District showed positive results for the fiscal year. Operating Revenues, which are primarily derived from sales of potable water and meter service charges, increased 6.2% year- over-year. While water rates or meter service charges did not increase during the fiscal year, this increase reflects a 5.5% increase in customer demand for potable water compared to the prior fiscal year. Operating Expenses decreased by 1.7% overall. General operations and maintenance and general administration both saw decreases compared to the prior fiscal year due to personnel vacancies and the implementation of reduced retirement benefits for new employees. Facility operations and maintenance costs also decreased due to reduced labor and benefit costs for Santa Fe Irrigation District (SF1D) employees who operate the Joint Facilities, including the R.E. Badger 9 MANAGEMENT'S DISCUSSION AND ANALYSIS • FINANCIAL SECTION Water Filtration Plant. Source of supply expenses remained flat even though customer demand and imported water costs increased during the fiscal year. This is due to increased availability of lower cost local water during the fiscal year,which the District was able to take advantage of as opposed to utilizing more expensive imported water, offsetting the cost of increased production. Nonoperating Revenue increased modestly by 12.5% in the fiscal year,primarily due to a rebound in the District's property tax apportionment and an increase in development in the District, which resulted in additional connection fee revenue from new customers connecting to the water system. • Cardiff Sanitary Division also showed positive results for the fiscal year, with net operating income of$1.5 million, compared to$1.9 million in the prior fiscal year. Operating revenues,primarily sewer service charges, were slightly lower this fiscal year due to the nature of the billing methodology, which bills customers utilizing a rolling five-year average based on customer usage (flows.) Operating expenses were slightly higher than the prior year, primarily in general operations and maintenance. City wastewater crews service both Cardiff and Encinitas Sanitary, and the proration of work varies from year-to-year.Overall sewer maintenance costs were essentially flat year-over-year. • Encinitas Sanitary Division also posted positive results for the fiscal year, with net operating income of$0.9 million, compared to$1.2 million in the prior fiscal year. Operating revenues,primarily sewer service charges, were slightly higher this fiscal year mainly due to a steady customer base and a modest 1% increase in sewer rates. Operating expenses were slightly higher than the prior year in both general operations and maintenance and facility operations and maintenance. General operations and maintenance was higher this year due to the scheduling of maintenance by City wastewater crews,as discussed above. The amount of time spent in each service area varies from year to year. • Affordable Housing activities had a net operating loss of$1.2 million, which was mostly offset by Federal funding from the City's Section 8 housing choice vouchers program of $1.1 million. Depreciation charges made up the remaining $0.1 million of change in net position. This program is expected to run at a loss, which will increase as Federal funding assistance declines in future years. However, the program has adequate reserves to maintain its financial viability for several years to come. • Recreation programs took in $1.1 million this fiscal year, while incurring $1.2 million in. operating expenses.The Parks and Recreation department is currently reviewing its fee and cost structures,with the goal of better aligning cash inflows and outflows. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS * FINANCIAL SECTION The City's Fund Financial Statements The City's Fund financial statements provide a greater level of detail regarding the City's Governmental Activities, which include the General fund, Capital Improvements, and other Nonmajor Governmental funds. The City reports the General fund and the Capital Improvements fund as major funds, under the guidance provided by GASB Statement No. 34. All other governmental fiends are considered to be nonmajor, and are reported as one group. The City's General fund is the largest and most discretionary source of funding for operations, debt service and capital improvements, via both direct expenditures and transfers to other City funds. The City's Capital Improvement fund is utilized to account for all governmentally funded capital improvements, as well as several larger "work projects" such as longer- term consultant studies. Capital spending totaled approximately$18.3 million this fiscal year,an increase of about$6 million over the prior year. Further discussion of the City's capital program is included in the section of this analysis entitled CAPITAL ASSETS AND CAPITAL IMPROVEMENT PROGRAM. The other Nonmajor Governmental funds are primarily Special Revenue funds, where monies are collected and held, but are restricted to the specific purpose for which they are collected. The City's Debt Service fund is included in this group, as well. Discussion of the City's debt service program is included in the section of this analysis entitled DEBT ISSUANCE AND ADMINISTRATION. The City's major funds include: (1) General Fund Governmental Activities (2) Capital Improvement Capital Projects Fund Governmental Activities (3) Water and WasteWater Funds Business-Type Activities * San Dieguito Water District * Cardiff Sanitary Division * Encinitas Sanitary Division The focus of the discussion below will be on the City's General and Capital Improvement funds. Discussion of the net position and results of the City's Water and WasteWater funds is included above, under the section entitled:Business-Type Activities. GENERAL FUND General Fund Budgetary Highlights General Fund Revenues $2.8 million over projections This budget surplus was produced by a combination of tax revenues and most other general revenue categories. The most significant revenue items were: (1)property taxes, $958,000 above projections,and (2) sales and use taxes, $923,000 above projections. The increase in property taxes is due to a general increase in assessed valuations of 2%, and a significant rise in the median home price to $740,000 (16% increase), which affects supplemental property taxes collected on homes sold during the period. Sales and use taxes (the City's second largest revenue generator) increased $1 million year-over-year (9% increase). The increase was driven in part by the continuing lease-up of formerly vacant retail establishments and overall increases in several categories due to continuing improvement in overall economic activity. Other taxes made up about $413,000 of the balance of the surplus. Other general revenues were about $543,000 (net) above projections, including charges for services and other general revenues. ii MANAGEMENT'S DISCUSSION AND ANALYSIS * FINANCIAL SECTION General Fund Expenditures $2.1 million under budget Significant budget savings were realized in all primary functional areas, due to a number of different factors. Overall, the City had a number of personnel vacancies during the fiscal year that were not immediately filled due to City Council direction to freeze hiring while labor negotiations were under way. This process affected hiring for the majority of the fiscal year. Cost containment measures previously in place were continued in fiscal year 2012-13,encouraging departments to set targets for savings amounts. Excess of Revenues over Expenditures $4.9 million over proiections Actual revenues over expenditures were approximately $7.3 million, compared to a budget of $2.4 million. Other Financing Sources and Uses $1.2 million over budget Other financing sources and uses included both transfers in and out, and the proceeds for lease revenue and capital lease financing. The City raised $7.9 million in March 2013 via the issuance of lease revenue bonds, to partially fund the improvements to the Encinitas Community Park. The capital lease financing related to the purchase of a replacement front-line fire engine(pumper). The primary item that was over budget was capital transfers out. This line item is budgeted for the capital funding appropriated in this fiscal year only. Transfers out include both current and previously appropriated (carryover) capital amounts. Thus, this line item only reflects the timing of capital transfers,rather than a direct comparison of spending versus appropriations. Analysis of Fund Balance and Changes in Fund Balance Fund balance was projected to be $37.8 million as of June 30, 2013, a scheduled decrease of about $2.4 million. Actual fund balance is$41.5 million,or$3.7 million higher than projected. The explanations for the actual change in fund balance,and its relationship to the budget projections, is detailed in the analyses presented directly above this section. The difference between the General Fund's original and final budgeted expenditures was an increase of$1.3 million, from $49.9 million to $51.2 million. Capital outlay expenditures increased by$0.8 million primarily related to the acquisition of fire equipment. Overall, the City's General Fund ended the year in a very healthy financial condition, with fund balance well above anticipated levels. CAPITAL IMPROVEMENT FUND The City utilizes its Capital Improvement Fund to account for all City capital improvements, including public facilities, acquisition of parkland and park improvements, infrastructure, and certain City "work projects"such as multi-year consultant studies that meet the criteria for inclusion as capital projects. The classification of studies is mainly driven by internal classifications in the City's budget process. The city invested approximately $16 million in capital improvements this fiscal year, including such projects as the construction of improvements to Moonlight Beach, improvements to the long-awaited Encinitas Community Park,and the completion of the construction of Encinitas Fire Station#2 in the cominunity of Cardiff-by-the-Sea. The City has over 100 active capital projects, that are funded from a variety of sources including the General Fund, capital grants, special taxes such as the TransNet special sales tax, and a variety of development impact fees. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS . FINANCIAL SECTION CAPITAL ASSETS AND CAPITAL IMPROVEMENT PROGRAMS As of June 30, 2013, the City had approximately $285 million (net of accumulated depreciation and amortization) invested in a broad range of capital assets including road and drainage systems, parks and beach facilities, public buildings, water and wastewater treatment facilities, collection and distribution systems and affordable housing stock. Of that amount, $196 million is classified as assets under the category of Governmental Activities and $89 million is classified as assets of the City's Business-Type Activities. Included under Business-Type Activities is $41 million of Investment in Other Agencies, which represents principally the investment of the City's water and sewer divisions in joint venture treatment facilities. The City's capital improvement program expended over $18 million this fiscal year. Some of the significant projects funded this fiscal year were the annual street overlay program, construction of Fire Station#2 in South Encinitas, construction of improvements at Moonlight State Beach and the Encinitas Community Park, and three grade-separated railroad crossings. Appropriated but unspent capital carryovers totaled approximately$28 million at June 30,2013. The City also continued its ongoing capital programs for the San Dieguito Water District and the two wastewater divisions, which expended capital funds on both infrastructure (in the ground) and investments in jointly-owned treatment facilities. As of June 30, 2013, the City had remaining contractual commitments totaling nearly $17.0 million for capital projects related to its governmental and business-type activities. The more significant capital commitments include $11.5 million related to the Encinitas Community Park and $3.3 million for the 2"d Street Sewer Main Repair. There have been no changes to the City's credit ratings or debt imitations that would affect the financing of planned facilities or services. DEBT ISSUANCE AND ADMINISTRATION The City had a total of approximately $70 million of long-term obligations at the beginning of the fiscal year, including both governmental and business-type long-term debt and other long-term obligations such as compensated absences and claims payable. Excluding these smaller items,the City added a total $8.5 million to long-term debt, all of which relates to governmental activities. The City issued $7.9 million of lease revenue bonds in March 2013 to partially fund the construction of improvements to the Encinitas Community Park. The City also replaced one front-line fire engine, which was financed via a capital lease arrangement. A total of about $4.0 million of long-term debt was paid off during the fiscal year. This]ell a total balance of about$74 million of long-term obligations,of which$70.4 million is classified as long-term debt. Of that amount,$4.3 million is due and payable with one year. The City underwent a credit review this fiscal year by Standard & Poors national credit rating services division. The result(s)of that review were: (1) the credit rating on the newly issued bonds was AA+,the same rating that has been assigned to former City debt issues such as the refinancing of the Encinitas Community Park bonds in 2010 and the issuance of the Public Library construction bonds in 2006. In addition, Standard & Poors, for the first time, assigned an AAA credit rating to the City of Encinitas. This is the highest rating attainable under the scale utilized by Standard & Poors. The overall rating is affected by a variety of factors, including such criteria as financial strength and stability, financial viability in future years, levels of established reserves, and the strength of the City's financial and management controls. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS • FINANCIAL SECTION The City has a very respectable debt service ratio of S%,which represents the amount of general fund debt due within one year,compared to the 2013-2014 forecast of total general fund revenues. The City has no current plans to issue additional debt within the next year. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS The City's elected and appointed officials consider many economic factors when setting budgets, including national, state and local economic conditions, trends in residential housing, and the unique needs of the community. The Finance Department coordinates the development of the operating and capital budgets,which are presented by the City Manager to the City Council for consideration. The City adopts its operating budget in a two-year cycle, with appropriations set for the first year only. The Operating and Capital Budgets for fiscal year 2013-14,which is the first year of the two-year cycle,were adopted by the City Council in June 2013. The 2013-14 operating budget anticipates general fund revenue of about $55 million, with expenditure appropriations totaling about $50.5 million. After considering expected transfers for debt service, fund balance is anticipated to be unchanged year-over-year. CONTACTING THE CITY'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers,customers, and investors and creditors with a general overview of the City's finances and to demonstrate the City's accountability for the monies it receives and manages. If you have questions about this report or need additional information, please contact the Finance Department of the City of Encinitas, 505 South Vulcan Ave, Encinitas, CA 92024, telephone(760) 633- 2600, or visit our website at www.encinitasCA.gov and review the Finance Department webpage. 14 BASIC FINANCIAL STATEMENTS SECTION City of Encinitas COAST„Vyy 505 South Vulcan Avenue *Encinitas CA 92024 1 01 760-633-2600 a www.encinitasea.gov [THIS PAGE INTENTIONALLY LEFT BLANK] CITY OF ENCINITAS Statement of Net Position June 30,2013 Governmental Business-type Activities Activities Total Assets: Current assets: Cash and investments $ 51,950,559 $ 38,995,585 $ 90,946,144 Restricted cash and investments with fiscal agent - 18,057 18,057 Receivables 3,509,061 2,717,595 6,226,656 Inventory and prepaid expenses 16,782 224,280 241,062 Total current assets 55,476,402 41,955,517 97,431,919 Noncurrent assets: Restricted assets: Cash and investments with fiscal agent 11,106,817 1,040,197 12,147,014 Internal balances 17,907 (17,907) - Long-term receivable 650,000 - 650,000 Investment in other agencies - 40,571,748 40,571,748 Other assets,net of accumulated amortization 1,330,075 392,611 1,722,686 Capital assets not being depreciated 71,821,140 20,637,659 92,458,799 Capital assets,net of accumulated depreciation I24,704,299 31,020,580 155,724,879 Total noncurrent assets 209,630,238 93,644,888 303,275,126 Total assets 265,106,640 135,600,405 400,707,045 Liabilities: Current liabilities: Accounts payable and accrued liabilities 4,436,804 1,746,226 6,183,030 Accrued interest payable 489,627 204,658 694,285 Unearned revenues 321,320 524,785 846,105 Deposits and other liabilities 1,612,178 448,381 2,060,559 Long-tern liabilities-due within one year 5,703,312 1,805,154 7,508,466 Total current liabilities I2,563,241 4,729,204 I7,292,445 Noncurrent liabilities: Long-term liabilities-due in more than one year 47,520,783 18,571,723 66,092,506 Total liabilities 60,084,024 23,300,927 83,384,951 Deferred inflows of resources: Deferred amount on refunding - 234,937 234,937 Net position: Net investment in capital assets 157,395,370 38,402,878 195,798,248 Restricted 9,980,695 - 9,980,695 Unrestricted 37,646,551 73,661,663 111,308,214 Total net position $ 205,022,616 $ 112,064,541 $ 317,087,157 See Accompanying Notes to the Basic Financial Statements. 15 CITY OF ENCINITAS Statement of Activities For the Year Ended June 30,2013 Program Revenues Operating Capital Charges for Contributions Contributions Functions/Programs Expenses Services and Grants and Grants Governmental activities: General government $ 10,616,440 $ 1,775,756 $ - $ Public safety 24,629,613 91,495 111,932 - Public works 10,851,147 - 3,118,520 5,945,644 Planning and building 4,353,831 1,894,785 224,114 - Engineering services 3,813,678 955,986 - - Parks and recreation 5,542,550 39,946 305,298 517,335 Interest on long tenn debt 1,932,904 - - - Total governmental activities 61,740,163 4,757,968 3,759,864 6,462,979 Business-type activities: Cardiff Sanitary Division 3,373,704 4,755,573 - 120,278 San Dieguito Water District 12,200,431 13,687,156 - 868,023 Encinitas Sanitary Division 1,983,786 2,933,319 - 14,756 Affordable Housing 1,499,863 214,115 1,103,639 - Recreation Programs 1,153,840 1,059,009 - - Total business-type activities 20,211,624 22,649,172 1,103,639 1,003,057 Total primary government $ 81,951,787 $ 27,407,140 $ 4,863,503 $ 7,466,036 General revenues: Taxes: Property taxes and transfer fees Transient occupancy taxes Franchise taxes Sales tax Intergovernmental-unrestricted Use of money and property Other Transfers Total general revenues and transfers Change in net position Net position,beginning,as restated Net position,ending See Accompanying Notes to the Basic Financial Statements. 16 Net(Expense)Revenue and Changes in Net Position Primary Government Governmental Business-type Activities Activities Total $ (8,840,684) $ - $ (8,840,684) (24,426,186) (24,426,186) (1,786,983) - (1,786,983) (2,234,932) - (2,234,932) (2,857,692) - (2,857,692) (4,679,971) - (4,679,971) (1,932,904) (1,932,904) (46,759,352) - 46,759,352) - 1,502,147 1,502,147 - 2,354,748 2,354,748 - 964,289 964,289 - (182,109) (I82,109) - (94,831) (94,831) - 4,544,244 4,544,244 (46,759,352) 4,544,244 (42,215,108) 34,974,578 749,378 35,723,956 1,491,998 - 1,491,998 2,323,616 - 2,323,616 11,585,145 - 11,585,145 541,079 - 541,079 552,512 189,676 742,188 1,596,026 3,118 1,599,144 1,809,656 (1,809,656) - 54,874,610 (867,484) 54,007,126 8,115,258 3,676,760 11,792,018 196,907,358 108,387,781 305,295,139 $ 205,022,616 $ 112,064,541 $ 317,087,157 See Accompanying Notes to the Basic Financial Statements. 17 CI'T'Y OF ENCINITAS Balance Sheet Governmental Funds June 30,203 Infrastructure Capital Improvements Improvement Noomajor Total Special Capital Governmental Governmental General Revenue Projects Funds Funds Assets: Cash and investments $ 32,529,951 $ 1,598,386 $ 1,105,996 $ 11,187,791 $ 46,422,024 Receivables 2,671,298 207,526 - 628,168 3,506,992 Due from utlrer funds 992,653 - - - 992,653 Other assets 1,345,062 - - 1,795 1,346,857 Long-tam receivable 650,000 650,000 Restricted cash 8,02(),468 3,086,349 1],106,817 Total assets $ 46,209,332 $ 1,805,912 $ 1,105,996 $ 14,904,103 $ 64,025,343 Liabilities and fund balances: Liabilities: Accouuls payable and accrued liabilities $ 3,060,496 $ 15,035 $ 1,105,996 $ 196,541 $ 4,368,068 Interest payable - - - 30,]68 30,168 Unearned revenue - 321,320 - - 121,320 Due to other funds - 570,597 - 404,149 974,746 Deposits and other liabilities 1,602,058 - f0 1,20 1,612,178 Total liabilities 4,662,554 906,952 1,105,996 630,978 7,306,480 Fund balances: Nompendable 1,980,075 - - - 1,980,075 Restricted 7,996,400 898,960 - 12,138,025 21,033,385 Commircd 9,847,719 - - - 9,847,719 Assibmcd 561,762 - - 2,135,100 2,696,862 Unassigned 21,160,822 - 21,160,922 Total fund balances 41,546,778 898,960 14,273,125 56,718,863 Total liabilities and fund balances $ 46,249,332 $ 1,805,912 $ 1,105,996 $ 14,904,103 $ 64,025,343 See Accompanying Notes to the Basic Financial Statements. 18 CITY OF ENCINITAS Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position June 30,2013 Fund balances-total governmental funds $ 56,718,863 Amounts reported for governmental activities in the Statement of Net Position are different because: Capital assets used in governmental activities are not current financial resources and,therefore,are not reported in the fund balance sheet,but are reported in the governmental activities in the Statement of Net Position: Land $ 53,880,312 Construction in progress 1 7,940,828 Public facilities 71,663,288 Equipment and machinery 10,642,539 Infrastructure 108,525,913 Less: Accumulated depreciation (66,127,441) 196,525,439 Internal service funds are used by management to charge the costs of risk management, personnel support,f1cct maintenance and vehicle replacement to individual funds. The assets and liabilities of the internal service funds are not included in the fund financial statements, but are reported in the governmental activities in the Statement of Net Position, 5,461,868 Long-term liabilities applicable to the City's governmental activities are not due and payable in the current period and,accordingly,are not reported as fund liabilities. All liabilities,both current and long- term arc reported in the Statement of Net Position: 2007 Storm drain equipment (37,789) 2008 Civic Center roof replacement (1,523,397) 2011 Fire apparatus lease (810,359) 2012 Fire apparatus lease (519,447) 2013 Fire apparatus lease (555,384) 1997 Civic Center COPS (2,185,000) 2002 ABAG financing (1,325,000) 2006 Public Library Lease Revenue Bonds,net of unamortized discount (17,680,000) 2010 Community Park Lease Revenue Bonds,net of unamortized premium (17,549,983) 2013 Community Park Bonds,net of unamortized premium (7,996,400) Claims payable (1,048,309) Compensated absences (1,993,027) (53,224,095) Accrued interest payable for the current portion of interest due on long-term liabilities has not been reported in the governmental funds. (459,459) Net position of governmental activities $ 205,022,616 See Accompanying Notes to the Basic Financial Statements. 19 CITY OF ENCINITAS Statement of Revenues,Expenditures and Changes in Fund Balances Governmental Foods For the Year Ended June 30,2013 Iafrastrueture Capital Improvements Improvement Nonmajor Total Special Capital Governmental Governmental General Revenue Projects Funds Funds Revenues: Taxes and ussessments $ 49,140,365 $ 297,945 $ - $ 2,090,232 $ 51,528,542 Licenses and pennils 219,288 - - - 219,288 Intergovernmental 522,865 6,922,628 - 1,074,727 8,520,220 Development impact fees - - - 876,181 876,181 Charges for services 4,450,756 - - - 4,450,756 Fines,forfeitures,and penalties 611,029 - - - 611,029 Ilse of moncy and property 452,386 1,620 - 118,475 572,481 Other 1,022,653 23,317 1,045,970 Total revenues 56,419,342 7,222,193 - 4,182,932 67,824,467 Expenditures: Current: GcneraI govermneul 9,364,941 - - 65,546 9,430,487 Public safety 23,543,342 - - 112,025 23,655,367 Public works 3,597,216 232,341 - 2,228,089 6,057,646 Planning and building 3,825,996 - - 412,886 4,238,882 Engineering services 3,716,994 - - - 3,716,994 Parks and rccrcalion 4,260,368 - - 116,679 4,377,047 Capital outlay 559,653 18,276,353 - 18,836,006 Debt service: Principal retirement: Bonds issued with other agencies(ABAG) - - - 330,000 330,000 C:apitallcascs 390,614 390,614 1997 Civic Center COP's 485,000 485,000 2006 Public Library bonds - - - 445,000 445,000 2010 Community Park bonds - - - 645,000 645,000 Interest and fiscal charges Bonds issued with atltcr agencies(ABAG) - - - 64,650 64,650 Capital leases - - - 98,218 98,218 1997 Civic Center COP's - - - 125,018 125,018 2U66 Public Library bonds - - - 751,561 751,561 2010 Cormmunity Park bonds - - - 766,634 766,634 Bond issuance costs 243,987 243,987 Totat expenditures 49,112,497 232,341 18,276,353 7,036,920 74,658,111 Excess(deficiency)of revenues over(under)expenditures 7106,845 6,989,852 353, 18276 ( ) (2,853,988) ( Other financing sources(uses): Transfers in-cperating 1,121,181 34,020 - 32,438 1,187,639 Transfers out-operating (911,459) (931,370) - (189,809) (7,032,638) Transfers in-capital - (5,898,487) 18,276,353 - 12,377,866 Transfers out-capital (11,748,417) (679,450) (12,377,867) 'Transfers in-debt service 3,899,248 3,899,248 Transfers out-debt service (2,978,248) Bond issuance 7,865,000 _ _ (92[,000) (3,899,248) 7,865,000 Premium on bond issuance 131,400 - - - 131,400 Capital lease financing 555,384 555,384 Total other financing sources(uses) (5,965,159) _ (6,795,837) 18,276,353 2,191,427 7,706,784 Net chaggein fund balances 1,341,686 194,015 (662,561) 873,140 Fund balances-beginning ofyeur 4(),705,092 704,945 - 14,935,686 55,845,723 Pendbalances-endofyear S 41,546,778 $ 898,960 5 - $ 14,273,125 $ 56,718,863 See Accompanying Notes to the Basic Financial Statements. 20 CITY OF ENCINITAS Reconciliation of the Statement of Revenues,Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities For the Year Ended June 30,2013 Net change in fund balances-total governmental funds $ 873,140 Amounts reported for governmental activities in the statement of activities are different because: Govemmcntal funds report capital outlays as expenditures. However,in the statement of activities,the costs of those assets are allocated over their estimated useful lives as depreciation expense. Thu amount by which capital outlay exceeded depreciation in the current period: Capital outlay $ 15,910,033 Depreciation expense (5,058,399) 10,851,634 Capital assets transferred to governmental activities from internal service funds are not reported in governmental funds because there has been no use of current financial resources. However,the capital assets are reported as transfers in the statement of activities and increases net position. 1,809,656 Capital assets donated to the City do not provide current financial resources and, therefore, are not recorded in govennmental funds. However,donated capital assets increase net position and are reporterd in the statement of activities as capital contributions. 206,736 The issuance of long-term debt provides current financial resources to governmental funds while the repayment of the principal of long term debt consumes current financial resources of governmental funds,neither transaction,however,has any effect on net position. Also,governmental funds report the effect of bond premiums and discounts when the debt is first issued,whereas these amounts are deferred and amortized in the Statement of Activities These differences are as follows: Principal payments 2,295,614 Bond issuance (7,865,000) Premium on bond issuance (131,400) Capttal lease financing (555,384) Amortization of bond discounts and premiums 776 (6,255,394) Internal service funds are used by management to charge the costs of risk management, engineering, administrative and operational support to individual fiords.The net expense of internal service funds is reported with governmental activities. 622,471 Some expenses reported on the Statement of Activities do not require the use of current financial resources and therefore are not reported as expenditures in the governmental funds: Net changcin accrued interest (127,599) Net,change in compensated absences (119,002) Net change in claims payable 253,616 7,015 Change in net position of governmental activities $ 8,1 15,258 See Accompanying Notes to the Basic Financial Statements. 21 CITY OF ENCINITAS Statement of Net Position Proprietary Funds June 30,2013 Business-type Activities Enterprise Funds Cardiff San Dieguito Encinitas Sanitary Water Sanitary Division District Division Assets: Current assets: Cash and investments $ 1 1,729,177 $ 14,793,223 $ 11,346,645 Restricted cash and investments with fiscal agent - - - Accounts and taxes receivable 139,021 2,492,708 64,121 Inventory and prepaid expenses - 142,577 - Total current assets 11,868,198 17,428,508 11,410,766 Noncurrent assets: Restricted assets: Cash and investments with fiscal agent - 1,040,197 - Other noncurrent assets: Prepaid pension asset,net of accumulated amortization of$588,912 392,611 - Investment in other agencies 18,100,000 18,594,413 3,877,335 Total other noncurrent assets 18,100,000 18,987,024 3,877,335 Capital assets: Land easements - 2,925,679 - Public works facility right-of-use - 3,378,700 - Construction in progress 11,184,840 898,920 2,249,520 Capacity rights,net of accumulated amortization - 210,612 - Utility,plant,vehicles,and equipment,net of accumulated depreciation 3,752,345 14,176,555 9,772,775 Total capital assets(net of accumulated depreciation) 14,937,185 21,590,466 12,022,295 Total noncurrent assets 33,037,185 41,617,687 15,899,630 Total assets 44,905,383 59,046,195 27,310,396 See Accompanying Notes to the Basic Financial Statements. 22 Business-type Activities Governmental Enterprise Funds Activities- Nonmajor Nonmajor Total Internal Affordable Recreation Enterprise Service Housing Fund Funds Funds $ 399,143 $ 727,397 $ 38,995,585 $ 5,528,535 18,057 - 18,057 - 5,428 16,317 2,717,595 2,069 81,703 - 224,280 - 504,331 743,714 41,955,517 5,530,604 - - 1,040,197 - 392,611 - 40,571,748 - 40,964,359 - 2,925,679 - 3,378,700 - 14,333,280 - - - 210,612 - 3,108,293 - 30,809,968 3,108,293 51,658,239 - 3,108,293 93,662,795 - 3,612,624 743,714 135,618,312 5,530,604 (Continued) See Accompanying Notes to the Basic Financial Statements. 23 CITY OF ENCINITAS Statement of Net Position Proprietary Funds(Continued) June 30,2013 Business-type Activities Enterprise Funds Cardiff San Diegutto Encinitas Sanitary Water Sanitary Division District Division Liabilities: Current liabilities: Accounts payable and accrued liabilities 209,793 1,063,336 418,104 Due to other funds - - _ Accrued interest payable 43,989 160,669 Unearned revenue - - _ Deposits 750 430,609 Current portion of long-term debt 563,037 1,179,219 - Total current liabilities 817,569 2,833,833 418,104 Noncurrent liabilities: Revenue bonds payable - 8,110,000 - Notes and mortgages payable 3,481,992 5,535,000 - Total noncurrent liabilities 3,481,992 13,645,000 - Total liabilities 4,299,561 16,478,833 418,104 Deferred inflows of resources: Deferred amount on refunding 234,937 - - Net position: Net investment in capital assets 10,892,156 13,880,663 12,022,295 Unrestricted 29,478,729 28,686,699 14,869,997 Total net position $ 40,370,885 $ 42,567,362 S 26,892,292 See Accompanying Notes to the Basic Financial Statements. 24 Business-type Activites Governmental Enterprise Funds Activities- Nonmajor Nonmajor Total internal Affordable Recreation Enterprise Service Housing Fund Funds Funds 3,319 51,674 1,746,226 68,736 17,907 17,907 - - - 204,658 907 523,878 524,785 17,022 - 448,381 62,898 - 1,805,154 - 102,053 575,552 4,747,111 68,736 - - 8,110,000 - 1,444,731 - 10,461,723 1,444,731 - 18,571,723 - 1,546,784 575,552 23,318,834 68,736 - - 234,937 - 1,607,764 - 38,402,878 458,076 168,162 73,661,663 5,461,868 $ 2,065,840 $ 168,162 $ 112,064,541 $ 5,461,868 See Accompanying Notes to the Basic Financial Statements. 25 CITY OF ENCINITAS Statement of Revenues,Expenses and Changes in Net Position Proprietary Funds For the Year Ended dune 30,2013 Business-type Activities Enterprise Funds Encinitas Cardiff Sanitary San Dieguito Sanitary Division Water District Division Operating revenues: Charges for services $ 4,755,573 $ 13,509,376 $ 2,929,996 Rental income - - - Contribution from Users - Interfund revenues 27,099 Intergovernmental - - Other revenues - 150,681 3,323 Total operating revenues 4,755,573 13,687,156 2,933,319 Operating expenses: Housing assistance payments - - - Source of supply - 3,815,390 - General operations and maintenance 1,107,347 2,348,194 613,599 Facility operations and maintenance 1,148,118 2,121,251 551,908 General and administrative 239,736 1,713,045 127,365 Program cost - - - Depreciation 193,727 604,382 288,124 Amortization 367,126 871,662 281,333 Administrative support - - - Operational support services - - - Insurance and claims 174,752 68,544 121,457 Total operating expenses 3,230,806 11,542,468 1,983,786 Operating income(loss) 1,524,767 2,144,688 949,533 Nonoperating revenues(expenses): Use of money and property 39,015 117,072 32,391 Property taxes - 749,378 - Federal operating grants - - Gain on sale of capital assets - 3,118 - Interest expense on notes payable (142,898) (657,963) - Total nonoperating revenues(expenses),net (103,883) 211,605 32,391 Income(loss)before capital contributions and transfers 1,420,884 2,356,293 981,924 Capital contributions: Easements -- 211,582 - Donated infrastructure - 553,961 - Connection fees 120,278 102,480 14,756 Transfersin - - - Transfers out (1,358,589) - (451,067) Changc in nct position 182,573 3,224,316 545,613 Total net position-beginning of year 40,188,312 39,343,046 26,346,679 Total net position-end of year $ 40,370,885 $ 42,567,362 $ 26,892,292 See Accompanying Notes to the Basic Financial Statements, 26 Business-type Activities _ Enterprise Funds Governmental Nonmajor Nonmajor Total Activities- Affordable Recreation Enterprise Internal Service Housing Fund Funds Funds $ - $ 905,025 $ 22,099,970 $ 1,505,838 117,621 144,882 262,503 - - 9,102 9,102 588,000 - - 27,099 692,779 96,494 96,494 - - 154,004 160,453 214,115 1,059,009 22,649,172 2,947,070 1,079,816 1,079,816 - - - 3,815,390 103,142 4,172,282 - - - 3,821,277 160,911 149,372 2,390,429 - 1,004,468 1,004,468 100,538 - 1,186,771 - 1,520,121 - - 623,115 - - 1,470,707 4,210 368,963 1,090,339 1,448,617 1,153,840 19,359,517 3,184,161 (1,234,502) (94,831) 3,289,655 (237,091) 1,198 189,676 - 749,378 1,103,639 1,103,639 - - - 3,118 14,562 (51,246) - (852,107) - 1,053,591 1,193,704 14,562 (180,9I1) (94,831) 4,483,359 (222,529) 211,582 553,961 237,514 - - 845,000 (1,809,65(j) (180,911) (94,831) 3,676,760 622,471 2,246,75I 262,993 1 08,387,781 4,839,397 $ 2,065,840 168,162 $ 112,064,541 $ 5,461,868 See Accompanying Notes to the Basic Financial Statements. 27 CITY OF ENCINITAS Statement of Cash Flows Proprietary Funds For the Year Ended June 30,2013 Business-type Activities Enterprise Funds Cardiff San Dieguito Encinitas Sanitary Water Sanitary Division District Division Cash flows from operating activities: Receipts from users $ 4,876,378 $ 12,951,303 2,946,375 Receipts from interfund charges - 27,099 - Other receipts 150,681 Payments to employees (3,422) (2,478,840) Payments to suppliers and vendors (3,204,653) (7,444,040) (1,142,026) Net cash provided(used)by operating activities 1,668,303 3,206,203 I,804,349 Cash flows from noncapital financing activities: Transfers in - - - Federal operating grants - Proceeds from property taxes 749,378 Net cash provided by noncapital and related financing activities 749,378 - Cash flows from capital and related financing activities: Capital contributions received-connection/capacity fees 120,27$ 102,480 14,756 Proceeds from sale of capital assets 3,118 - Repayment of advances from the City (95,000) Principal payments on bonds and notes payable (546,540) (990,000) Interest payments on bonds and notes payable and trustee fees (148,364) (669,450) Capital related payments to other agencies (317,369) (59,561) (448,417) Purchase of capital assets (3,835,359) (1,007,509) (1,510,046) Net cash provided(used)by capital and related financing activities (4,727,354) (2,715,922) (1,943,707) Cash flows from investing activities: investment income received 64,869 94,128 51,950 Net increase(decrease)in cash and cash equivalents (2,994,182) 1,333,787 (87,408) Cash and cash equivalents,beginning ofyear 14,723,359 14,499,633 11,434,053 Cash and cash equivalents,end of year $ 11,729,177 $ 15,833,420 $ 11,346,645 Schedule of cash and cash equivalents: Current assets: Cash and investments $ 11,729,177 $ 14,793,223 $ 11,346,645 Restricted rash and investments with fiscal agent - - - Noncurrent restricted assets: Cash and investments with fiscal agent - 1,040,197 - Total cash and cash equivalents $ 11,729,177 $ 15,833,420 $ 11,346,645 See Accompanying Notes to the Basic Financial Statements. 28 Business-type Activities Enterprise Funds Governmental Activities- Nonmajor Nonmajor Total Internal Affordable Recreation Enterprise Service Housing Fund Funds Funds $ 209,461 $ 1,264,351 $ 22,247,868 $ 2,945,001 - - 27,099 - - 150,681 (155,797) (511,887) (3,149,946) (1,352,774) (1,169,257) (653,497) (13,613,473) (1,864,100) (1,115,593) 98,967 5,662,229 (271,873) - - - 845,000 1,103,639 1,103,639 - 749,378 - 1,103,639 1,853,017 845,000 - 237,514 - 3,118 14,562 (95,000) - (49,019) (1,585,559) (51,246) (869,060) (825,347) (6,352,914) - (100,265) (9,487,248) 14,562 2,207 - 213,154 - (110,012) 98,967 (1,758,848) 587,689 527,212 628,430 41,812,687 4,940,846 $ 417,200 $ 727,397 $ 40,053,839 $ 5,528,535 $ 399,143 $ 727,397 38,995,585 $ 5,528,535 18,057 - 18,057 - - 1,040,197 - $ 417,200 $ 727,397 $ 40,053,839 $ 5,528,535 (Continued) See Accompanying Notes to the Basic Financial Statements. 29 CITY OF ENCINITAS Statement of Cash Flows Proprietary Funds(Continued) For the Year Ended June 30,2013 Business-type Activities Enterprise Funds San Dicguito Cardiff Sanitary Water Encinitas Division District Sanitary Division Reconciliation of operating income(loss)to net cash provided(used)by operating activities: Operating income(loss) $ 1,524,767 $ 2,144,688 $ 949,533 Adjustments to reconcile operating income(loss)to net cash provided(used)by operating activities: Depreciation and amortization 560,853 1,476,044 569,457 Changes in operating assets and liabilities: Accounts receivable 120,805 (558,073) 13,056 Inventory and prepaid expenses - 22,612 - Accounts payable and accrued liabilities (538,122) 204,362 272,303 Due to other funds - - Deferred revenue Deposits (90,791) Compensated absences - 7,361 - Net cash provided(used)by operating activities $ 1,668,303 $ 3,206,203 $ 1,804,349 Noncash from capital and related financing activities: Acquisition of capital assets included in accounts payable $ - $ 187,885 $ - Amortization of original issue premium 34,401 - Contribution of capital assets - 765,543 Transfers out ofcapilal assets to governmental activities (1,358,589) - (451,067) See Accompanying Notes to the Basic Financial Statements. 30 Business-type Activities Governmental Enterprise Funds Activities- Nonmajor Nonmajor Total Internal Affordable Recreation Enterprise Service Housing Fund Funds Funds $ (1,234,502) $ (94,831) $ 3,289,655 $ (237,091) 100,538 2,706,892 (5,428) (1,420) (431,060) (2,069) - 22,612 4 (11,544) (72,997) (32,713) 17,907 - 17,907 68 206,762 206,830 706 - (90,085) 5,114 12,475 $ (1,115,593) $ 98,967 $ 5,662,229 $ (271,873) $ $ - $ 187,885 $ 34,401 765,543 (1,809,656) See Accompanying Notes to the Basic Financial Statements. 31 CITY OF ENCINITAS Statement of Fiduciary Net Position Agency Funds June 30,2013 Assets: Cash and investments $ 2,09 8,305 Cash and investments with fiscal agent 1,975,483 Interest receivable 14 Current assessments receivable 12,424 Special assessments receivable 32,540,000 Total current assets 36,626,226 Liabilities: Due to bondholders 36,626,226 Net Position: $ - See Accompanying Notes to the Basic Financial Statements. 32 NOTES TO THE FINANCIAL STATEMENTS City of Encinitas COASTH 505 South Vulcan Avenue •Encinitas CA 92024 im O%ff! 760-633-2600 * www.encinitasea.gov CITY OF ENCINITAS Notes to the Basic Financial Statements For the Year Ended June 30,2013 {1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (a) Reporting Entity The City of Encinitas (the City) was incorporated on October 1, 1986, pursuant to an election approving the San Dieguito Reorganization Plan, which consisted primarily of the detachment of territory from the Cardiff area and the annexation of the same territory to the City of Solana Beach. The reporting entity of the City includes the accounts of the City, as the primary government, and the following blended component units: the Encinitas Housing Authority (the EHA), the Encinitas Public Financing Authority(the EPFA),and the San Dieguito Water District(SDWD). The EHA was formed on January 26, 1994, under the laws of the State of California to provide housing assistance to citizens of the City. The EPFA was formed on November 6, 1991, by the City and SDWD as a Joint Powers Authority under the laws of the State of California to purchase, finance,and lease certain real property to the members.The member agencies are the City and the SDWD. SDWD was fornled in 1922 under the laws of the State of California to supply water services to the central western portion of San Diego County. Certain management, maintenance, and operating functions are the responsibility of the City, which bills periodically for these services. The criteria used in determining the scope of the reporting entity are based on the provisions of Governmental Accounting Standards Board (GASB) Statement No 14, The Financial Reporting Entity, as amended by GASB Statement No. 61, The Financial Reporting Entity—Omnibus—An Amendment of GASB Statements No. 14 and No. 34. The City is the primary governmental unit. Component units are financially accountable to the City. Financial accountability exists if the primary government appoints a voting majority of the entity's governing body and(1)it is able to impose its will on that organization or (2) there is potential for the organization to provide financial benefit, or impose financial burdens on the primary government. The component units have been accounted for as "blended" component units of the City. Despite being legally separate, these entities are so intertwined with the City that they are, in substance, part of the City's operations. Accordingly, the balances and transactions of these component units are reported within the funds of the City. SDWD is reported as an enterprise fund of the City. The following specific criteria were used in detemuning the status of these component units; • Members of the City Council also act as the governing body of the EHA, the EPFA, and SDWD. • The City,the EHA,the EPFA,and SDWD are financially interdependent. • The EHA, the EPFA,and SDWD arc managed, at least in part,by employees of the City, who provide various support functions including financial reporting and investment decisions. 33 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 Separate financial statements for SDWD are available at the City's administrative office. Separate financial statements are not required or prepared for the EHA and the EPFA. (b) Government-Wide and Fund Financial Statements: The government-wide financial statements(i.e.,the statement of net position and the statement of activities)report information on all of the non-fiduciary activities of the primary government. As a general rule, the effect of interfund activity has been removed from these statements and eliminations have been made to minimize the double counting of internal activities. Exceptions to this general rule are payments-in-lieu of taxes and other charges between the City's water and sewer function and various other functions of the City. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for services. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes. Program revenues and expenses are classified by function. Each function is defined as a major department with a department head and separate budget. The statement of net position includes all assets and liabilities of the primary government, including capital assets, long-term debt,and other long-term liabilities.The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include (1) fees and charges to customers, applicants, or citizens who purchase, use or directly benefit from goods, services, or privileges provided by a given function or segment and(2)grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. The fund financial statements provide information about the City's funds, including fiduciary funds. Separate statements for each fund category(governmental, proprietary, and fiduciary) are presented. The emphasis of fund financial statements is on major governmental and enterprise funds,each displayed in a separate column. All remaining governmental and enterprise funds are aggregated and reported as nonmajor funds. (c) Measurement Focus,Basis ofAccounting and Financial Statement Presentation: "Measurement Focus" is a term used to describe which transactions are recorded within the various financial statements. "Basis of Accounting" refers to when transactions are recorded regardless of the measurement focus applied. The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the tuning of related cash flows. Property taxes are recognized as revenues in the fiscal year for which they were levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. 34 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose,the City considers revenues to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. The City accrues interest in the Debt Service Fund when resources have been set aside for repayment that occurs early in the following year. Property taxes, transient occupancy taxes, franchise taxes, sales tax, licenses, intergovernmental revenues and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Only the portion of special assessments receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when cash is received by the government. Proprietary fund,financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned. Expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Proprietary fiends distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the proprietary funds are charges to customers for sales and services, which are considered exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Operating expenses include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.Nonoperating revenues,such as subsidies and investment earnings,result from non-exchange transactions or ancillary activities. Fiduciary fund financial statements are accounted for according to the nature of the fund. The City has only Agency funds, which are purely custodial in nature (assets equal liabilities) and thus, do not involve the measurement of the results of operations. These funds are accounted for on the accrual basis of accounting. The City reports the following Major Governmental fund types: The General Fund is used to account for resources which are not required to be accounted for in another fund. The fiord includes the general activities of the City and other administrative functions. The Infrastructure Improvements Special Revenue Fund is used to account for financial resources from state and federal grants which are primarily to fund operations and capital improvements. The Capital Improvement Capital Projects Fund is used to account for financial resources to be used for the acquisition or constriction of major property, equipment, or facilities which are generally financed by governmental funds. 35 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 The City reports the following Nonmajor Governmental fund types: The Special Revenue Funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes. The Debt Service Funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for the payment of principal and interest on long-term debt. The City reports the following Major Enterprise.funds: The Cardiff Sanitary Division (CSD) provides wastewater collection and treatment services to approximately 6,000 customers in the southern portion of the City. SDWD provides potable and reclaimed water services to approximately 11,000 customers in Encinitas. The Encinitas Sanitary Division(ESD)provides wastewater collection and treatment services to approximately 5,000 customers in the northern portion of the City. The City reports the following Nonmajor Enterprise,funds: The Affordable Housing fund accounts for the ownership and operation of 16 affordable housing units that are rented to qualified low-income households by the FHA. In addition to the rental income collected, the fund is also supported by rental voucher payments from the U.S. Department of Housing and Urban Development (HUD) related to the administration of the Section 8 Housing Choice Vouchers Program. The Recreation Fund is used to account for the recreation programs administered by the Parks and Recreation Department which are generally provided on a fee-for-service basis. The Internal Service Funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the City, or to other governments,on a cost-reimbursement basis.These funds include Risk Management,Wastewater Support,Vehicle Maintenance and Vehicle Replacement. The City reports the,following,fiduciary funds: The Agency Funds are used to account for money and property held by the City as trustee or custodian.The Agency Funds are custodial in nature(assets equal liabilities). These funds include one Assessment District and one Community Facilities(Mello-Roos)District. 36 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 (d) Description of Assets,Liabilities,Net Assets and Fund Balance Accounts Cash, Cash Equivalents and Investments: Investments are stated at fair value. Investment income is reported as revenue in the governmental funds and as nonoperating revenue in the proprietary funds. For purposes of the statements of cash flows, the City considers all amounts reported as cash and investments or restricted cash and investments with fiscal agents to be cash equivalents. Investment in Other Agencies: The City's major proprietary funds participate in joint ventures with other local agencies, generally to more efficiently provide water and wastewater treatment. Each entity has an ownership interest in the joint facilities, which is accounted for under the equity method of accounting. The City agencies pay for the fair share of operating costs, and make capital contributions for major maintenance and the upgrade or construction of facilities. The City agencies also record their share of the results of operations for these joint ventures. Receivables: Receivables include such items as taxes, intergovernmental revenues, charges for services, miscellaneous accounts receivable, and interest receivable. No allowance for doubtful accounts has been established, as the City believes all amounts are considered to be collectible in the normal course of business. Other Assets: Other current assets include inventories, stated at cost, which is not in excess of fair value. Inventory applies only to SDWD and includes such items as water meters and other materials used in the repair of capital facilities. Cost has been determined on an average-cost basis. Other assets also include prepaid pension costs for the City and SDWD. Capital Assets and Depreciation Expense: Capital assets are recorded as expenditures in the various governmental funds at the time of purchase and are reported as assets in the applicable governmental or business-type activities columns in the government-wide financial statements, as well as the proprietary fund financial statements. Such assets include land, Iand easements, construction in progress, public facilities (buildings and building improvements), vehicles, equipment and machinery, and infrastructure assets (e.g., roads, streets and sidewalks, bridges, curbs and gutters, drainage systems, lighting systems and similar assets). All capital assets are valued at historical cost or estimated historical cost if actual historical cost is not available. Donated capital assets are valued at their estimated fair value on the date donated. Proprietary fund capital assets include, land easements, public works facility right of use, construction in progress, structures and improvements, collection and distribution systems, machinery and equipment,and capacity rights,which are stated at cost. Contributed assets,which are principally collection and distribution lines, are stated at cost or estimated fair value on the date of donation. Cost includes materials,direct labor,and such indirect items as engineering and supervision, employee fringe benefits and interest during construction on borrowed funds related to plant under construction. 37 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 Depreciation is provided using the straight-line method over the estimated useful service lives of the related assets: Structures and improvements 20-45 years Equipment,machinery and vehicles 5-20 years Infrastructure 20-50 years Collection and distribution systems 50 years The City's capitalization threshold for capital assets is $5,000 for non-infrastructure assets and $100,000 for infrastructure assets. Deposit Liabilities: The City collects deposits from homeowners and commercial enterprises as surety for the payment of fees and other costs related to planning and engineering services provided by the City. The City collects two types of deposits: (1) Application Deposits and (2) Security Deposits. Application deposits are collected on certain projects for which a fee for services has not been established. As costs for these projects are incurred by the City,the applicant's deposit balance is adjusted and revenue (including applicable overhead charges) is recognized. Expenses incurred in excess of the deposit amounts are billed to the applicant. Any surplus at project completion is returned to the applicant. Security deposits are collected by the applicant to guarantee required performance. These may either be in cash or in the form of non-cash, such as performance bonds or letters of credit. The amount of cash deposits on hand as of June 30, 2013, is reported as a current liability in the Statement of Net Position and Balance Sheets. Noncash security deposits are not reported as liabilities,as the corresponding surety is not an asset of the City. Unearned Revenue: Unearned revenue recorded in the government-wide statement of net position for business-type activities and the proprietary fund financial statements generally consist of program fees collected from customers prior to the statement of net position date for recreation programs that begin in the next fiscal year or donations for capital or work projects, for which the related expenses have not yet been incurred. Unearned revenue recorded in the government-wide statement of net position for governmental activities and the governmental fund financial statements consist of federal and state capital grants, representing voluntary nonexchange transactions, for which advance payments have been received from the provider for which eligibility requirements, other than timing requirements, have not been satisfied. Long Term Obligations: In the government-wide financial statements and proprietary fund financial statements, long-term debt and other long-term obligations are reported as liabilities, Bonds payable are reported net of the applicable bond premium or discount. Long-term lease obligations that meet all applicable criteria are accounted for as capital leases. Leases not meeting the criteria are accounted for as operating leases. 38 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 In governmental funds, compensated absences (accrued vacation and sick leave for firefighters) are recorded as a liability,based on current pay rates,when due and payable at year-end. Unpaid compensated absences of proprietary funds are recorded as an expense and a liability as the vested benefits to the employees accrue. The City accounts for material claims and judgments outstanding at year-end. When it is probable that a claim liability has been incurred at year-end, and the amount of the loss can be reasonably estimated,the City records the estimated loss. Classification of Net Position: On the statement of net position, net position is classified into three components which are defined as follows: • Net investment in ca itai assets - This component of net position consists of capital assets, net of accumulated depreciation, and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition,construction,or improvement of those assets. If there are significant unspent debt proceeds at year-end, the portion of the debt attributable to the unspent amount is not included in the calculation of net investment in capital assets. • Restricted -This component of net position consists of restricted assets reduced by liabilities related to those assets. Restrictions represent constraints on the use of resources which are externally imposed by creditors(such as through debt covenants), grantors,contributors,laws or regulations of other governments, or constraints imposed by law through constitutional provisions or enabling legislation. • Unrestricted - This component of net position consists of resources that do not meet the definition of"restricted"or"net investment in capital assets." When both restricted and unrestricted resources are available for use, it is the government's policy to use restricted resources first,and then unrestricted resources as they are needed. Classification of'Fund Balances: Fund balances presented in the governmental fund financial statements represent the difference between assets and liabilities. GASB Statement No. 54 requires that fund balances be classified into the following categories based upon the type of constraints imposed on the use of funds: • Nonspendable — This classification includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. • Restricted — This classification includes amounts that have constraints placed on the use of resources that are either(a)externally imposed by creditors,grantors, contributors,or laws or regulations of other governments or (b) imposed by law through constitutional provisions or enabling legislation. 39 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 • Committed — This classification includes amounts that can be used only for the specific purposes determined by a formal action by the entity's highest level of decision-making authority,the City Council. The funds must be formally appropriated,but unspent as of fiscal year-end. • Assigned—This classification includes amounts intended to be used by the entity for specific purposes but do not meet the criteria to be classified as restricted or committed. The discretion to classify fund balances under this category rests with the Finance Director. No formal City Council policy has been adopted covering this type of classification. • Unassignedd -- This classification is the residual amount for the City's General Fund and includes all spendable amounts not contained in the other classifications. The City reduces restricted amounts first when expenditures are incurred for purposes for which both restricted and unrestricted (cormitted, assigned or unassigned) amounts arc available. The City reduces committed amounts first, followed by assigned amounts, and then unassigned amounts when expenditures are incurred for purposes for which arnounts in any of the unrestricted fund balance classifications could be used. (e) Property Taxes: Under California law, property taxes are assessed and collected by the counties up to 1% of the assessed value, plus other increases approved by the voters. The property taxes go into a pool and are then allocated to the cities based on complex formulas. The City considers only taxes which are received within 60 days after year-end to be revenue in the governmental funds. The County of San Diego's property tax calendar is as follows: Lien date January I Levy date July I Due dates November I and February 1 Delinquent after December 10 and Apri l 10 40 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2413 (2) ADOPTION OF NEW GOVERNMENTAL ACCOUNTING: The City implemented the following new governmental accounting standards as of July 1,2012. GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, addresses issues related to service concession arrangements (SCAB), which are a type of public-private or public-public partnership. An SCA is an arrangement between a transferor (government) and an operator(governmental or non-governmental entity) in which (1) the transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another public asset(facility) in exchange for significant consideration and(2)the operator collects and is compensated by fees from third parties.This statement did not impact the City's financial statements. GASB Statement No. 61, The Financial Reporting Entity: Omnibus — an amendment of GASB Statements No. 14 and No. 34,seeks to improve and better meet the user needs regarding defining governmental financial reporting entities and to address reporting entity issues that have arisen since the issuance of GASB Statement No. 14 and No. 34. This statement did not impact the City's financial statements. GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 1989 FASB and AICPA Pronouncements, provides for the incorporation into GASB's authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: (a) Financial Accounting Standards Board (FASB) Statements and Interpretations, (b) Accounting Principles Board Opinions, and (c) Accounting Research Bulletins of the American Institute of Certified Public Accountants(AICPA)Committee on Accounting Procedure. GASB Statement No. 62 also supersedes GASB Statement No. 20, Accounting and Financial Reporting,for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, thereby eliminating the election for enterprise funds and business-type activities to apply post-November 30, 1989 FASB Statements and Interpretations that do not conflict with or contradict GASB pronouncements. However, such entities can continue to apply, as other accounting literature,post-November 30, 1989 FASB pronouncements that do not conflict with or contradict GASB pronouncements. GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, provides financial reporting guidance for deferred outflows and deferred inflows of resources. State and local entities enter into transactions that result in the consumption or acquisition of net assets in one period that are applicable to future periods. Concepts Statement No. 4, Elements of Financial Statements, identifies those consumptions and acquisitions as deferred outflows of resources and deferred inflows of resources, respectively, and distinguishes them from assets and liabilities. Previous financial reporting standards do not include guidance for reporting those financial statement elements, which are distinct from assets and liabilities. 41 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 Concepts Statement No. 4 also identifies net position as the residual of all other elements in a statement of financial position. It is the difference between (a) assets and deferred outflows of resources and (b) liabilities and deferred inflows of resources. GASB Statement No. 63 amends the net asset reporting requirements in GASB Statement No. 34, Basic Financial Statements — and Management's Discussion and Analysis —for State and Local Governments, and other pronouncements by incorporating deferred outflows of resources and deferred inflows of resources into the definitions of the required components of the residual measure and by renaming that measure as net position, rather than net assets. Implementation of this Statement impacted the presentation of financial information and changed the titles of the financial statements themselves,as well as specific elements in the financial statements. GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. Concepts Statement No. 4, Elements of Financial Statements introduced and defined the elements included in financial statements, including deferred outflows of resources and deferred inflows of resources. In addition,Concepts Statement No. 4 provides that reporting a deferred outflow of resources or a deferred inflow of resources should be limited to those instances identified by the GASB in authoritative pronouncements that are established after applicable due process. This Statement amends the financial statement element classification of certain items previously reported as assets and liabilities to be consistent with the definitions in Concepts Statement No. 4. GASB Statement No. 65 also provides other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources, such as limiting the use of the term deferred in financial statement presentations. Refer to Note 15 which describes the impact to the City's financial statements resulting from the implementation of GASB Statement No. 65. (3) CASH AND INVESTMENTS: Cash and investments are classified in the accompanying financial statements as follows: Government- Statement of wide Statement Fiduciary of Net Position Net Position Total Current assets: Cash and investments $ 90,946,144 $ 2,098,305 $ 93,044,449 Restricted cash and investments with fiscal agents 18,057 1,975,483 1,993,540 Noncurrent assets: Restricted assets: Cash and investments with fiscal agents 12,147,014 - 12,147,014 Total cash and investments $ 103,111,215 $ 4,073,788 $ 107,185,003 42 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 Cash and investments at June 30,2013,consisted of the following: Cash on hand $ 3,525 Deposits with financial institutions-book balance 1,645,795 Investments 105,535,683 Total cash and investments $ 107,185,003 Investments Authorized by the California Government Code and the City's Adopted Investment Policy: The table on the following page identifies the allowable investment types authorized by the California Government Code (the "Gov't Code") and the City's adopted Investment Policy (the "Investment Policy"). The table also identifies certain restrictions related to interest rate risk and concentration of credit risk. The Investment Policy restricts the City Treasurer to investing in only the types of investments listed herein,which is more restrictive than the Gov't Code, as the City's policy does not allow certain investments to be purchased which are permitted under the Gov't Code. Authorized Maximum Maximum by Investment Maximum Percentage Investment Authorized Investment Type Policy Maturity of Portfolio in One Issuer Repurchase Agreements-Overnight"Sweep" Yes 1 year No Limit No Limit Local Agency Investment Fund(LA IF) Yes N/A No Limit No Limit Local Agency Bonds No 5 years N/A N/A Other Governmental Managed Investment Pools Yes N/A No Limit No Limit Money Market Mutual Funds Yes N/A 20% 10% Certificates of Deposit Yes 5 years No Limit No Limit Negotiable Certificates of Deposit Yes 5 years 30% No Limit Bankers'Acceptances Yes 180 days 40% 30°/o U.S.Treasury Bills,Notes and Bonds Yes 5 years No Limit No Limit U.S.Gov't Sponsored Enterprises Yes 5 years No Limit No Limit Commercial Paper Yes 270 days 25% 100/0 Commercial Medium-Term Notes Yes 5 years 30% No Limit Investments Authorized by Debt Agreements: The investment of the proceeds from debt issuances, held by a third-party trustee, is governed by the provisions of the specific debt agreement rather than by the Gov't Code or the Investment Policy. The investment types that are authorized and currently utilized by the City are Guaranteed Investment Contracts and Money Market Mutual Funds. 43 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continuer[) For the Year Ended June 30,2013 Disclosures Related to Interest Rate Risk: Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity the greater the sensitivity its fair value is to changes in market interest rates. One of the ways that the City manages its exposure to interest rate risk is by purchasing a combination of shorter-term and longer-term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. Information about the sensitivity of the fair values of the City's investments to interest rate risk is provided in the table on the following page that shows the distribution by maturity. Remaining Maturity(in Months) Less than 12 to 60 Investment Type Total 12 Months Months Investments: Local Agency Investment hund $ 24,384,371 $ 24,384,371 $ - California Asset Management Program 10,035,431 10,035,431 - Money Market Mutual Funds 243,432 243,432 - Corporate Medium Term Notes 993,002 - 993,002 U.S.Government Sponsored Enterprise Securities 55,750,301 7,046,826 48,703,475 Total Investments 91,406,537 41,710,060 49,696,477 Investments with Fiscal Agents: Guaranteed Investment Contracts 619,500 - 619,500 Money Market Mutual Funds 13,509,646 13,509,646 - Total Investments with fiscal Agents 14,129,146 13,509,646 619,500 Total $ 105,535,683 $ 55,219,706 $ 50,315,977 Disclosures Relating to Credit Risk: Credit risk is defined as the risk that an issuer of an investment will not fulfill its obligation to repay the holder at the maturity date. This is generally measured by the assignment of a rating by a nationally recognized statistical organization. However, some issuers do not seek a credit rating. For instance, the California Local Agency Investment Fund (LA]T) has not sought or received a credit rating. In these cases, the purchaser is solely responsible for performing their own due diligence before purchasing an investment or participating in an external investment pool. Certificates of deposit of $250,000 or less are fully insured by the Federal Deposit Insurance Corporation(FDIC), and therefore,do not seek a credit rating. Presented on the following page is the minimum rating required by(where applicable) the Gov't Code,the Investment Policy, or the debt agreements, and the actual rating as of year-end for each investment type. 44 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 Minimum Rating as of Year End Legal AAA/ Investment Type Total Rating AA+ Not Rated Investments: Local Agency Investment Fund $ 24,3$4,371 None $ - $ 24,394,371 California Asset Management Program 10,035,431 None 10,035,431 - Money Market Mutual Funds 243,432 AAA 243,432 Corporate Medium Term Notes 993,002 A 993,002 U.S.Government Sponsored Enterprise Securities 55,750,301 None 55,750,301 - Total investments 91,406,537 67,022,166 24,394,371 Investments with Fiscal Agents: Guaranteed Investment Contracts 619,500 None - 619,500 Money Market Mutual Funds 13,509,646 AAA 13,509,646 - Total Investments with Fiscal Agents 14,129,146 13,509,646 619,500 Total $ 105,535,683 $ 80,531,812 $ 25,003,871 Disclosures Relating to Concentration of Credit Risk: The investment policy of the City contains no limitations on the amount that can be invested in any one issuer beyond that stipulated in the Gov't Code. GASB Statement No. 40 requires disclosure by amount and issuer, of investments in any one issuer that represent 5% or more of total investments. Investments in any one issuer (other than U.S. Treasury securities, mutual funds, and external investment pools) that represents 5% or more of the City's total investments are as follows: Fair Issuer Investment Type Value Federal National Mortgage U.S.Government Sponsored $ 20,105,865 Association Enterprise Securities Federal Home Loan Mortgage U.S,Government Sponsored 16,237,447 Corporation Enterprise Securities Federal Home Loan Bank U.S.Government Sponsored 15,279,831 Enterprise Securities Disclosures Relating to Custodial Credit Risk: Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g. broker- dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The Gov't Code and the City's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provisions for deposits: The Gov't Code requires that a financial institution secure deposits made by state or local 45 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110%of the total amount deposited by the public agencies. California law also allows financial institutions to secure deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. At June 30, 2013, the City deposits (bank balances) were insured by the Federal Depository Insurance Corporation, up to $250,000 and the remaining balance of the deposits were collateralized under California Law. Disclosures Related to the State Local Agency Investment Fund(LAIF): The City is a voluntary participant in LAIF that is regulated by Government Code Section 16429 under the oversight of the State Treasurer. The City's policy is to report the value of its investment in LAIF at the amount reported to the City by LAIF. The LAIF has not sought, and does not maintain,a credit rating from any nationally recognized credit rating agency. The average amount invested by all public agencies (other than the State of California) in LAIF was approximately$21.2 billion for the year ended June 30, 2013. LAIF is part of the California Pooled Money Investment Account(PMIA),which had a balance of$58.8 billion and a weighted average maturity of 278 days as of June 30,2013. According to the State Treasurer's annual disclosure statement,the PMIA has not invested in,nor will it invest in, Derivative Products as defined in FASB 133. As of June 30, 2013, the PMIA held structured notes and asset-backed securities totaling $1.15 million, or 1.88% of the total portfolio. Disclosures Related to the Cali brnia Asset Management Program (CAMP): The City is a voluntary participant in CAMP,a California Joint Powers Authority that falls under California Government Code Section 53601(p), which is directed by a Board of Trustees that is made up of experienced local government finance directors and treasurers. The CAMP pool is operated in a manner similar to registered money market funds which follow Rule 2a-7 of the Securities and Exchange Commission. The Pool is required to maintain an average maturity of less than 60 days,and is rated AAA by Standard&Poor's national rating agency. (4) INVESTMENT IN OTHER AGENCIES Investment in other agencies is reported as other noncurrent assets in the Statement of Net Position,consists of the following,as of June 30, 2013 Cardiff Sanitary Division San Elijo Joint Facilities $18,100,000 San Dieguito Water District R.E.Badger Joint Facilities 17,777,594 San Dieguito Water District R.E.Badger Financing Authority 816,819 Encinitas Sanitary Division Eneina Joint Facilities 3,877,335 Total Investment in Other Agencies $40,571,748 46 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2413 (A) Cardiff Sanitary Division: Investment in San El{jo Joint Powers Authority(SEJPA): In 1964,Cardiff Sanitary Division(CSD) entered into an agreement with Solana Beach Sanitation District(Solana Beach)for the joint ownership, maintenance,operation,and use of a Wastewater Treatment Plant and Ocean Outfall (collectively, the "Facilities"). In 1987, CSD and Solana Beach agreed to establish the San Flijo Joint Powers Authority (SEJPA), a separate legal entity whose function it is to manage and operate the Facilities and to determine the joint and separate obligations of the members concerning the transmission, treatment, disposal, and reclamation of wastewater within the respective service territories. On June 30, 1988, CSD and Solana Beach each transferred all of their assets related to the Facilities in exchange for a 50% interest in SEJPA. The Ocean Outfall is jointly owned by SEJPA (21% interest) and the City of Escondido (79%interest). SEJPA is responsible for the operations and maintenance of the Facilities as well as the related administration. The operations and maintenance costs are allocated monthly and billed quarterly, based on the relative volume of flows after taking into account charges to other agencies that lease certain capacity rights and share in the costs of operations and maintenance. For the year ended June 30, 2013, CSD's share of those costs was $1,018,356, which is reported as a component of"facility operations and maintenance"in the accompanying financial statements. (B) San Dieguito Water District: Investment in R.E. Badger Filtration Plant and related Facilities(the"Joint Facilities'): In 1967, SDWD entered into an agreement with Santa Fe Irrigation District (Santa Fe) for the joint ownership, maintenance, operation, and use of a water treatment plant and various facilities for the storage and delivery of potable water. During the ensuing years,the SDWD and Santa Fe have added various facilities and improvements, which are owned in different percentages depending on the type of facility and the agreements in place. The ownership percentages of these Joint Facilities are described below: San Dieguito Water District Santa Fe Facilities 45% 55% Filtration Plant 31% 690/a Filtered Water Reservior 39% 61% Joust Pipeline 42% 58% San Dieguito Reservoir Santa Fe is responsible for the operations and maintenance of the Joint Facilities as well as the related administration. The operations and maintenance costs are allocated monthly on the basis of the water used by each district, and administrative costs are allocated based on an agreed-upon cost allocation plan. For the year ended June 30, 2013, SDWD's share of those was $2,121,251, which is shown as "facility operations and maintenance" in the accompanying financial statements. 47 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 Investment in R.E. Badger Water Facilities Financing Authority(the "Financing Authority'): In 1999, SDWD and Santa Fe entered into a joint exercise of powers agreement and formed the Financing Authority to provide financing for the acquisition and construction of capital improvements related to the Joint Facilities. The Financing Authority subsequently issued revenue bonds for the purpose of funding those capital improvements. SDWD and Santa Fe are obligated under Installment Purchase Agreements to repay their proportionate shares of the long- term financing. The investment in the Financing Authority consists primarily of SDWD's share of the debt reserve funds held by a fiscal agent and unamortized bond discounts and issuance costs. (C) Encinitas Sanitary Division: Investment in Encina Water Pollution Control Facility(the "Joint Facilities'): ESD is one of six member agencies with an ownership interest in the Joint Facilities. ESD owns approximately 2.7%of the Joint Facilities,after adjusting for the construction and upgrades to the Joint Facilities, referred to a "Phase V improvements." This ownership percentage affords ESD treatment capacity rights of approximately 2.0 million gallons/day, which is in excess of current needs and sufficient to meet all projected future needs. The Encina Wastewater Authority (Encina) is responsible for the operations and maintenance of the Joint Facilities, as well as the related administration. The operations, maintenance, and administrative costs are allocated monthly on the basis of the relative flows of each member agency. For the year ended June 30, 2013, ESD's share of those costs was $551,908, which is shown as "facility operations and maintenance"in the accompanying financial statements. (5) OTHER ASSETS,NET OF ACCUMULATED AMORTIZATION (A) Governmental Activities: In the prior fiscal year, the City reported "Other assets, net of accumulated amortization" of $2,686,606. During the current fiscal year,the City elected to early implement the provisions of GASB Statement No. 65, Items Previously Listed as Assets and Liabilities. As a result of that implementation, costs of issuance in the amount of$466,745 related to previous Lease Revenue Bond issuances have been expensed, resulting in the restatement of beginning net position. Refer to Note 15 which farther describes the impact to the City's financial statements resulting from the implementation of GASB Statement No. 65. The remaining other assets of $1,330,075 relates to the City's unamortized prepayment of its pension side fund obligations in 2007. This asset is being amortized over a 10 year period. (B) Business-type Activities: Other assets reported in the amomit of$392,611, relates to SDWD's unamortized prepayment of its pension side fund obligations in 2007.This asset is being amortized over a 10 year period. 48 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 (6) CAPITAL ASSETS AND DEPRECIATION: A summary of the balances and capital asset activity for governmental activities is presented below: Balance at Transfers In& Balance at July 1,2012 Additions Deletions Transfers(Out) June 30,2013 Governmental Activities: Capital assets,not being depreciated: Land $ 51,833,600 $ - $ $ $ 51,833,600 Land easements 22,425 214,630 1,809,656 2,046,711 Construction in progress 21,266,682 15,693,731 (19,019,585) - 17,940,828 Total capital assets, not being depreciated 73,122,707 15,908,361 (19,019,585) 1,809,656 71,821,139 Capital assets,being depreciated: Public facilities 60,815,560 10,847,728 - 71,663,288 Vehicles,equipment and machinery 9,905,223 879,496 (142,180) 10,642,539 Infrastructure 101,025,145 7,500,768 108,525,913 Total capital assets, being depreciated 171,745,928 19,227,992 (142,180) 190,831,740 Less accumulated depreciation for: Public facilities (18,449,545) (2,038,567) - (20,488,112) Vehicles,equipment and machinery (6,728,651) (566,462) 142,180 (7,152,933) Infrastructure (36,033,026) (2,453,369) - (38,486,395) Total accumulated depreciation (61,211,222) (5,058,398) 142,180 (66,127,440) Total capital assets being depreciated,net 110,534,706 14,169,594 - 124,704,300 Govermnental activities Capital assets,net $ 183,657,413 $ 30,077,955 $ (19,019,585) $ 1,809,656 $ 196,525,439 Depreciation expense was charged to the functions/programs of the governmental activities as follows: Governmental Activities- General government $ 926,131 Public safety 481,949 Public works 2,728,803 Parks and recreation 921,515 Total depreciation expense-governmental activities $ 5,058,398 49 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 During FY 2012-13, the City transferred $1,809,656 of land easements that had previously been recorded as capital assets of the enterprise funds ($1,358,5$9 for Cardiff Sanitary Division and $451,067 for Encinitas Sanitary Division) to the City's governmental activities, as these are considered assets of the City of Encinitas,granting access for any legitimate City business. A summary of the balances and capital asset activity for business-type activities is presented below: Balance at Transfers In& Balance at July 1,2012 Additions Deletions Transfers(Out) June 30,2013 Business-Type Activities: Capital assets,not being depreciated: Landcascmcnts $ 4,523,758 $ 211,578 (1,809,656) $ 2,925,680 Public Works facility right of use 3,378,700 - 3,378,700 Construction in progress 8,789,249 6,487,047 (943,017) 14,333,279 Total capital assets, not being depreciated 16,691,707 6,698,625 (943,017) (1,809,656) 20,637,659 Capital assets,being depreciated: Structures and improvements 14,447,003 (96,402) 14,350,601 Collection and distribution 47,903,790 1,496,972 96,402 49,497,164 Machinery and equipment 2,299,165 53,759 (19,639) 2,333,285 Capacity rights 323,190 323,190 Total capital assets, being depreciated 64,973,148 1,550,731 (19,639) 66,504,240 Less accumulated depreciation for: Structures and improvements (4,091,698) (338,954) (4,430,652) Collection and distribution (27,997,203) (220,980) 3 (348,373) (28,566,553) Machinery and equipment (2,121,516) (620,373) 19,639 348,373 (2,373,877) Capacity rights (106,114) (6,464) - - (112,578) Total accumulated depreciation (34,316,531) (1,186,771) 19,642 (35,483,660) Total capital assets being depreciated,net 30,656,617 363,960 3 31,020,580 Business-type activities Capital assets,net $ 47,348,324 $ 7,062,585 $ (943,014) $ (1,809,656) $ 51,658,239 Depreciation expense was charged to the functions/programs of the business-type activities as follows: Business-Type Activities: Cardiff Sanitary Division $ 193,727 San Dieguito Water District 604,382 Encinitas Sanitary Division 288,124 Nonmajor Affordable Housing 100,538 Total depreciation expense-business-type activities $ 1,186,771 50 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 (7) LONG-TERM OBLIGATIONS: A summary of changes in long-term liabilities for the year ended June 30,2013 is as follows: Balance at Balance at Due Within July 1,2012 Additions Deletions June 30,2013 One Year Governmental Activities: Capital Lcases: 2007 Storm Drain Equipment $ 73,876 $ $ (36,087) $ 37,789 $ 37,789 2008 Civic Center Roof Replacement 1,647,302 (123,905) 1,523,397 128,518 2011 Fire Apparatus 960,789 (150,430) 810,359 154,182 2012 Fire Apparatus 599,639 (80,192) 519,447 81,950 2013 Fire Apparatus - 555,384 555,384 79,537 Bonded Debt: 1997 Civic Center COP's 2,670,000 - (485,000) 2,185,000 505,000 2002 ABAG Financing 1,655,000 (330,000) 1,325,000 240,000 2006 Public Library Bonds 18,365,000 (445,000) 17,920,000 465,000 less:original issue discount (250,000) 10,000 (240,000) - 2010 Community Park Bonds 18,010,000 (645,000) 17,365,00[} 665,000 add:original issue premium 195,759 (10,776) 184,983 - 2013 Community Park Bonds - 7,865,000 7,865,00{1 305,000 add:original issue premium 131,400 131,400 - Subtotal of governmental capital leases and bonded debt 43,927,365 8,551,784 (2,296,390) 50,182,759 2,661,976 Claims payable 1,301,925 395,342 (648,958) 1,048,309 1,048,309 Compensated absences 1,874,025 1,993,027 (1,874,025) 1,993,027 1,993,027 Total Governmental Activities 47,103,315 10,940,153 (4,819,3 53,224,095 5,703,312 Business-type Activities: 2011 CSD Note Payable to SEJPA 4,316,361 - (546,540) 3,769,821 563,037 add:original issue premium 309,608 (34,401) 275,207 - 2004 SDWD Water Revenue Bonds 9,365,000 (615,000) 8,750,000 640,000 2007 SDWD Note Payable Badger 6,295,000 (375,000) 5,920,000 385,000 2004 EHA Housing Note Payable 1,544,434 (49,019) 1,495,415 50,684 Subtotal of business-type notes payable and bonded debt 21,830,403 (1,619,960) 20,210,443 1,638,721 Compensated absences fSDWD) 146,858 154,218 (146,858) 154,218 154,218 Compensated absences(Affordable Housing) 7,100 12,215 _ (7,10 12,215 12,215 Total Business-type Activities 21,984,361 166,433 (1,773,918) 20,376,876 1,805,154 Long-term liabilities total $ 69,087,676 $ 11,106,586 $ (6,593,291 L $ 73,600,971 $ 7,508,466 51 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 34,2013 (A) Governmental Activities: Capital Leases: 2007 Storm Drain Cleaning Equipment: The City entered into a long-term lease arrangement in fiscal year 2006-07 to finance the purchase of a new 2007 Vac-Con combination sewer and storm drain cleaner for $231,358. The lease has a term of seven (7) years, an interest rate of 4.66%, and semi-annual payments of $19,557. The City will own the equipment at the end of the lease tern in fiscal year 2014. 2008 Civic Center Roof'Replacement and Ener�,g Optimization Project: On February 27, 2008, the City entered into a long-term lease arrangement with a financial institution to finance $2,100,000 of the 2008 improvements to the Encinitas Civic Center. The lease has a term of fifteen (15) years, an interest rate of 3.69%, and semi-annual payments of $91,778. The project was completed during fiscal year 2008-2009, and the final payment is due in fiscal year 2023. 2011 Fire Apparatus Lease: The City entered into a long-term lease arrangement in fiscal year 2010-11 to finance the purchase of a 2011 Pierce Arrow XT Aerial Tiller Truck for$1,107,555. The lease has a term of seven (7) years, an interest rate of 2.48%, and annual payments of $173,329. The lease is accounted for as a capital lease,as the City will be purchasing the unit for$1.00 at the maturity of the lease in fiscal year 2018. 2012 Fire Apparatus Lease: The City entered into a long-term lease arrangement in fiscal year 2011-12 to finance the purchase of a 2012 Pierce Arrow XT Pumper Truck for$599,639. The lease has a term of seven (7)years, an interest rate of 2.18%,and annual payments of$92,830. The lease is accounted for as a capital lease, as the City will be purchasing the unit for$1.00 at the maturity of the Iease in fiscal year 2019. 2013 Fire Apparatus Lease: The City entered into a long-term lease arrangement in fiscal year 2012-13 to finance the purchase of a 2012 Pierce Arrow XT Pumper Truck for$555,384. The lease has a term of seven (7)years, an interest rate of 1.91%,and annual payments of$84,693. The lease is accounted for as a capital lease, as the City will be purchasing the unit for$1.00 at the maturity of the lease in fiscal year 2020. 52 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 34,2013 Capital assets and accumulated depreciation for assets held under capital leases are as follows: Governmental Activites Accumulated Net Capital Cost Depreciation Assets Public facilities $ 3,543,258 $ (578,732) $ 2,964,526 Fire apparatus and equipment 2,287,053 (275,451) 2,011,602 Equipment and machinery 231,358 (231,358) - Bonded Debt: 1997 Refunding Certificates of Participation (COP'S)-Series A (Encinitas Civic Center-): In December 1991, the Encinitas Public Financing Authority(on behalf of the City of Encinitas) issued its 1991 Certificates of Participation-Series A totaling$7,635,000, to purchase the site and existing improvements for the Encinitas Civic Center. In December 1997, the EPFA issued the 1997 Refunding Certificates of Participation-Series A totaling $7,550,000, to refund all of the 1991 Certificates. The refunding qualified as an in-substance defeasance. Principal is due and payable annually in amounts ranging from $505,000 to $590,000. Interest is due and payable semi-annually with rates ranging from 3.70%to 5.05%. The final maturity of the issue is due and payable in fiscal year 2017, These certificates are subject to federal arbitrage requirements. The certificates are not subject to optional redemption prior to maturity. 2002 Association of Bay Area Governments(ABA G)Lease Revenue Bonds: In July 2002,the City issued$6,590,000 of Lease Revenue Bonds, Series 2002-1 through ABAG, a California Joint Powers Authority. The proceeds were utilized to retire the 1992 Certificates of Participation-Series B (Encinitas Civic Center) and four existing debt obligations (including one of the Encinitas Sanitary Division) and to provide funding for improvements to the Civic Center and the SDWD Water Utility meter exchange and automation program. The Bonds mature annually in amounts ranging from $240,000 to $290,000. Interest is due and payable semi- annually at rates ranging from 3.00%to 4.65%. The final maturity of the issue is due and payable in fiscal year 2018. The bonds are subject to federal arbitrage requirements. The Encinitas Sanitary Division has repaid all of its obligations to the City under the agreement to advance funds. The San Dieguito Water District is scheduled to make its final installment repayment to the City on July 1,2013. The bonds are subject to optional redemption beginning in 2013 at the following respective redemption prices (expressed as percentages of the principal amount of the Bonds to be redeemed): Redemption Redemption Period Price Jt>ly 1,2012 through June 30,2013 101% July 1,2013 through June 30,2014 100.5% July 1,2014 and thereafter 100% 53 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 2006 Lease Revenue Bonds(Public Library): On October 1, 2006 the Encinitas Public Financing Authority(on behalf of the City of Encinitas) issued its 2006 Lease Revenue Bonds-Series A (Library Construction Project) in the amount of $20,000,000 to provide funds for the construction of a new 26,000 square foot public library. The bonds consist of$10,405,000 of serial bonds and $9,595,000 in term bonds. The seriaL bonds mature through 2026 in annual installments ranging from$465,000 to$755,000. The term bonds inature through 2037 and are subject to mandatory sinking fund requirements. Annual principal installments range from $785,000 to $1,155,000. Interest is due and payable semi-annually at rates ranging from 3.6%to 4.4%. The bonds were issued at a discount, which is being amortized over the life of the bonds on a straight-line basis in the government-wide financial statements. The bonds are subject to federal arbitrage requirements. The bonds maturing on or after October 1, 2015 are subject to optional redemption beginning on or after October 1,2014 at the following respective redemption prices: Redemption Redemption Period Price October 1,2014 through September 30,2015 102% October 1,2015 through September 30,2016 101% October 1,2016 and thereafter 100% 2010 Lease Revenue Refunding Bonds(Park Project): On September 1, 2010, the Encinitas Public Financing Authority (on behalf of the City of Encinitas) issued its 2010 Lease Revenue Refunding Bonds, Series A (Park Project) in the amount of$19,530,000 to provide funds for the refinancing of its 2001 Lease Revenue Bonds, Series A. The bonds consist of$15,675,000 of serial bonds and $3,855,000 of term bonds. The serial bonds mature from 2011 to 2028 in annual installments ranging from $625,000 to $1,175,000. The term bond matures on April 1, 2031 and is subject to mandatory sinking fund requirements. Interest is due and payable semi-annually at rates ranging from 2.00% to 4.85%. The bonds were issued at a premium, which is being amortized over the life of the bonds on a straight-line basis in the government-wide financial statements. The bonds are subject to federal arbitrage requirements. The bonds maturing on or after April 1, 2018 are subject to optional redemption on any date after April 1,2017,without premium. 2013 Lease Revenue Refunding Bonds (Public Park Construction Project): On March 20, 2013,the Encinitas Public Financing Authority(on behalf of the City of Encinitas) issued its 2013 Lease Revenue Bonds, Series A(Public Park Construction Project) in the amount of $7,865,000 to provide funds for the construction of capital improvements to the Encinitas Community Park. The bonds consist of $7,865,000 of serial bonds, which mature annually through 2033 in installments ranging from $305,000 to $510,000. Interest is due and payable semi-annually at rates ranging from 2.00% to 3.00%. The bonds were issued at a premium, which is being amortized over the life of the bonds on a straight-line basis in the government- wide financial statements. The bonds are subject to federal arbitrage requirements. The bonds maturing on or after October 1, 2023 through October 1, 2027, are subject to optional redemption on any date on or after October 1,2022,without premium. 54 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 The debt service requirements to maturity of the governmental activities for capital leases and the bonded debt(excluding claims payable and compensated absences)are as follows: Year Ending June 30 Principal Interest Totals 2014 $ 2,661,976 $ 1,933,041 $ 4,595,017 2015 2,730,686 1,825,394 4,556,080 2016 2,842,873 1,715,306 4,558,179 2017 2,955,410 1,600,249 4,555,659 2018 2,458,311 1,495,214 3,953,525 2019-2023 10,307,120 6,455,129 16,762,249 2024-2028 11,085,000 4,476,486 15,561,486 2029-2033 10,730,000 2,008,797 12,738,797 2034-2037 4,335,000 389,484 4,724,484 Totals $ 50,106,376 $ 21,899,100 $ 72,005,476 (B) Business-type Activities: 2011 CSD Note Payable to San Elijo Joint Powers Authority(SEJPA): On December 1, 2011, the SEJPA, on behalf of its members (the Cardiff Sanitary Division and the City of Solana Beach) refinanced all of its outstanding debt, including its 2003 refunding revenue bonds and a loan from the State of California. Information on the bond issuance itself is available through the SEJPA administrative offices. CSD is responsible, via a Third Amended and Restated Loan Agreement, for the repayment of $4,341,362 of the total borrowing amount of$9,235,000 (or approximately 47%.) Annual debt service is approximately$690,000 through fiscal year 2019,with smaller repayments due in 2020 and 2021. The average rate on the borrowing is approximately 2.0%. The bonds were issued at a premium, which is being amortized over the life of the bonds on a straight-line basis. The issue also resulted in deferred refunding costs, which are also being amortized over the life of the bonds on a straight-line basis. CSD has pledged its net revenues to pay for this outstanding obligation.Net revenues are defined as gross revenues less operations and maintenance costs, excluding depreciation, amortization and other non-cash type charges.CSD has covenanted to budget for net revenues each fiscal year of at least 110% of annual debt service. Total principal and interest remaining to be paid on the 2011 Note Payable as of June 30, 2013 is $4,284,554. During the year ended June 30, 2013, principal and interest paid on the 2011 Note Payable was $694,904 and net revenue was $2,244,913,or 323%of annual debt service. CSD is in compliance with these covenants for fiscal year 2012-2013. 55 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 30,2013 2004 SDWD Water Revenue Refunding Bonds: On January 22, 2004, SDWD issued $13,845,000 of Water Revenue Refunding Bonds, Series 2004, to redeem all of the outstanding 1993 Water Revenue Refunding Bonds. The Bonds consist of$10,170,000 of serial bonds maturing from 2004 through 2019 in annual installments of$505,000 to $820,000 and one term bond of$3,675,000 maturing on October 1, 2023. The term bond is subject to sinking fund requirements, with annual principal installments ranging from$850,000 to$990,000. Interest is due and payable semi-annually at rates ranging from 2.5% to 5.0%. Annual debt service is approximately$1,020,000 through 2024. The bonds are subject to federal arbitrage requirements. The bonds maturing on or after October 1, 2015 are subject to optional redemption on any date after October 1,2014,without premium. 2007 SDWD Note Payable to R.E. Badger Water Facilities Financing Authority(WFFA): On November 20, 2007,the WFFA, on behalf of its members(the Santa Fe Irrigation District and the San Dieguito Water District) issued $20,685,000 of 2007 Water Revenue Refunding Bonds while concurrently redeeming all of its outstanding 1999 Water Revenue Bonds. Information on the bond issuance itself is available through the WFFA administrative offices. SDWD is responsible, via an Amended and Restated Loan Agreement, for the repayment of $7,705,000 of the total borrowing. Principal is due and payable annually in amounts ranging from$335,000 to$620,000. Interest is due and payable semi-annually at rates ranging from 3.5% to 4.5%. Annual debt service is approximately$630,000 through fiscal year 2025. SDWD has pledged its net revenues to pay the debt service on these two obligations. Net revenues are defined as gross revenues less operations and maintenance costs, excluding depreciation, amortization and other non-cash type charges. Total principal and interest outstanding of the above mentioned debts as of June 30, 2013, is $18,766,373. During the year ended June 30, 2013 principal and interest paid was $1,655,650 and net revenue was $4,592,780, or 277% of annual debt service. SDWD has covenanted to budget for net revenues each fiscal year of at least 115% of combined annual debt service. SDWD is in compliance with these covenants for fiscal year 2012-2013. 2004 Encinitas Housing Authority(EHA)Note Payable: In 2004, the EHA secured a note payable with a financial institution of$1,905,338 to partially fund the acquisition of 16 affordable housing units. The note is secured only by the rental income generated by the housing units. Principal and interest is due and payable monthly. Annual principal installments range from $50,684 in 2014 to$74,562 in 2034. The note bears interest at 90%of the ten-year US Treasury note,adjustable every six years. The EHA is solely responsible for repayment on this note. 56 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 30,2013 The debt service requirements to maturity for the Business-type Activities, excluding compensated absences,were as follows: Year Ending June 30 Principal Interest Totals 2014 $ 1,638,721 $ 803,624 $ 2,442,345 2015 1,701,783 745,400 2,447,183 2016 1,757,613 682,452 2,440,065 2017 1,828,251 614,471 2,442,722 2018 1,903,328 537,166 2,440,494 2019-2023 7,997,238 1,558,947 9,556,185 2024-2028 2,584,506 201,326 2,785,832 2029-2033 449,234 52,089 501,323 2034 74,562 1,058 75,620 Totals $ 19,935,236 $ 5,196,533 $ 25,131,769 (8) INTERFUND RECEIVABLES,PAYABLES AND TRANSFERS: Due To and Due From: Individual interfund receivables and payables at June 30,2013,were as follows: Due From Due To Other Funds Other Funds Governmental Funds: General Fund $ 992,653 $ - Nonmajor Governmental Funds - 974,746 Nonmajor Affordable Housing Enterprise Fund - 17,907 Totals $ 992,653 $ 992,653 The amounts due to the General Fund are all short-term borrowings in anticipation of grant revenue not yet received or for debt service payments. 57 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 30,2013 Transfers In and Out: Transfers in and out between funds for the year ended June 30,2013,were as follows: Transfers Out N onmajor General Governmental Total Fund Funds All Funds Transfers In: Major Funds: General Fund $ - $ 1,121,181 1,121,181 Capital Improvement Capital 11,748,417 6,527,937 18,276,354 Projects Fund Nonmajor Govemmental Funds: Special Revenue Funds 66,458 - 66,458 Debt Service Funds 2,978,248 921,000 3,899,248 internal Scrvice Funds 845,000 - 845,000 $ 15,638,123 $ 8,570,118 $ 24,208,241 (t) Transfers In to the General Fund consist of reimbursements from two of the City's development impact fee funds for qualified costs incurred, or to be incurred in the future years, by the General Fund for the construction of public facilities. In addition, the City now accounts for all street maintenance expenditures in the Streets Division budget unit within the General Fund, and transfers all State Gasoline Tax operating revenues from the Infrastructure Improvements special revenue fund to the General Fund. (2) Transfers in to the Capital Improvement Capital Projects Fund represent reimbursements from other governmental funds for capital expenditures incurred on their behalf. Reimbursements are transferred on a monthly basis, thus, the Capital Improvement fiord maintains a zero fund balance. (3) Transfers in to the Special Revenue funds represent the General Fund subsidy for the Senior Nutrition Program and the General Fund contribution to the Coastal Zone Management fund,which is included in the Grants and Housing special revenue fund. (4) Transfers in to the debt service funds represent the amounts being transferred to the City's general debt service fund and the Encinitas Public Financing Authority debt service fund to pay for the City's various debt service obligations. (s) Transfers in to the Internal Service Funds represent the City's annual contribution from the General Fund to the Risk Management fund. The contribution is not mandated and is established by the City Council during the annual budget process. 58 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 30,2013 (9) FUND BALANCE AND NET POSITION CLASSIFICATIONS: The City classifies fund balances, as shown on the Balance Sheet -- Governmental Funds as of June 30,2013 as follows: General Infrastructure Total Fund Improvements Nonmalor Funds Totals Nonspendable $ 1,980,075 - $ - $ 1,980,075 Restricted 7,996,400 898,960 12,138,025 20,134,425 Committed 9,847,719 - - 9,847,719 Assigned 561,762 2,135,100 2,696,862 Unassigned 21,160,822 - - 21,160,822 Total Fund Balances $ 41,546,778 898260 $ 14,273,125 $ 55,819,903 • Nonspendable—these amounts are representative of long-term notes receivable and prepaid items which are not readily convertible into spendable resources within the next year. • Restricted—amounts are generally related to specific activities,where the available funds can only be expended for the purposes specified by law or the terms and conditions of certain debt agreements. Restricted fund balance amounts are to be used for operating expenditures governed by State or Federal grant agreements, expenditures for future infrastructure funded by grants, taxes, or development impact fees, operating and capital expenditures funded by benefit assessments,and debt service reserve fund amounts that can only be utilized to satisfy overdue obligations on specified debt issues. • Committed—these amounts represent funds that have been appropriated for the City's Capital Improvement Program, but remain unspent as of the balance sheet date. The decision to commit certain portions of fund balance (generally for capital projects) requires legislative action; specifically,an appropriation by the City Council.Any subsequent action to modify or rescind a fund balance commitment also requires City Council action. • Assigned — these amounts represent funds from existing capital projects that have been previously designated by the City Council for re-appropriation from the General Fund reserves, and the unappropriated portions of fund balance in the City's grants and housing special revenue find. • Unassime —these amounts are funds that are not otherwise categorized and do not have any restrictions on use,other than any internal directives on spending. Categorization of'Reserves under Adopted City Policies All unassigned amounts in the City's General Fund are considered reserves under internal City policies. The City maintains three separate and distinct reserves: (1) Contingency Reserve — represents funds that are set-aside for use only in exceptional circumstances such as catastrophic events that could negatively impact the financial condition of the City. Funding represents 20%of operating expenditures, and no drawdowns have ever been executed on this reserve. City Policy requires a 415 vote of the City Council to authorize 59 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 draws on this reserve. The amount of the contingency reserve as of June 30, 2013 was $10,113,602. (2) Budget Stabilization Reserve-was established in 2007 to help mitigate potential fluctuations in operating revenues, or to fund unanticipated operating expenditures. Funding levels are mandated at 2% to 5% of budgeted operating revenues. Any changes to the level of funding for this reserve also require a 415 vote of the City Council. in practice,this reserve has been funded within the established range since 2007, and changes are made during the annual budget process. The amount of the budget stabilization reserve as of June 30, 2013 was $1,104,770. (3) General Undesignated Reserve — This reserve represents any remaining unassigned fund balance after funding levels have been established for(1) and(2)above. These funds may be allocated in any manner the City Council designates.The amount of the general Undesignated reserve as of June 30,2013 was$9,942,450. (10) COMMITMENTS AND CONTINGENCIES: (A) City of Encinitas—Risk Management and Insurance Programs: The City is exposed to various risks of loss related to torts; theft of,damage to,and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City has a proactive in-house risk management program, which combines risk mitigation initiatives with a self-insurance program and excess coverage policies with outside providers. The City maintains a self-insurance fund to finance and account for its self-insured risks of loss. The Risk Management fund is accounted for as an Internal Service fund. It is supported by interfund charges for workers compensation coverage, unemployment insurance, and contributions from CSD, ESD and the City. The Risk Management fund strives to maintain an adequate net position, over time, to cover all known and reported claims, as well as an adequate reserve for incurred but not reported(IBNR)claims. The City is self-insured for liability claims and losses up to $500,000 per occurrence, and for worker's compensation claims and losses up to$350,000 per occurrence. 60 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 30,2013 The City of Encinitas is a member of the San Diego Pooled Insurance Program Authority (SANDPIPA) which covers any liability claims or losses above the $500,000 self-insured level. SANDPIPA is a separate legal entity formed by the participating municipalities to provide pooled excess liability insurance coverage to its members. The members do not hold any ownership stake in SANDPIPA and have no claims to revenue or assets upon withdrawal,at which time the purchase of tail coverage is required. SANDPIPA is governed by a Board of Directors, who determines policy and necessary funding levels, including retroactive adjustments for over-or under-funding, which is reflected as adjustments to current year premiums. The City is covered for losses between $125,000 and $2,500,000 by the SANDPIPA reserve pool. The members share the risk of claims in excess of reserves. For claims incurred after July 1, 1992, member expenses are included in the self-insurance reserve for purposes of calculating pooled coverage. Excess liability insurance coverage is provided for losses between $2,500,000 and $47,000,000 via excess insurers. The City is a member of the Local Agency Workers Compensation Excess (LAWCX), a California Joint Powers Insurance Authority. LAWCX provides coverage for claims between $500,000 and $2,500,000. Excess worker's compensation and commercial coverage between $2,500,000 and $45,000,000 is provided through contract reinsurance. City departments contribute premiums to the self-insurance fund based on annual rates set for each work class. Changes in the balances of claims liabilities for liability and workers compensation during the past two years are as follows: Year Ended Year Ended June 30,2013 June 30,2012 Claims Payable,beginning of year $ 1,301,925 $ 565,098 Estimated Incurred Claims,net 395,342 1,735,989 Claim Payments (648,958) (999,162) Claims Payable,end of year $ 1,048,309 $ 1,301,925 The City and the General Contractor of the Encinitas Community Park received the Regional Water Quality Control Board (Regional Board) complaint and proposed fine of $430,851 on November 21, 2013. The City is in the process of entering settlement negotiations with the Regional Board for resolution and ultimately will be seeking recovery of a portion of the fine from the General Contractor. (B) San Dieguito Water District(SDWD)—Risk Management and Insurance Programs: Risk management programs and support for SDWD are provided by the City of Encinitas Risk Management Department, for which SDWD pays the City an annual fee (charge for those services.) SDWD is a member of the Association of California Water Agencies - Joint Powers Insurance Authority (JPIA), which provides coverage for general liability, property and casualty, and workers' compensation. Self-insured retention levels ranges from $10,000 to $25,000. As of June 30, 2013, in the opinion of the District's management and general counsel, there were no material claims which would require accrual in the accompanying financial statements. Management has determined, based on modest self-insurance retention levels and favorable claims experience, that no self-insurance liabilities were necessary. SDWD has no outstanding claims as of June 30, 2013,and did not pay any claims during the fiscal year. 61 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 (C) Capital Commitments: As of June 30, 2013, the City had remaining contractual commitments totaling nearly $17.0 million for capital projects related to its governmental and business-type activities. The more significant capital commitments include $11.5 million related to the Encinitas Community Park and$3.3 million for the 2nd Street Sewer Main Repair. {11) CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM: (A) City of Encinitas(not including the San Dieguito Water District) Plan Descriptions: The City of Encinitas has entered into three (3) separate defined benefit pension plans covering miscellaneous and safety employees with the California Public Employees' Retirement System (Ca1PERS). Ca1PERS is an agent multiple-employer public employee defined benefit pension plan. The plans provide retirement and disability benefits, annual cost-of-living adjustments,and death benefits to Plan members and beneficiaries.The Plans are administered by Ca1PERS, which acts as a common investment and administrative agent for participating public employers within the State of California. A menu of benefit provisions as well as other requirements is established by State statutes within the Public Employees' Retirement Law. The City selects optional benefit provisions from the benefit menu by contract and adopts those benefits through local ordinances. CalPERS provides a separate comprehensive annual financial report,which can be obtained from the Ca1PERS Executive Office,Lincoln Plaza North—400 Q Street—Sacramento,CA 95811. The three City plans are as follows: (1) The Miscellaneous Plan of the City of Encinitas (Miscellaneous Plan) (2) The Safely Fire Department Plan of the City of Encinitas(Fire Plan) (3) The Safety Lifeguard Plan of the City of Encinitas(Lifeguard Plan) The City's Miscellaneous Plan is an agent multiple-employer Plan that is part of the Public Agency's portion of Ca1PERS. The Fire and Lifeguard Plans are cost-sharing multiple employer defined benefit plans in which the City participates with other public agencies that each have less than 100 active members and share the same benefit formula. The Miscellaneous Plan provides employees hired before October 13, 2012 with a'Pier I benefit equal to 2.7% @ 55 years of age, calculated based on the single highest year of qualifying compensation. As of October 13, 2012, the City Council imposed new terms and conditions on the miscellaneous employees which created a new benefit formula for employees hired after the effective date of the change(the"Tier 2 miscellaneous plan".) Employees hired under the Tier 2 miscellaneous plan receive a lower benefit formula, referred to as the 2% at 60 formula. In addition, legislation enacted by the State of California applying to all local units of government, referred to as the Public Employees' Pension Reform Act (PEPRA) which became effective on January 1, 2013, created yet another benefit formula for new hires with no experience or prior service credit with CaIPERS. In the case of the City, this will constitute a"Tier 3 miscellaneous plan" which provides a retirement benefit, referred to as the 2% @ 62 formula. The actual retirement benefit for Tier 2 and Tier 3 miscellaneous employees will be calculated using the average of the highest 36 consecutive months of qualifying compensation. 62 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 The Safety Fire Department Plan provides employees hired before June 23, 2012 with a Tier 1 benefit equal to 3.0% a) 55 years of age,calculated based on the single highest year of qualifying compensation. Effective June 23, 2012, the Encinitas Firefighters Association executed a new four year Memorandum of Understanding(MOU)with the City that provides for modifications to the pension benefit formula for employees hired on or after the effective date (the "Tier 2 fire safety plan'.) The 3.0% Co) 55 formula is maintained, but the actual retirement benefit will be calculated using the average of the highest 36 consecutive months of qualifying compensation. In addition, the PEPRA legislation, created yet another benefit formula for new hires with no experience or prior service credit with CalPERS. In the case of the City, this will constitute a "Tier 3 fire safety plan" which provides a retirement benefit, referred to as the 2.7% �&, 57 formula. This plan also utilizes the mandated method of calculation based on the average of the highest 36 consecutive months of qualifying compensation. The Safety Lifeguard Plan provides employees hired before October 13, 2012 with a Tier I benefit equal to 3.0% a)55 years of age, calculated based on the single highest year of qualifying compensation. The lifeguards have Tier II and Tier III plans which are identical to the Fire .Safety Plan described above. Funding Policy: Emnloyee Contributions: Active Tier 1 miscellaneous members are required to contribute 8%of their annual covered salary (the "employee contribution'). Effective October 13, 2012, all Tier 1 miscellaneous members contribute the full 8%,which is credited to their individual accounts. Members receiving the Tier 2 or Tier 3 benefits are required to contribute 7%of their annual covered salary. Safety lifeguard members are also now required to contribute the full 9% of their annual covered salary as their employee contribution.The funding of the employee contribution of 9%for fire safety members is in transition, based on the provisions of the June 23, 2012 MOU. In the first year, employees are required to contribute 3% towards the employee contribution, with the employer picking up the balance of 6%. After the third year, the employees will be required to contribute the full required 9%.The employee contribution requirements are established by State statute. EMlloyer Contributions: The City is required to contribute the actuarially determined remaining amounts necessary to fund the benefits for its members (the"employer contributions"). The employer contribution rates for fiscal year 2012-2013 range from approximately 18% for miscellaneous members to 23% for safety members. The employer contribution rates are calculated and established annually by CalPERS,based on the actuarial methods and assumptions as adopted by the CalPERS Board of Administration. Annual Pension Costs: The annual pension cost (APC), which is equivalent to the actual annual required employer contributions made to CalPERS, is based on the actuarially determined rates in effect for that fiscal year. These amounts do not include any payments made by the City on behalf of the employees for employee contributions. 63 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 30,2013 A summary of the annual pension costs and the percentage of the required APC contributed for the last three fiscal years is presented below: Miscellaneous Plan Fire Plan Lifeguard Plan Annual Percentage Annual Percentage Annual Percentage Year Pension of APC Pension of APC Pension of APC Ended Cost Contributed Cost Contributed Cost Contributed June 30,2011 $ 2,198,184 100% $ 962,019 100% $ 67,974 100% June 30,2012 2,525,786 100% 1,160,826 100% 85,924 100% June 30,2013 2,247,251 100% 1,035,753 100% 81,503 100% The following table summarizes the City's Miscellaneous Plans funding status for the most recent actuarial valuation(latest available data): Actuarial UAAL as Actuarial Actuarial Accrued Unfunded a%of Valuation Value of Liability AAL Funded Covered Covered Date Assets (AAL) (UAAL) Ratio Payroll Payroll June 30,2011 $ 50,482,359 $ 67,942,601 $ 17,460,242 74.3% $ 13,791,815 126.6% The actuarial assumptions in the June 30,2010 actuarial valuation for the City's Miscellaneous Plan, which was used to determined the fiscal year 2012-2013 annual required contribution, included(1) 7.75% investment rate of return (net of administrative expenses), (b)projected salary increases that vary by duration of service ranging from 3.55% to 14.45, and (c) a 3.25% growth in payroll. Both (a)and(b)included an inflation component of 3.00%. The actuarial assumptions in the June 30, 2011 actuarial valuation for the City's Miscellaneous Plan included (1) 7.50% investment rate of return (net of administrative expenses), (b) projected salary increases that vary by duration of service ranging from 3.30%to 14.20%,and(c)a 3.25%growth in payroll. Both(a)and(b)included an inflation component of 3.00%. The actuarial value of the Miscellaneous Plan assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a fifteen-year period (smoothed market value). CalPERS' unfunded actuarial accrued liabilities (or excess assets) are being amortized as a level percentage of projected payroll on a closed basis,depending on the size of investment gains and/or losses. The Schedule of Funding Progress presented as Required Supplementary Information following the Notes to the Basic Financial Statements presents multi-year trend information about whether the actuarial value of the plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.The actuarial assumptions utilized are as described above. 64 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 34,2413 (B) San Dieguito Water District: Plan Description: The San Dieguito Water District has entered into a contract for a defined benefit pension plan for miscellaneous employees with CalPERS (the"SDWD Plan"). The SDWD Plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to members and beneficiaries and is administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State of California. A menu of benefit provisions as well as other requirements is established by State statutes within the Public Employees' Retirement Law. The District selects optional benefit provisions from the benefit menu by contract and adopts those benefits through local ordinances. CalPERS issues a separate comprehensive annual financial report, which can be obtained from the CalPERS Executive Office, Lincoln Plaza North—400 Q Street—Sacramento,CA 95811. The SDWD Plan is a cost-sharing multiple employer defined benefit plan, in which the District participates with other public agencies that share the same benefit formula and have less than 100 active members. The SDWD Plan provides employees hired before October 13, 2012 with a Tier 1 benefit equal to 2.7% @ 55 years of age,calculated based on the single highest year of qualifying compensation.As of October 13, 2012,the Board of Directors imposed new terms and conditions which created a new benefit formula for employees hired after the effective date of the change (the "Tier 2 Plan"). Employees hired under the Tier 2 Plan receive a lower benefit formula, referred to as the 2% at 60 formula. In addition, the PEPRA created yet another benefit formula for new hires with no experience or prior service credit with CalPERS. In the case of the District, this will constitute a "Tier 3 Plan" which provides a retirement benefit, referred to as the 2% @ 62 formula. The actual retirement benefit for Tier 2 and Tier 3 employees will be calculated using the average of the highest 36 consecutive months of qualifying compensation. Funding Policy: Employee Contributions: Active members in the Tier 1 Plan arc required to contribute 8% of their annual covered salary(the "employee contribution'). Effective October 13, 2012, all Tier 1 members contribute the full 8%, which is credited to their individual accounts. Members receiving the Tier 2 or Tier 3 benefits are required to contribute 7% of their annual covered salary. The employee contribution requirements are established by State statute. Employer Contributions: The District is required to contribute the actuarially determined remaining amounts necessary to fund the benefits for its members(the"employer contributions"). The employer contribution rate for fiscal year 2012-2013 was approximately 16%. The employer contribution rates are calculated and established annually by CalPERS,based on the actuarial methods and assumptions as adopted by the CaiPERS Board of Administration. 65 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 Annual Pension Costs: The annual pension cost (APC), which is equivalent to the actual annual employer required contributions made to Ca1PERS, based on the actuarially determined rates in effect for that fiscal year. These amounts do not include any payments made by the District on behalf of the employees for employee contributions. A summary of the annual pension costs and the percentage of the required APC contributed for the last three fiscal years are presented below: Annual Percentage Fiscal Pension Cost of APC Net Pension Year (APC) Contributed Obligation June 30,2011 $ 91,176 100% $ - June 30,2012 202,637 100% - June 30,2013 252,408 100% - Summary Description of CalP1ERS Actuarial Assumptions: Some of the actuarial assumptions have changed effective with the latest actuarial valuation dated June 30,2011. The primary assumptions and changes are briefly described below. (1) The price inflation factor was lowered to 2.75% from 3.00%. The change in this assumption directly impacts the investment return and overall payroll growth assumptions. (2) The investment return assumption has been lowered to 7.50% from 7.75%. (3) The overall payroll gmowth assumption has been lowered from 3.25%to 3.00%. The actuarial value of the SDWD Plan assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a fifteen-year period (smoothed market value). CaIPERS' unfunded actuarial accrued liabilities (or excess assets) are being amortized as a level percentage of projected payroll on a closed basis, depending on the size of investment gains and/or losses. (12) OTHER POSTEMPLOYMENT BENEFITS(OPEB): The City of Encinitas and the San Dieguito Water District maintain separate plans to provide for post-retirement health care benefits. An actuarial report is prepared every two years to update plan information and assumptions (when required). The latest actuarial valuation was prepared for June 30, 2011, and applies to fiscal years 2012-13 and 2013-14. (A) City of Encinitas Retiree Health Plan: Plan Description: The City provides postretirement health care benefits through the Public Employees Medical and Hospital Care Act (PEMHCA), which is a health benefit plan administered by Ca1PERS, to eligible employees who retire directly from the City. The City pays the cost for lifetime retiree and dependent medical benefits (average premium for CAPERS health plans available in San Diego County) for fire department employees hired before March 16, 1995. Other City retirees receive the PEMHCA minimum benefit,as determined by CalPERS. The City does not provide a 66 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 retiree contribution for dental, vision, or life insurance benefits. The City's OPEB plan does not issue a separate stand-alone report. The City has elected to join the California Employers' Retiree Benefit Trust (the "Trust") in accordance with GASB Statement No. 45, which provides a means to fund the annual OPEB costs, referred to as the Annual Required Contribution (ARC). The City makes an annual contribution to the Trust,pays benefits either directly to retirees or through PEMHCA during the year, and then seeks reimbursement for these"pay-as-you-go expenses"from the Trust. Funding Policy and Actuarial Methods and Assumptions: It is the City's policy to fully fund the ARC each fiscal year.The actual contributions of the City to the Trust are established by action of the City Council. The contribution requirements were established via an actuarial valuation of the City's Retiree Healthcare Plan as of June 30, 2011, performed in conformity with the requirements of GASB Statement No. 45. The following ley assumptions were utilized in developing the June 30,2011 actuarial valuation: (1) The actuarial cost method used to determine the benefit obligations is the Entry Age Normal cost method. (2) The ARC is comprised of the present value of benefits in the current fiscal year(normal cost with interest)plus a 28-year amortization(on a level-percentage of basis)of the unfunded actuarial accrued liability. (3) The valuation reflects updated census and premium information,as well as changes to the demographic tables,reflecting the recent experience study published by CalPERS. (4) A change in the investment return assumption by the Trust from 7.75%to 7.61%. (5) A change to the expected future medical price inflation trend from 4.5%to 4.0%. (6) Core inflation rate of 3.0%. (7) Payroll increases of 3.25%per annum,in aggregate. (8) Projected salary increase are based on merit increase data from the most recent CalPERS Pension Plan Study using the average pay increase based on the employee's date of hire. (9) Participation levels for safety personnel eligible for lifetime medical benefits is assumed to be 100%,while participation levels for miscellaneous employees who receive the CalPERS minimum required contribution is 50%,based on experience. 67 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 30,2013 Annual Required Contrihution (ARC)and OPEB cost summary: The ARC for fiscal year 2012-13 of approximately$760,000 represents a level of funding that, if paid on an on-going basis, is projected to cover normal costs each year and to amortize any unfunded actuarial liability over a maximum of 30 years. The City contributed the ARC to the Trust and received reimbursement for actual pay-as-you-expenses incurred during the year. The City's annual OPEB costs,the percentage of annual OPEB cost contributed,and the resulting net OPEB obligation for the preceding three years were as follows: Percentage of Net Annual Annual OPEB Cost OPEB Year Ended OPEB Cost Contributed Obligation June 30, 2011 $ 781,000 100% $ - June 30, 2012 803,000 100% - June 30,2013 760,000 100% - Funded Status and Funding Progress: The following table summarizes the funding status of the City's Retiree Health Plan from the June 30,2011 actuarial valuation: Actuarial Accrued Liability $ 10,506,000 Actuarial Value of Assets (1,960,000) Unfunded Actuarial Accrued Liability(UAAL) $ 8,546,000 Funding Ratio 18.66% Estimated Covered Payroll $ 19,252,000 UAAL as a percentage of Covered Payroll 46.82% (B) San Dieguito Water District-Retiree Health Plan: The San Dieguito Water District maintains a separate plan to provide for post-retirement health care benefits. An actuarial report is prepared every two years to update plan information and assumptions (when required). The latest actuarial valuation was prepared for June 30, 2011, and applies to fiscal years 2012-13 and 2013-14. Plan Description: SDWD provides postretirement health care benefits through the Public Employees Medical and Hospital Care Act (PEMHCA), which is a health benefit plan administered by CaIPERS, to eligible employees who retire directly from SDWD. Retirees receive the PEMHCA minimum benefit, as determined by CalPERS. SDWD does not provide a retiree contribution for dental, vision, or life insurance benefits. SDWD's OPEB plan does not issue a separate stand-alone report. 68 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 30,2013 SDWD has elected to join the California Employers' Retiree Benefit Trust (the "Trust") in accordance with GASB Statement No. 45, which provides a means to fund the annual OPEB costs, referred to as the Annual Required Contribution (ARC). SDWD makes its annual contribution to the Trust,pays benefits either directly to retirees or through PEMHCA during the year, and then seeks reimbursement for these"pay-as-you-go expenses" from the Trust. Funding Policy and Actuarial Methods and Assumption: It is SDWD's policy to fully fund the ARC each fiscal year. The actual contributions of SDWD to the Trust are established by action of the Board of Directors. The contribution requirements were established via an actuarial valuation of the SDWD's Retiree Healthcare Plan as of June 30,2011, performed in conformity with the requirements of GASB Statement No.45. The following key assumptions were utilized in developing the June 30,2011 actuarial valuation: (1) The actuarial cast method used to determine the benefit obligations is the Entry Age Normal cost method. (2) The ARC is comprised of the present value of benefits in the current fiscal year(normal cost with interest) plus a 28-year amortization (on a level-percentage of basis) of the unfunded actuarial accrued liability. (3) The valuation reflects updated census and premium information, as well as changes to the demographic tables,reflecting the recent experience study published by Ca1PERS. (4) A change in the investment return assumption by the Trust from 7.75%to 7.61%. (5) A change to the expected future medical price inflation trend from 4.5%to 4.0%. (6) Core inflation rate of 3.0%. (7) Payroll increases of 3.25%per annum, in aggregate. (8) Projected salary increase are based on merit increase data from the most recent CalPERS Pension Plan Study using the average pay increase based on the employee's date of hire. (9) Participation levels for safety personnel eligible for lifetime medical benefits is assumed to be 100%,while participation levels for miscellaneous employees who receive the Ca1PERS minimum required contribution is 50%,based on experience. Annual Required Contribution (ARC)and OPEB cost summary: The ARC for fiscal year 2012-13 of$31,000 represents a level of funding that, if paid on an on- going basis, is projected to cover normal costs each year and to amortize any unfunded actuarial liability over a maximum of 30 years. SDWD contributed the ARC to the Trust and received reimbursement for actual pay-as-you-expenses incurred during the year. SDWD's annual OPEB costs, the percentage of annual OPEB cost contributed, and the resulting net OPEB obligation for the preceding four years were as follows: Percentage of Net Annual Annual OPEB Cost OPEB Year Ended OPEB Cost Contrihuted Obligation June 30,2011 $ 24,000 100% $ - June 30,2012 25,000 100% - June 30,2013 31,000 100% - 69 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year June 34,2413 Funded Status and Funding Progress: The latest information available on the funding status comes from the actuarial valuation dated June 30,2011,projected to June 30,2012: Actuarial Accrued Liability $ 343,000 Actuarial Value of Assets (65,000) Unfunded Actuarial Accrued Liability(UAAL) $ 278,000 Funding Ratio 18.95% Covered Payroll $ 1,230,000 UAAL as a Percentage of Covered Payroll 22.60% General Information regarding Actuarial Valuations Methods and Assumptions: Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future, Projections of benefits for financial reporting purposes are based on the substantive plan(the plan as understood between the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing benefit costs between the employer and the plan members at that point. The actuarial methods and assumptions used include techniques designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of plan assets, consistent with the long—term perspective of the calculations. The Schedule of Funding Progress for the City and SDWD retiree health care plans are presented as Required Supplementary Information following the Notes to the Basic Financial Statements.These schedules show multi-year trend information about whether the actuarial value of the plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. (13) JOIN']'VENTURE: The Encinitas Ranch Golf Authority (the Authority) is a joint powers authority, formed by the City and SDWD in 1995 to finance, own and operate an 18-hole golf course (the Golf Course) within the City. The Golf Course was constructed in connection with the development of the Encinitas Ranch master-planned community (the Ranch). The Ranch is a mixed-use community of residential, commercial and agricultural development within the City. As a condition to the development of the Ranch,the Carltas Company(the Developer),agreed to dedicate land for and construct the Golf Course improvements. The Golf Course opened to the public on March 1, 1998,and is managed and operated under a contract arrangement with a private company. The Authority is governed by a five-member Board of Directors, the membership of which is specified in the 1994 Encinitas Ranch Development Agreement. It is a self-sustaining golf course operation and receives no financial support from the City or SDWD. In future years, depending on the net revenues from golf operations, the City may benefit financially from the operations. 70 CITY OF ENCINITAS Notes to the Basic Financial Statements(Continued) For the Year Ended June 30,2013 However,this is unlikely until at least 2030, when the Golf Course bonded debt is expected to be paid off. The debts and obligations of the Authority are not the debts and obligations of the City or SDWD. Separate audited financial statements of the Authority are available at City's administrative office. (14) SPECIAL ASSESEMENT DEBT: City of'Encinitas- Community Facilities District(CFD)41:Encinitas Ranch Community During fiscal year 2012-2013, the City, on behalf of the residents and businesses of the CFD#1, refunded all of the outstanding bonds of the 2004 Special Tax Bonds, Series A, via a current refunding transaction.The CFD#1 issued $32,265,000 par value of 2012 Special Tax Refunding Bonds (Encinitas Ranch Public Improvements), at lower interest rates, while maintaining the same general terms and conditions, including the final maturity date of September 1, 2030. The transaction will save the taxpayers an average of$170,000 in annual debt service, or about 6%of the average annual debt service of prior bonds. As of June 30, 2013, the outstanding balance on the 2012 Special Tax Refunding Bonds was $32,265,000. The City acts solely as an agent for CFD #1. The City has no duty or obligation to pay any liabilities or potential liabilities of the district. Neither the full faith and credit, nor the taxing power of the City or any other City related agency, is pledged to the repayment of these 2012 Special Tax Refunding Bonds. Therefore, such bonds are not considered to be a liability of the City and are not included in the accompanying basic financial statements. (15) RESTATEMENT AND RECLASSIFICATION: Restatement: As a result of the early implementation of GASB Statement No. 65,the net position of the City's governmental activities was restated as follows: Governmental Activities Ending net position-June 30,2012,as previously reported $ 197,374,103 Restatement to recognize deferred bond costs as an expense due to implementation of GASB Statement No.65. (466,745) Beginning net position-July 1,2012,as restated $ 196,907,358 Reclassification: The City has also reclassified the deferred amount on refunding reported in the Cardiff Sanitary Division due to the early implementation of GASB Statement No. 65. In the prior year the deferred amount on refunding was reported as a component of the carrying value of the 2011 Note Payable to SEJPA, however,pursuant to GASB Statement No. 65, it is being reported as a deferred inflows of resources. 71 REQUIRED S UPPLEMENTAR Y SECTION ccrosr„ City of Encinitas 101 505 South Vulcan Avenue *Encinitas CA 92024 760-633-2600 • www.encinitasea.gov CITY OF ENCINITAS Budgetary Comparison Schedule General Fund For the Year Ended June 30,2013 Budgeted Amounts Variance with Original Final Actual Final Budget Revenues: Taxes: Property $ 32,708,370 $ 32,741,408 $ 33,699,290 $ 957,882 Sales 10,437,025 10,661,954 11,585,145 923,191 Franchise 2,189,961 2,189,961 2,117,008 (72,953) Real property transfer 291,312 291,312 544,869 253,557 Transient occupancy 961,095 961,095 1,194,053 232,958 Total taxes 46,587,763 46,845,730 49,140,365 2,294,635 Licenses and permits 180,755 180,755 219,288 38,533 Intergovernmental 575,603 488,103 522,865 34,762 Charges for services 3,752,365 4,221,365 4,450,756 229,391 Fines,forfeitures and penalties 689,750 689,750 611,029 (78,721) Use of money and property 407,212 479,930 452,386 (27,544) Other 284,474 675,871 1,022,653 346,782 Total revenues 52,477,922 53,581,504 56,419,342 2,837,838 Expenditures: General government: City council 380,751 380,751 357,268 23,483 Community enhancement 75,000 75,000 75,295 (295) City attorney 308,500 323,500 313,157 10,343 City manager 4,110,605 4,017,918 3,836,277 181,641 City clerk 602,595 1,162,767 898,824 263,943 Finance 1,556,820 1,680,108 1,575,445 104,663 Non-departmental 2,473,666 2,217,129 2,308,675 (91,546) Total general government 9,507,937 9,857,173 9,364,941 492,232 Public safety: Law enforcement 11,969,965 11,519,965 11,376,916 143,049 Fire and marine safety 12,529,626 12,468,521 12,166,426 302,095 Total public safety 24,499,591 23,988,486 23,543,342 445,144 Public works: Administration 126,855 141,855 123,312 18,543 Environmental programs 118,000 118,000 85,797 32,203 Street maintenance 1,631,797 1,631,797 1,609,503 22,294 Facility maintenance 1,041,165 1,049,382 1,031,388 17,994 Stormwater 796,399 796,399 747,216 49,183 Total public works 3,714,216 3,737,433 3,597,216 140,217 See Accompanying Note to Required Supplementary Information. See Accompanying Note to the Required Supplementary Information. 73 CITY OF ENCINITAS Budgetary Comparison Schedule General Fund(Continued) For the Year Ended June 30,2013 Over(Under) Budgeted Amounts Variance with Original Final Actual Final Budget Planning and building: Planning $ 2,237,964 $ 2,237,964 $ 2,144,209 $ 93,755 Code enforcement 567,650 567,650 492,943 74,707 Building services 987,929 1,337,929 1,188,844 149,085 Total planning and building 3,793,543 4,143,543 3,825,996 317,547 Engineering services: City engineering 2,321,939 2,346,939 2,296,123 50,816 Traffic engineering 716,204 716,204 671,594 44,610 Stormwater 779,631 779,631 749,277 30,354 Total engineering services 3,817,774 3,842,774 3,716,994 125,780 Parks and recreation: Administration 852,810 852,810 838,393 14,417 Park services 1,269,666 1,269,666 1,192,125 77,541 Beach services 498,909 498,909 413,879 85,030 Recreational trails 125,531 125,531 102,509 23,022 Recreational services 620,605 620,605 548,783 71,822 Community and senior center 1,183,505 1,183,505 1,164,679 18,826 Total parks and recreation 4,551,026 4,551,026 4,260,368 290,658 Capital outlay - 831,537 559,653 271,884 Debt service: Bond issuance costs - 256,537 243,987 12,550 Total expenditures 49,884,087 51,208,509 49,112,497 2,096,0I2 Excess of revenues over expenditures 2,593,835 2,372,995 7,306,845 4,933,850 Other financing sources(uses): Transfers in-operating 1,047,915 1,047,915 1,121,181 73,266 Transfers out-operating (891,539) (891,539) (911,459) (19,920) Transfersout-capital (1,100,746) (10,383,418) (11,748,417) (1,364,999) Transfers out-debt service (3,879,161) (3,058,006) (2,978,248) 79,758 Proceeds of bond issuance 7,996,400 7,865,000 (131,400) Premium on bond issuance - 131,400 131,400 Proceeds of capital lease 555,384 555,384 - Total other financing sources(uses) (4,823,531) (4,733,264) (5,965,159) (1,231,895) Net change in fund balance (2,229,696) (2,360,269) 1,341,686 3,701,955 Fund balance-beginning of year 40,205,092 40,205,092 40,205,092 - Fund balance-end of year $ 37,975,396 $ 37,844,823 $ 41,546,778 $ 3,701,955 See Accompanying Note to the Required Supplementary Information. 74 CITY OF ENCINITAS Budgetary Comparison Schedule Infrastructure Improvements Special Revenue Fund For the Year Ended June 30,2013 Final Variance with Budget Actual Final Budget Revenues: Taxes and assessments $ 243,818 $ - $ (243,818) Intergovernmental 6,142,984 - (6,142,984) Use of money and property 2,335 - (2,335) Total revenues 6,389,137 - (6,389,137) Expenditures: Public works 269,927 - 269,927 Excess of revenues over expenditures 6,119,210 - (6,119,210) Other financing sources(uses): Transfers in - _ - Transfers out (5,623,713) - 5,623,713 Total other financing sources (uses) (5,623,713) - 5,623,713 Net change in fund balance 495,497 - (495,497) Fund balance-begirnvng of year 704,945 - 704,945 Fund balance-end of year $ 1,200,442 $ - $ (1,200,442) 75 CITY OF ENCINITAS Note to Required Supplementary Information For the Year Ended June 30,2013 {1) BUDGETARY INFORMATION: (a) Budgets and Budgetary Accounting. The City follows these procedures in establishing the budgetary data reflected in the required supplementary information and other supplementary information budgetary comparison schedules: The City Council adopts a two-year operating budget, with appropriations for the first year only. This annual budget provides for the general operations of the City. It includes all proposed expenditures and inter-fund transfers, and the means of financing them. The Council also approves any amendments to appropriations throughout the year,generally at the mid-year budget review in February. This "appropriated budget" covers substantially all City expenditures, with the exception of capital improvement projects, which expenditures constitute a legally authorized "non-appropriated budget". The legal level of budgetary control is the fund level. The budget figures used in the required supplementary information are both original and final budgeted amounts. The final budget amounts include any amendments adopted during the year. Formal budgetary integration is employed as a management control device. Commitments for materials and services, such as purchase orders and contracts, are recorded during the year as encumbrances to assist in controlling expenditures. Appropriations which are unencumbered lapse at year-end. City Council approval is required to include any unencumbered appropriations at year-end in the following fiscal year's budget as continuing appropriations. Budgets for the general and special revenue funds are adopted on a basis substantially consistent with accounting principles generally accepted in the United States of America. Accordingly, actual revenue and expenditures can be compared with related budgeted amounts without any significant reconciling items. No budgetary comparisons are presented for the debt service, capital projects or proprietary funds, as the City is not legally required to adopt an annual budget for those types of funds. Under Article XIIIB of the California Constitution(the Gann Spending Limitation Initiative),the City is restricted as to the amount of annual appropriations from the proceeds of taxes, and if proceeds of taxes exceed allowed appropriations, the excess must be either refunded to the State Controller, returned to the taxpayers through revised tax rates or revised fee schedules, or an excess in one year may be offset against a deficit in the following year. Further, Section 5 of Article XIIIB allows the City to designate a portion of fund balance for general contingencies to be used in future years without limitation. 76 CITY OF ENCINITAS Required Supplementary Information Other Postemployment Benefits Schedules of Funding Progress June 30,2013 City Schedule of Finding Progress Actuarial Actuarial Actuarial UAAL as Valuation Value of Accrued Unfunded Funded Covered a%of Date Assets Liability AAL(UAAL) Ratio Payroll Payroll June 30,2007 $ - $ 10,045,000 $ 10,045,000 0.00% $ 16,599,000 60.52% June 30,2009 467,000 9,990,000 9,523,000 4.67% 17,138,000 55.57% June 30,2011 1,960,000 10,506,000 8,546,000 18.66% 18,252,000 46.82% SDWD Schedule of Funding Progress Actuarial Actuarial Unfunded UAAL as Actuarial Value of Accrued AAL Funded Covered a%of Valuation Date Assets Liability (UAAL) Ratio Payroll Payroll June 30,2007 $ - $ 344,000 $ 344,000 0.00% $ 1,016,000 33.86% June 30,2009 13,000 302,000 289,000 4.30% 1,049,000 27.55% June 30,2011 65,000 343,000 278,000 18.95% 1,230,000 22.60% 77 CITY OF ENCINITAS Required Supplementary Information Schedule of Funding Progress for Ca1PERS June 30,2013 Actuarial Unfunded UAAL as a Actuarial Accrued Overfunded %of Actuarial Value of Liability AAL Funded Covered Covered Valuation Date Assets (AAL) (UAAL) Ratio Payroll Payroll (A) (B) (B-A) (AB) (C) (B-A/C) June 30,2009 $ 40,484,775 $ 55,662,304 $ 15,177,529 72.7% $ 13,267,844 114.4% June 30,2010 45,537,530 61,709,285 16,171,755 73.8% 13,394,687 120.7% June 30,2011 50,482,359 67,942,601 17,460,242 74.3% 13,791,815 126.6% 78 [THIS PAGE INTENTIONALLY LEFT BLANK] SUPPLEMENTARY INFORMATION SECTION �(MSTHWY City of Encinitas 1 01 505 South Vulcan Avenue •Encinitas CA 92024 760-633-2600 • www.encinitasca.gov CITY OF ENCINITAS Combining Balance Sbect Nonmajor Governmental Funds June 30,2013 Special Revenue Funds Grants and Development Ligbting and Housing Impact Landscaping Assets: Cash and investments $ 2,123,276 $ 6,357,186 $ 2,707,329 Receivables 615,616 - 12,552 Other assets 1,795 - - Cash and investments with fiscal agent-restricted - - - Total assets $ 2,740,687 $ 6,357,I86 $ 2,719,881 Liabilities and fund balances: Liabilities: Accounts payable and accrued liabilities $ 97,497 $ - $ 89,044 Interest payable - - - Unearned revenue - Due to other funds 404,149 - - Deposits and other liabilities - 10,120 - Totalliabilities 501,646 10,120 89,044 Fund balances: Restricted 103,941 6,347,066 2,630,837 Assigned 2,135,100 - - Total fund balances 2,239,041 6,347,066 2,630,837 Total liabilities and fund balances $ 2,740,687 $ 6,357,186 S 2,719,881 79 Debt Service Funds Total Encinitas Public Nonmajor City Financing Governmental Debt Service Authority Funds $ - $ $ 11,1 87,791 - 628,168 - 1,795 486,397 2,599,952 3,086,349 $ 486,397 2,599,952 $ 14,904,103 $ - - $ 186,541 30,168 - 30,168 - - 404,149 - - 10,120 30,168 - 630,978 456,229 2,599,952 12,138,025 - - 2,135,100 456,229 2,599,952 14,273,125 $ 486,397 $ 2,599,952 $ 14,904,103 80 CITY OF ENCINITAS Combining Statement of Revenues,Expenditures and Changes in Fund Balances Nonmajor Governmental Funds Forth c Year Ended June 30,2013 Special Revenue Funds Grants and Development Lighting and Housing Impact Landscaping Revenues: Taxes and assessments $ 206,609 $ $ 1,883,623 Intergovernmental 1,074,727 - Development impact fees - 676,181 - Use of money and property 20,277 19,840 60,210 Other 23,317 Total revenues 1,301,613 896,021 1,967,150 Expenditures: Current: General government 65,546 - - Public safety 112,025 - Public works 471,019 1,757,070 Planning and building 412,886 - Parks and recreation 116,679 Debt service: Principal retirement: Bonds issued with other agencies(ABAG) - Capital leases 1997 Civic Center COPS 2006 Public Library bonds - 2010 Community Park bonds Interest and fiscal charges: Bonds issued with other agencies(ABAG) Capital leases 1997 Civic Center COPS 2006 Public Library bonds 2010 Community Park bonds Total expenditures ],178,155 - 1,757,070 Excess(deficiency)of revenues over(under)expenditures 123,458 896,021 210,080 Other financing sources(uses); Transfers in-operating 32,438 - - Transfers out-operating (189,809) Transfers out-capital (606,763) (22,687) Transfers in-debt service Transfers out-debt service (921,000) Total other financing sources(uses) (157,371) (1,527,763) (22,687) Net change in fund balances (33,913) (631,742) 187,393 Fund balances-beginning of year 2,272,954 6,978,808 2,443,444 Fund balances-end of year $ 2,239,041 $ 6,347,066 $ 2,630,837 81 Debt Service funds Total Encinitas Public Nonmajor City Financing Governmental Debt Servicc Authority Funds $ $ $ 2,090,232 1,074,727 876,181 4,063 14,085 118,475 - - 23,317 4,063 14,085 4,182,932 - - 65,546 112,025 2,228,089 412,886 - 116,679 330,000 330,000 390,614 - 390,614 485,000 485,000 - 445,000 445,000 - 645,000 645,000 64,650 - 64,650 98,218 - 98,218 - 125,018 125,018 751,561 751,561 - 766,634 766,634 883,482 3,218,213 7,036,920 (879,419) (3,204,128) (2,853,988) 32,438 (189,809) - - (629,450) 695,120 3,204,128 3,899,248 - - (921,000) 695,120 3,204,128 2,191,427 (184,299) - (662,561) 640,528 2,599,952 14,935,686 $ 456,229 $ 2,599,952 $ 14,273,125 82 CITY OF ENCINITAS Budgetary Comparison Schedule Grants and Housing Special Revenue Fund For the Year Ended June 30,2413 Final Variance With Budget Actual Final Budget Revenues: Taxes and assessments $ 179,392 $ 206,609 $ 27,217 Intergoverrunental 1,529,705 1,074,727 (454,978) Use of money and property 517 20,277 19,760 Total revenues 1,709,614 1,301,613 (408,001) Expenditures: General government 74,718 65,546 9,172 Public safety 115,093 112,025 3,068 Public works 488,027 471,019 17,008 Planning and building 833,461 412,886 420,575 Parks and recreation 126,143 116,679 9,464 Total expenditures 1,637,442 1,178,155 459,287 Excess of revenues over expenditures 72,172 123,458 51,286 Other financing sources(uses): Transfers in 46,539 32,438 (14,101) Transfers out (867,944) (189,809) 678,135 Total other financing sources(uses) (821,405) (157,371) 664,034 Net change in fund balance (749,233) (33,913) 715,320 Fund balance-beginning of year 2,272,954 2,272,954 - Fund balance-end of year $ 1,523,721 $ 2,239,041 $ 715,320 83 CITY OF ENCINITAS Budgetary Comparison Schedule Development Impact Special Revenue Fund For the Year Ended June 30,2013 Final Variance With Budget Actual Final Budget Revenues: Development impact fees $ 732,598 $ 876,181 $ 143,583 Use of money and property - 19,840 19,840 Total revenues 732,598 896,021 163,423 Other financing uses: Transfers out (1,686,096) (1,527,763) 158,333 Net change in fund balance (953,498) (631,742) 321,756 Fund balance-beginning of year 6,978,808 6,978,808 - Fund balance-end of year $ 6,025,310 $ 6,347,066 $ 321,756 84 CITY OF ENCINITAS Budgetary Comparison Schedule Lighting and Landscaping Special Revenue Fund For the Year Ended June 30, 2013 Final Variance With Budget Actual Final Budget Revenues: Taxes and assessments $ 1,901,203 $ 1,883,623 $ (17,580) Use of money and property 46,958 60,210 13,252 Other - 23,317 23,317 Total revenues 1,948,161 1,967,150 18,989 Expenditures: Public works 1,903,439 1,757,070 146,369 Excess of revenues over expenditures 44,722 210,080 165,358 Other financing uses: Transfers out (28,800) (22,687) 6,113 Net change in fund balance 15,922 187,393 171,471 Fund balance-beginning of year 2,443,444 2,443,444 - Fund balance-end of year $ 2,459,366 $ 2,630,837 $ 171,471 85 CITY OF ENCINITAS Combining Statement of Net Position Internal Service Funds June 30,2013 Total Risk Wastewater Vehicle Vehicle Internal Management Support Maintenance Replacement Service Assets: CwY ent assets: Casb and investments $ 3,816,235 $ 25,253 $ 15,558 $ 1,671,489 $ 5,528,535 Accounts receivable 2,069 - - 2,069 Total cuncntassets 3,818,304 25,253 15,558 1,671,489 5,530,604 Liabilities: Current liabilities: Accounts payable and accrued liabilities 27,814 25,364 15,558 68,736 Net Position Unrestricted $ 3,790,490 $ (111) $ - $ 1,671,489 $ 5,461,868 86 CITY OF ENCINITAS Combining Statement of Revenues,Expenses and Changes in Net Position Internal Service Funds For the Year Ended June 30,2013 Total Risk Wastewater Vehicle Vehicle Internal Management Support Maintenance Replacement Service Operating revenues: Charges for services $ 134,560 $ 893,883 $ 477,395 $ $ 1,505,838 Contribution from users 250,000 - 338,000 588,000 xnterfund revenues 692,779 - 692,779 Otherrevenues 156,202 578 3,673 160,453 Total operating revenues 1,233,541 894,461 477,395 341,673 2,947,070 Operating expenses: Operational support services - 807,511 477,395 185,801 1,470,707 Administrative support 536,054 87,061 - - 623,115 Insurance and claims 1,090,339 - 1,090,339 Total operating expenses 1,626,393 894,572 477,395 185,801 3,184,161 Operating income(loss) (392,852) (111) - 155,872 (237,091) Nonoperating revenues(expenses): Gain on sale of capital assets - 14,562 14,562 Income(Ioss)before transfers (392,852) (11 l) 170,434 (222,529) Transfers in 845,000 - - 845,000 Change in net position 452,148 (111) 170,434 622,471 Net position-beginning of year 3,338,342 - 1,501,055 4,839,397 Net position-end of year $ 3,790,490 $ (Ill) $ $ 1,671,489 $ 5,461,868 87 CITY OF ENCINUUAS Combining Statement of Cash Flows Internal Service Funds For the Year Ended June 30,2013 Total Risk Wastewater Vehicle Vehicle Internal Management Support Maintenance Replacement Service Cash flaws from operating activities: Roccipis from users S 1,231,472 $ 894,461 $ 477,395 $ 341,673 S 2,945,001 Payments to employees (369,560) (686,015) (297,199) - (1,352,774) Payrncutsto suppliers and vendors (1,249,609) (211,061) (204,522) (198,908) (1,864,100) Net cash provided by(used in) operating activities (387,697) (2,615) (24,326) 142,765 (271,873) Cash flows from noucapital financing activities: Transfers in 845,000 - 845,000 Cash flows from capital and related financing activities: Proceeds from sale of capital assets - - 14,562 14,562 Nct incrcasc(decrease)in cash and cash equivalents 457,303 (2,615) (24,326) 157,327 587,689 Cash and cash equivalents,beginning of year 3,358,932 27,868 39,884 1,514,162 4,940,846 Cash and cash equivalents,end ofyear $ 3,816,235 $ 25,253 $ 15,558 $ 1,671,489 $ 5,528,535 Recon elliatio n of operating income(loss)to net cash provided(used)by operating activities: Operating income(loss) $ (392,852) $ (111) $ $ 155,872 $ (237,091) Adjustments to reconcile operating income(loss)to net cash provided(used)by operating activities: increase in accounts receivable (2,069) - - (2,069) hierease(decrease)in accounts payable and accrued liabilities 7,224 (2,504) (24,326) (13,107) (32,713) Net cash provided(used)by operating activities $ (387,697 $ (2,615) S (24,326) $ 142,765 $ (271,873) 88 CITY OF ENCINITAS Combining Statement of Net Position Agency Funds June 30,2013 Community Requeza Facilities Assessment District#1 District Total Assets: Cash and investments $ 1,920,236 $ 178,069 $ 2,098,305 Cash and investments with fiscal agent 1,975,483 - 1,975,483 Interest receivable 14 - 14 Special assessments receivable 32,265,000 275,000 32,540,000 Current assessments receivable 12,424 - 12,424 Total assets 36,173,I57 453,069 36,626,226 Liabilities: Due to bondholders 36,173,157 453,069 36,626,226 Net Position $ - $ - $ _ 89 CITY OF ENCINITAS Combining Statement of Changes in Assets and Liabilities Agency Funds For the Year Ended June 30,2013 Community Facilities District#1 Beginning Ending Balance Additions Deletions Balance Assets: Cash and investments $ 2,074,175 $ 2,766,123 $ (2,920,062) $ 1,920,236 Cash and investments with fiscal agent 2,794,191 38,500,825 (39,319,533) 1,975,483 Interest receivable 3,560 - (3,546) 14 Special assessments receivable 35,345,000 32,265,000 (35,345,000) 32,265,000 Current assessments receivable 18,661 12,424 (18,661) 12,424 Total assets 40,235,587 73,544,372 (77,606,802) 36,173,157 Liabilities: Due bondholders 40,235,587 73,544,372 (77,606,802) 36,173,157 Net Position $ - $ - $ - $ - Reclueza Assessment District Beginning Ending Balance Additions Deletions Balance Assets: Cash and investments $ 183,456 S 155,424 $ (160,811) $ 178,069 Interest receivable 313 - (313) - Special assessments receivable 335,000 - (60,000) 275,000 Total assets 518,769 155,424 (221,124) 453,069 Liabilities: Due to bondholders 518,769 155,424 (221,124) 453,069 Net Position $ - $ - $ - $ - 90 CITY OF ENCINITAS Combining Statement of Changes in Assets and Liabilities Agency Funds(Continued) For the Year Ended June 30,2013 Total Beginning Ending Balance Additions Deletions Balance Assets: Cash and investments $ 2,257,631 $ 2,921,547 $ (3,080,873) $ 2,098,305 Cash and investments with fiscal agent 2,794,191 38,500,825 (39,319,533) 1,975,483 Interest receivable 3,873 - (3,859) 14 Special assessments receivable 35,680,000 32,265,000 (35,405,000) 32,540,000 Current assessments receivable 18,661 12,424 (18,661) 12,424 Total assets 40,754,356 73,699,796 (77,827,926) 36,626,226 Liabilities: Due to bondholders 40,754,356 73,699,796 (77,827,926) 36,626,226 Net Position $ - $ - $ - $ - 91 STATISTICAL SECTION COASTHW City of Encinitas 101 505 South Vulcan Avenue •Encinitas CA 92024 760-633-2600 • www.encinitasca.gov [THIS PAGE INTENTIONALLY LEFT BLANK] CITY OF ENCINITAS S'T'ATISTICAL INFORMATION The section of the City of Encinitas' Comprehensive Annual Report presents detailed information as a context for understanding what the information in the financial statements,note disclosures, and required supplementary information says about the City's overall financial health. Contents Financial Trends These schedules contain trend information to help the reader understand how the government's financial performance and well-being have changed over time. Revenue Capacity These schedules contain information to help the reader assess the government's most significant local revenue source,the property tax. Debt Capacity These schedules present information to help the reader assess the affordability of the government'scurrent levels of outstanding debt and the government's ability to issue additional debt in the future. Demographic and Economic Information These schedules offer demographic and economic indicators to help the reader understand the environment within which the government's financial activities take place. Operating Information These schedules contain service and infrastructure data to help the reader understand how the information in the government's financial report relates to the services the government provides and the activities it performs. Source: Unless otherwise noted,the information in these schedules is derived from the comprehensive annual financial reports for the relevant year. 92 CITY OF ENCINITAS Net Position by Components Last Ten Fiscal Years (4ccrual Basis of Accounlin g) Fiscal Year 2004 2005 2006 2007 Government activities: Net investment in capital assets $ 101,006,065 $ 99,822,192 $110,362,657 $ 120,651,504 Restricted 18,410,061 7,336,647 6,011,187 6,264,431 Unrestricted 33,463,725 52,506,975 51,645,424 52,721,705 Total governmental activities net position $ 152,979,851 $159,665,814 $168,019,268 $ 179,637,640 Business-type activities: Net investment in capital assets $ 35,749,169 $ 32,464,901 $ 26,265,471 $ 18,865,708 Restricted 9,681,193 8,170,042 1,815,913 1,806,768 Unrestricted 25,544,548 32,494,310 47,263,919 60,256,625 Total business-type activities net position $ 70,974,910 $ 73,129,253 $ 75,345,303 $ 80,929,101 Primary government: Net investment in capital assets $ 136,755,234 $132,287,093 $136,628,128 $ 139,517,212 Restricted 28,091,254 15,506,689 7,827,100 8,071,199 Unrestricted 59,008,273 85,001,285 98,909,343 112,978,330 Total primary government net position $ 223,854,761 $232,795,067 $243,364,571 $ 260,566,741 Source: City of Encinitas Finance Department 93 CITY OF ENCINITAS Net Position by Components Last Ten Fiscal Years (Accrual Basis ofAccounling) (Continued) Fiscal Year 2008 2009 2010 2011 2012 2013 $ 125,786,039 $ 131,703,037 $ 130,912,728 $ 139,575,875 $ 153,516,469 $ 157,395,370 5,207,761 4,340,090 4,219,623 - - 9,980,695 56,901,871 53,452,967 54,755,944 56,799,902 43,857,634 37,646,551 $ 187,895,671 $ 189,496,094 $ 189,888,295 $ 196,375,777 $ 197,374,103 $ 205,022,616 $ 19,204,679 $ 19,422,684 $ 25,014,811 $ 30,076,172 $ 25,I55,766 $ 38,402,878 1,814,716 1,048,426 - - - - 65,301,729 68,683,799 71,916,135 72,608,845 83,232,015 73,661,663 $ 86,321,124 $ 89,154,909 $ 96,930,946 $ 102,685,017 $ 108,387,781 $ 112,064,541 $ 144,990,718 $ 151,125,721 $ 155,927,539 $ 169,652,047 $ 178,672,235 $ 195,798,248 7,022,477 5,388,516 4,219,623 - - 9,980,695 122,203,600 122,136,766 126,672,079 129,408,747 127,089,649 111,308,214 $ 274,216,795 $ 278,651,003 $ 286,819,241 $ 299,060,794 $ 305,761,884 $ 317,087,157 94 CITY OF ENCINITAS Changes in Net Position Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Year 2004 2005 2006 2007 Expenses: Government activities: General government $ 8,936,450 $ 11,371,884 $ 11,026,711 $ 11,858,189 Public safety 18,376,352 18,883,165 20,244,227 20,783,243 Public works 8,698,419 8,441,146 6,783,035 6,728,553 Planning and building 3,766,482 3,275,168 3,716,694 3,826,565 Engineering services 2,348,760 2,615,298 2,890,832 3,078,645 Community services - 1,077,558 1,102,571 1,065,636 Parks and recreation 5,444,334 4,791,064 5,132,178 5,318,816 Interest and fiscal charges on long-term debt 2,035,705 1,563,771 1,511,337 1,978,163 Total governmental activities expenses 49,606,502 52,019,054 52,407,585 54,637,810 Business-type activities: Cardiff Sanitary Division 3,123,260 2,702,948 3,278,916 2,948,112 San Dieguito Water District 10,008,027 9,335,523 10,826,162 11,712,887 Encinitas Sanitary Division 1,296,435 1,227,303 1,332,980 1,357,343 Affordable Housing 1,381,062 1,594,702 3,028,297 1,405,094 Recreation Programs - - - - Total business-type activities expenses 15,808,784 14,860,476 18,466,355 17,423,436 Total primary government expenses 65,415,286 66,879,530 70,873,940 72,061,240 Program revenues: Government activities: Charges for services: General government 1,205,596 448,271 1,701,854 2,248,666 Public safety 550,377 802,913 836,439 1,127,923 Public works - - - - Planning and building 1,753,197 1,563,196 1,896,751 2,341,988 Engineering services 685,832 731,638 839,176 1,430,282 Parks and recreation 914,625 965,685 907,974 928,810 Operating grants and contributions 5,127,262 5,279,931 5,299,476 5,086,623 Capital grants and contributions 5,235,672 5,458,200 5,638,059 4,372,149 Total governmental activities program revenues 15,472,561 15,249,834 17,119,729 17,536,441 Business-type activities: Charges for services: Cardiff Sanitary Division 2,392,338 4,154,963 4,939,158 4,826,970 San Dieguito Water District 8,033,298 8,059,594 9,515,054 10,961,760 Encinitas Sanitary Division 1,545,151 1,928,979 25557,690 2,556,281 Affordable Housing 67,979 1,474,837 105,559 - Recreation Programs - - - Operating grants and contributions - - - - Capital grants and contributions 4,969,157 534,135 380,593 277,210 Total business-type activities program revenues 17,007,923 16,152,508 17,498,054 18,622,221 Total primary government program revenues 32,480,484 31,402,342 34,617,783 36,158,662 Governmental activities (34,133,941) (36,769,220) (35,287,856) (37,101,369) Business-type activities 1,199,139 1,292,032 (968,301) 1,198,785 Total net revenue(expense) (32,934,802) (35,477,188) (36,256,157) (35,902,584) (I)Parks and Recreation activity is rcporlod in Planning and Building instead of Community Service starting in Fiscal Year 2011, (2)Div City reports Recreation Programs as a business-type activity starting in Fiscal Year 2012. Source: City of Encinitas Finance Department 95 CITY OF ENCINITAS Changes in Net Position Last Ten Fiscal Years (Accrual Basis ofAccounttng) (Continued) Fiscal Year 2008 2009 2010 2011 2012 2013 $ 12,783,573 $ 14,249,545 $ 12,132,268 $ 10,912,556 $ 12,064,527 $ 10,616,440 21,015,336 22,039,493 22,269,616 22,324,624 23,062,746 24,629,613 11,595,020 9,360,563 9,520,416 10,981,355 8,560,330 10,851,147 4,020,288 3,608,623 3,549,257 5,539,148 5,008,179 4,353,831 3,972,242 4,010,485 3,873,432 3,646,306 5,817,932 3,813,678 1,266,770 1,224,920 2,050,357 - (1} - - 6,594,001 6,902,715 6,518,623 6,243,769 5,578,716 5,542,550 2,261,104 2,266,817 2,296,422 2,029,477 1,811,714 1,932,904 63,508,334 63,663,161 62,210,391 61,677,235 61,904,144 61,740,163 2,985,912 2,854,368 3,569,880 3,715,529 3,385,439 3,373,704 11,894,734 12,955,085 11,633,694 11,622,126 12,448,911 12,200,431 1,823,088 1,805,624 1,855,278 1,992,334 1,719,176 1,983,786 242,553 260,130 256,873 244,748 1,492,811 1,499,863 - - - - 1,187,788 1,153,840 16,946,287 17,875,207 17,315,725 17,574,737 20,234,125 20,211,624 80,454,621 81,538,368 79,526,116 79,251,972 82,138,269 81,951,787 2,895,795 1,608,273 1,962,344 2,453,152 1,789,943 1,775,756 1,006,293 103,641 105,799 98,202 99,047 91,495 - 19,276 668 - - - 2,284,066 1,539,851 1,521,889 1,816,765 2,155,076 1,894,785 1,655,539 759,885 660,734 1,063,822 736,786 955,986 1,224,923 810,667 1,126,285 1,149,350 14,580 39,946 5,736,957 4,838,455 5,392,117 6,964,053 5,896,502 3,759,864 2,699,027 3,613,636 3,437,302 4,854,393 3,626,279 6,462,979 17,502,600 13,293,684 14,207,138 18,399,737 14,318,213 14,980,811 4,926,104 5,009,340 4,979,238 4,830,204 4,970,662 4,755,573 11,283,219 11,379,337 11,046,650 12,438,502 12,922,922 13,687,156 2,685,490 2,811,359 2,816,963 2,895,879 2,897,592 2,933,319 - 222,507 202,499 216,723 214,503 214,115 - - - 1,273,007 (2) I,059,009 - - - - 1,105,851 1,103,639 746,586 299,326 231,362 712,827 460,688 1,003,057 19,641,399 19,721,869 19,276,712 21,094,135 23,845,225 24,755,868 37,143,999 33,015,553 33,483,850 39,493,872 38,163,438 39,736,679 (46,005,734) (50,369,477) (48,003,253) (43,277,498) (47,585,931) (46,759,352) 2,695,I12 1,846,662 1,960,987 3,519,398 3,6I1,100 4,544,244 (43,310,622) (48,522,815) (46,042,266) (39,758,100) (43,974,831) (42,215,108) 96 CITY OF ENCINITAS Changes in Net Position Last Ten Fiscal Years (Accrual Basis ofAccounring) (Continued) Fiscal Year 2004 2005 2006 2007 General Revenues and Other Changes in Net Position: Governmental activities: Taxes Property taxes and transfer fees 19,375,968 26,417,943 29,290,854 32,593,979 Sales taxes 10,773,548 8,606,077 8,807,630 9,043,912 Transient occupancy taxes 777,195 790,943 1,094,994 1,089,065 Franchise taxes 1,511,676 1,837,213 1,951,637 2,011,947 Intergovernmental revenues-unrestricted 3,158,289 2,077,519 569,757 753,722 Use of money and property 1,942,927 3,506,285 2,670,990 3,957,869 Other general revenues 1,561,650 2,605,280 554,750 502,115 Gain/(loss)on sale of assets - - (32,510) (5,682) Transfers 481,715 (1,456,893) (1,266,792) (1,227,186) Total governmental activities 39,582,968 44,384,367 43,641,310 48,719,741 Business-type activities: Property taxes 475,898 168,038 228,881 651,195 Intergovernmental-unrestricted - - - 893,500 Use of money and property 587,222 1,304,963 1,550,626 1,374,862 Other general revenues 223,397 451,640 138,052 238,270 Transfers (481,715) 1,456,893 1,266,792 1,227,186 Total business-type activities 804,802 3,381,534 3,184,351 4,385,013 Total primary government 40,387,770 47,765,901 46,825,661 53,104,754 Changes in Net Position Government activities 5,449,027 7,614,147 8,353,454 11,618,372 Business-type activities 2,003,941 4,673,566 2,216,050 5,583,798 Total primary government $ 7,452,968 $ 12,287,713 $ 10,569,504 $ 17,202,170 (1)Parks and Recreation activity is reported in Planning and Building instead of Community Service starting in Fiscal Year 2011. (2)The City began to report Recreation Programs as a husiness-type activity starting in Fiscal Year 2012. Source: City of Encinitas Finance Department 97 CITY OF ENCINITAS Changes in Net Position Last Ten Fiscal Years (Accrual Basis of Accounting) (Continued) Fiscal Year 2008 2009 2010 2011 2012 2013 33,858,150 35,064,401 32,285,155 32,292,988 32,788,129 34,974,578 8,130,837 7,340,410 8,780,203 10,244,506 10,613,188 11,585,145 1,182,816 1,099,817 1,179,789 1,276,980 1,413,926 1,491,998 2,212,915 2,162,729 2,031,924 2,108,420 2,144,162 2,323,616 1,335,594 1,866,726 794,362 I,488,770 635,097 541,079 3,842,268 2,884,233 1,085,981 657,796 387,066 552,512 568,884 1,551,584 2,238,041 1,695,520 1,780,543 1,596,026 - - - (668,877) 1,809,656 51,131,464 51,969,900 48,395,455 49,764,980 49,093,234 54,874,610 690,407 721,628 718,212 706,175 725,551 749,378 1,756,153 974,702 392,152 508,089 188,259 189,676 250,351 45,193 228,614 401,013 - 3,118 - - - 668,877 (1,809,656) 2,696,911 1,741,523 1,338,978 1,615,277 1,582,687 (867,484) 53,828,375 53,711,423 49,734,433 51,380,257 50,675,921 54,007,126 5,125,730 1,600,423 392,202 6,487,482 1,507,303 8,115,258 5,392,023 3,588,185 3,299,965 5,134,675 5,193,787 3,676,760 $ 10,517,753 $ 5,188,608 $ 3,692,167 $ 11,622,157 $ 6,701,090 $ 11,792,018 98 CITY OF ENCINITAS Fund Balances of Governmental Funds Last Ten Fiscal Years (Modified Accrual Basis of Accounting) Fiscal Year 2004 2005 2006 2007 General fund: Reserved $ 22,200,278 $ 3,644,856 $ 4,092,489 $ 15,196,796 Unreserved,designated - - - - Unreserved,undesignated 13,254,418 36,390,504 36,866,828 36,488,893 Nonspendable - - - Restricted - - Committed - - Assigned - - Unassigned - - - - Total general fund $ 35,454,696 $ 40,035,360 $ 40,959,317 $ 51,685,689 All other governmental funds: Reserved $ 12,756,026 $ 3,691,791 $ 3,525,818 $ 4,176,025 Unreserved,designated 5,654,035 15,771,318 14,605,153 16,909,261 Unreserved,undesignated - - - - Nonspendable - Restricted - Committed - Assigned - Unassigned - - - - Total all other governmental funds $ 18,410,061 $ 19,463,109 $ 18,130,971 $ 21,085,286 Total all governmental funds $ 53,864,757 $ 59,498,469 $ 59,090,288 $ 72,770,975 (1)GASB 54,which requires changes in reporting categories for fund balances,was implemented in Fiscal Year 2611, Source: City of Encinitas Finance Department 99 CITY OF ENCINITAS Fund Balances of Governmental Funds Last Ten Fiscal Years (Modified Accrual Basis of Accounting) (Continued) Fiscal Year 2008 2009 2010 2011'' 2012 2013 $ 6,210,167 $ 5,255,137 $ 4,286,026 $ - $ - $ - 35,790,162 38,413,388 36,913,369 - 9,126,804 3,866,759 5,789,899 - - - - 2,648,338 2,868,533 1,980,075 - - 633,245 - - - 42,274,327 19,371,624 17,844,119 - - 561,762 - - - 1,850,582 17,964,935 21,160,822 $51,127,133 $ 47,535,284 $ 46,989,294 $ 47,406,492 $ 40,205,092 $ 41,546,778 $ 3,908,007 $ 3,771,850 $ 3,408,409 $ $ $ - 10,968,342 10,694,605 10,430,543 - 145,686 - - 8,290,163 13,471,421 13,03 6,9 84 7,570,021 - - - 2,169,209 2,135,100 $14,876,349 $ 14,466,455 $ 13,838,952 $ 16,005,870 $ 15,640,630 $ 15,172,084 $66,003,482 $ 62,001,739 $ 60,828,246 $ 63,412,362 $ 55,845,722 $ 56,718,862 100 CITY OF ENCINITAS Changes in Fund Balances of Governmental Funds Last Ten Fiscal Years (Modified Accrual Basis ofAccounting) 2004 2005 2006 2007 Revenues: Taxes and assessments $ 33,943,667 $ 39,383,642 $ 44,026,335 $ 46,922,540 Intergovernmental 9,098,006 9,301,017 6,464,129 5,596,224 Charges for services 6,504,237 5,582,317 6,642,855 8,022,053 Fines,forfeitures,and penalties 501,297 745,744 832,570 949,606 Use of money and property 1,942,914 3,506,285 2,586,286 3,943,512 Other 2,425,547 2,571,086 1,423,460 4,679,351 Total Revenues 54,415,668 61,090,091 61,975,635 70,113,286 Expenditures: Current: General government 8,180,099 10,129,726 9,378,799 9,601,089 Public safety 18,241,314 18,591,043 19,948,909 20,674,992 Public works 2,580,317 4,537,345 4,768,226 4,679,795 Planning and building 3,293,067 3,275,168 3,716,694 3,826,565 Engineering services 2,348,760 2,615,298 2,890,832 3,078,645 Community services - 1,077,558 1,102,571 1,065,636 Parks and recreation 5,444,334 4,791,064 5,132,178 5,318,816 Capital outlay 17,369,542 5,440,192 11,215,699 23,383,302 Debt service: Principal 1,015,000 1,32 7,445 1,450,404 1,499,032 Interest and fiscal charges 1,520,899 1,553,393 1,512,712 1,780,651 Bond issuance costs - - - Total expenditures 59,993,332 53,338,232 61,117,024 74,908,523 Excess(deficiency)of revenues over(under)expenditures (5,577,664) 7,751,859 858,611 (4,795,237) Other Financing Sources(Uses): Transfer in from CFD debt service 85,998 - - - Transfers in 22,781,022 8,548,333 13,552,280 23,774,352 Transfers out (22,299,307) (10,005,226) (14,819,072) (24,998,428) Proceeds from capital lease - - - issuance of debt - - 20,000,000 Premium on debt issuance - - Bond discounts - - (300,000) Total other financing sources(uses) 567,713 (1,456,893) (1,266,792) 18,475,924 Net change in fund balances $ (5,009,951) $ 6,294,966 $ (408,181) $ 13,680,687 Debt service as a percentage of noncapital expenditures 6.3% 6.4% 6.3% 6.8% Source: City of Encinitas Finance Department 101 CITY OF ENCINITAS Changes in Fund Balances of Governmeutal Funds Last Ten Fiscal Years (Modified Accrual Basis of Accounting) (Continued) 2008 2009 2010 2011 2012 2013 $ 47,483,312 $ 47,800,573 $ 46,805,219 $ 48,100,768 $ 49,089,142 $ 51,528,542 5,999,680 5,950,205 6,917,521 8,369,571 6,537,855 8,520,220 9,293,303 6,621,931 5,164,315 6,376,261 4,406,737 4,450,756 884,446 746,023 761,202 856,392 657,364 611,029 3,851,877 2,008,557 1,085,981 657,798 639,676 572,481 1,227,055 1,110,325 2,875,491 3,803,927 2,715,266 2,141,439 68,739,673 64,237,614 63,609,729 68,164,717 64,046,040 67,824,467 11,903,557 13,036,815 11,859,415 10,155,732 9,277,443 9,430,487 20,896,882 21,636,969 22,049,239 22,107,692 22,853,121 23,655,367 5,432,032 6,033,513 5,888,161 6,051,253 5,843,228 6,057,646 4,020,288 3,589,360 3,549,257 5,539,148 4,655,501 4,238,882 3,972,242 3,986,859 3,873,432 3,646,306 3,804,813 3,716,994 1,266,770 1,221,660 2,050,357 - - - 5,585,446 5,811,778 5,482,578 5,293,664 4,333,303 4,377,047 20,704,628 8,473,396 5,606,327 8,559,193 12,803,379 18,836,006 1,581,033 2,197,891 2,091,882 2,481,223 2,359,932 2,295,614 2,244,288 2,251,116 2,332,574 2,056,501 1,872,773 1,806,081 - - - 395,404 - 243,987 77,607,166 68,239,357 64,783,222 66,286,116 67,803,493 74,658,111 (8,867,493) (4,001,743) (1,173,493) 1,878,601 (3,757,453) (6,833,644) 25,007,578 I2,631,197 11,066,120 13,133,224 17,661,946 23,363,240 (25,007,578) (12,631,197) (11,066,120) (13,133,224) (18,354,656) (24,208,240) - - - - 599,639 555,384 2,100,000 - - 19,530,000 - 7,865,000 - - - 215,515 - 131,400 - - (19,040,000) - - 2,I00,000 _ - 705,515 (93,071) 7,706,784 $ (6,767,493) $ (4,001,743) $ (1,173,493) $ 2,584,116 $ (3,850,524) $ 873,140 7.2% 8.0% 8.1% 8.6% 8.3% 8.0% 102 CITY OF ENCINITAS Assessed Value and Estimated Actual Value of Taxable Property Last Ten Fiscal Years (In thousands of dollars) Fiscal Year Residential Commercial Industrial All Other Total Net Taxable Total Direct Ended June 30 Property Property Property Property(1) Assessed Value(2) Tax Rate% 2004 $ 6,466,136 $ 703,029 $ 29,622 $ 473,921 $ 7,672,748 0.23750 2005 7,218,507 748,540 30,209 457,085 8,454,341 0.23720 2006 7,995,632 805,108 32,074 504,680 9,337,494 0.23747 2007 8,742,273 852,894 32,714 562,621 10,190,502 0.23789 2008 9,355,905 927,637 33,375 583,340 10,900,257 0.23837 2009 9,800,179 969,642 35,427 451,831 11,257,079 0.23278 2010 9,774,056 1,063,161 36,255 454,096 11,327,568 0.23338 2011 9,767,731 1,110,811 36,036 427,619 11,342,197 0.23375 2012 9,886,681 1,154,923 34,944 421,308 11,497,856 0.23492 2013 10,030,357 1,247,785 37,766 408,020 11,723,928 0.23977 Note: In 1978 the voters of the State of California passed Proposition 13 which limited property taxes to a total maximum rate of I%based upon the assessed value of the property being taxed. Each year,the assessed value of property may be increased by an"inflation factor"(limited to a maximum increase of 2%). With few exceptions, property is only re-assessed at the time that it is sold to a new owner. At that point,the new assessed value is reassessed at the purchase price of the property sold. The assessed valuation data shown above does not directly represent or correlate to actual market values of taxable property and is subject to the limitations descrived above. (1) Includes the following categories:dry farm,institutional,irrigated,recreation,vacant land, SBC nonunitary,possessory interest,unsecured,and unknown. (2)The"total net taxable assessed value"is net of tax-exempt property. In addition,homeowners exemptions are not included in the above totals. Source: San Diego County Assessor 2012/13 Combined Tax Rolls The Hdl Company 103 CITY OF ENCINITAS Principal Property Taxpayers Current Fiscal Year and Nine Years Ago 2013 2004 Percent of Total Percent of Total Taxable City Taxable Taxable City Taxable Taxpayer Assessed Value Assessed Value Assessed Value Assessed Value TRC Encinitas Village $ 114,296,675 0.009750/a Belmont Village Tenant LLC 67,914,000 0.00579% Collwood Pines Apartments LP 54,963,312 0.00469% Encinitas Town Center Associates LLC 43,367,556 0.00370% $ 33,841,901 OA0441% SSL Landlord LLC 34,024,140 0.00290% WRl El Camino LP 32,617,049 0.00278% PK]I]Encinitas Marketplace LP 28,600,000 0.00244% Scripps Health 26,671,084 0.00227% North Coast Business Park 25,412,082 0.00217% 22,772,808 0.00297% Urschel Laboratories Inc. 22,892,104 0.00195% 19,901,917 0.00259% Keith B.and Sara S.Harrison 22,571,400 0.00193% ASN Encinitas LLC 22,357,880 0.00191% North Coast Health Center LLC 21,256,885 0.00181% 18,656,164 0.00243% Loja Pacific Station LLC 19,560,000 0.00167% UCSD Garden View LLC 18,000,000 0.00154% Lofts at Moonlight Beach LLC 17,710,395 0.00151% Sterling Family Trust 17,562,229 0.00150% LA Fitness International LLC 17,367,711 0.00148% Plenc El Camino LLC 17,226,730 0.00147% 14,655,000 0.00191% Quail Pointe Apartments LP 15,025,500 0.00128% Encinitas Terraces LLC 14,411,355 0.00123% Golden Eagle Annuity Investment LP 14,120,331 0.00120% Bellflower Capital LP 14,034,402 0.00120% 11,821,021 0.00154% ARV Assisted Living Inc. 12,240,000 0.00104% Home Depot USA Inc. 12,049,643 0.00103% 28,645,845 0.00373% Pacific Encinitas LP 32,000,001 Enrique Apartment Company 25,216,757 0.00329% Vons Companies Inc. 21,463,964 0.00280% ACF El Camino LLC 16,850,000 0.00220% Toll California IV LP 16,436,372 Encinitas Ranch Apartments LLC 15,242,770 Strategic Capital Resources Inc 14,048,797 Hughes Encinitas Limited 14,535,909 0.00189% Security Title Insurance Company Trust 13,648,304 0.00178% LBL Concordia Encinitas Ranch LLC 13,090,674 0.00171% Pan Pacific Retial Properties Inc. 12,881,422 0.00168% Dayton Hudson Corporation/Target 12,540,652 0.00163% GMS Realty LLC 12,415,042 0.00162% Fivc Stars Associates 11,037,450 0.00144% Donald B Gaines Revocable Trust 10,661,364 0.00139% Standard Pacific Corporation 10,459,969 0.00136% LVM California Corporation 10,088,904 0.00131% Brogan and Jones Living Trust 9,527,620 0.00124% S 706,252,463 0.06024% $ 423,040,827 0.04493% NOTE: Actual revenues are not available Source: San Diego County Assessor Combined Tax Rolls&the Hdl Company 104 CITY OF ENCINITAS Direct and Overlapping Property Tax Rates Last Ten Fiscal Years Fiscal Year 2004 2005 2006 2007 City of Encinitas Basic Rate 0.23750 0.23720 0.23747 0.23789 City of Encinitas Direct Rate(1) 0.23750 0.23720 0.23747 0.23789 Overlapping Rates:(2) City of Encinitas 0.26641 0.26641 0.26641 0.26641 Encinitas Landscape&Lighting District 0.01596 0.01596 0.01596 0.01596 Autistic Pupils Monors Elem 0.00009 0.00009 0.00009 0.00009 Autistic Pupils Monors High 0.00009 0.00009 0.00009 0.00009 Cardiff Elementary 0.26238 0.26238 0.26238 0.26237 Children's Institutions Tuition 0.00146 0.00146 0.00146 0.00146 County General 0.08264 0.08264 0.08264 0.08264 County Library 0.01298 0.01298 0.01298 0.01298 County School Service 0.00687 0.00687 0.00687 0.00687 County School Service-Capital Outlay 0.00173 0.00173 0.00173 0.00173 County Service Area No. 17 0.00291 0.00291 0.00291 0.00291 CWA San Dieguito Water District 0.00344 0.00344 0.00344 0.00344 Development Centers for Handicapped Elem 0.00043 0.00043 0.00043 0.00043 Development Centers for Handicapped High 0.00044 0.00044 0.00044 0.00044 Educable Mentally retarded Minors 0,00I96 0.00196 0.00196 0.00196 Educational Revenue Augmentation Fund 0.08574 0.08574 0.08574 0.08574 Mira Costa Community College 0.08594 0.08594 0.08594 0.08594 Physically Handicapped Minors Elem 0.00303 0,00303 0.00303 0.00303 Physically Handicapped Minors High 0.00304 0.00304 0,00304 0.00304 Regional Occupational Centers 0.00438 0.00438 0.00438 0.00438 San Dieguito Union High 0.14404 0.14404 0.14404 0.14405 San Dieguito Water District 0.00992 0.00992 0.00992 0.00992 Trainable Mentally Retarded Minors Elem 0.00197 0.00197 0.00197 0.00197 Trainable Mentally Retarded Minors High 0.00198 0.00198 0.00198 0.00198 Vista Project(19/85701) 0.00017 0.00017 0.00017 0.00017 Total Prop 13 Rate(3) 1.00000 1.00000 1.00000 1.00000 Notes: (1) Total Direct Rate is the weighted average of all individual direct rates applied by the government preparing the statistical section information. (2) Gc ucral fund tax rates are representative and based upon the direct and overlapping rates for the largest General Fund lax rate area (TRA)by net taxable value. (3) In 1978 the voters of the State of California passed Proposition 13 which limited property taxes to a total maximum rate of I% based upon the assessed value of the property being taxed. Each year,the assessed value of property may be increased by an "inflation factor"(limited to a maximum increase of 2%). With few exceptions,properly is only reassessed at the time that it is sold to a new owner. At that point,the new assessed value is reassessed at the purchase price of the property sold. The assessed valuation data shown above represents the only data currently available with respect to the actual market value. Source: San Diego County Assessor 2003/2004 through 2012/2013 Tax Increment Table The Hdl Company 105 CITY OF ENCINITAS Direct and Overlapping Property Tax Rates Last Ten Fiscal Years (Continued) Fiscal Year 2008 2009 2010 2011 2012 2013 0.23837 0.23278 0.23338 0.23375 0.23492 0.23977 0.23837 0.23278 0.23338 0.23375 0.23492 0.23977 0.26641 0.26648 0.26648 0.26648 0.24020 0.24020 0.01596 0.01596 0.01596 0.01596 0.02100 0.02100 0.00009 0.00009 0.00009 0.00009 0.00000 0.00000 0.00009 0.00009 0.00009 0.00009 0.00000 0.00000 0.26237 0.26240 0.26240 0.26240 0.24870 0.24870 0.00146 0.00146 0.00146 0.00146 0.00105 0.00105 0.08264 0.07570 0.07570 0.07570 0.08020 0.08020 0.01298 0.01995 0.01995 0.01995 0.01967 0.01967 0.00687 0.00687 0.00687 0.00687 0.00642 0.00642 0.00173 0.00173 0.00173 0.00173 0.00160 0.00160 0.00291 0.00291 0.00291 0.00291 0.00250 0.00250 0.00344 0.00344 0.00344 0.00344 0.02510 0.02510 0.00043 0.00043 0.00043 0.00043 0.00000 0.00000 0.00044 0.00044 0.00044 0.00044 0.00000 0.00000 0.00196 0.00196 0.00196 0.00196 0.00160 0.00160 0.08574 0.08570 0.08570 0.08570 0.08620 0.08620 0.08594 0.08590 0,08590 0.08590 0.08150 0.08150 0.00303 0.00303 0.00303 0.00303 0.00266 0.00266 0.00304 0.00304 0.00304 0.00304 0.00266 0.00266 0.00438 0.00438 0.00438 0.00438 0.00374 0.00374 0.14405 0.14400 0.14400 0.14400 0.13610 0.13610 0.00992 0.00992 0.00992 0.00992 0.03590 0.03590 0.00197 0.00197 0.00197 0.00197 0.00160 0.00160 0.00198 0.00198 0.00198 0.00198 0.00160 0.00160 0.00017 0.00017 0.00017 0.00017 0.00000 0.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 106 CITY OF ENCINITAS Direct and Overlapping Property Tax Rates Last Ten Fiscal Years (Continued) Fiscal Year 2004 2005 2006 2007 CWA San Dieguito Water Dist-Debt Service 0.00067 - - - Gen Bond Cardiff 2000A 0.03975 0.03913 0.03409 0.03508 Gen Bond Cardiff 2000 Election,2010 Ref.Bonds - - - - MWD D/S Remainder of SDCWA 1501999 0.00610 0.00580 0.00520 0.00470 Total Voter Approved Rate 0.04652 0.04493 0.03929 0.03978 Total Tax Rate 1.04652 1.04493 1.03929 1.03978 107 CITY OF ENCINITAS Direct and Overlapping Property Tax Rates Last Ten Fiscal Years (Continued) Fiscal Year 2008 2009 2010 2011 2012 2013 0.03306 0.03212 0.03518 - - - - - - 0.03715 0.03489 0.03458 0.00450 0.00430 0.00430 0.00370 0.00370 0.00350 0.03756 0.03642 0.03948 0.04085 0.03859 0.03808 1.03756 1.03642 1.03948 1.04085 1.03859 1.03808 108 CITY OF ENCINITAS Property Tax Levies and Collections Last Ten Fiscal Years Collected within the Fiscal Taxes levied(1) Fiscal Year of Levy Year Ended for the Percent June 30 Fiscal Year Amount of Levy 2004 $ 19,685,171 $ 19,145,685 97.26% 2005 22,082,262 21,269,966 96.32% 2006 24,285,772 23,360,483 96.19% 2007 25,857,065 24,741,077 95.68% 2008 26,950,803 25,584,630 94.93% 2009 27,441,558 26,326,996 95.94% 2010 27,421,386 26,490,783 96.61% 2011 27,541,4 87 26,888,921 97-63% 2012 28,100,611 27,540,858 98.011/1,) 2013 29,207,237 28,712,036 98.30% Note!Subsequent collections by year is not available. (l)City of Encinitas general fund Source: San Diego County Assessor Combined Tax Rolls 109 CITY OF ENCINITAS Ratios of Outstanding Debt by Type Last Ten Fiscal Years Governmental Activities Fiscal Year Total Ended Govemmental June 30 Bonded Debt Capital Leases 0) Activities 2004 $ 33,730,000 361,897 $ 34,091,897 2005 32,450,000 314,452 32,764,452 2006 31,105,000 559,048 31,664,048 2007 49,410,000 696,373 50,106,373 2008 47,960,000 2,670,340 50,630,340 2009 46,005,000 2,432,449 48,437,449 2010 44,105,000 2,185,567 46,350,567 2011 42,705,000 3,036,900 45,741,900 2012 40,700,000 3,281,606 43,981,606 2013 46,660,000 3,446,376 50,106,376 (l)Percentage of Personal Income ratios are calculated using personal income and population for the prior calendar year. (2)Debt per Capita is calculated by dividing the total primary government amount by City population shown on Demographic and Economic Statistic page. (3)During 2008,the City borrowed$2.1 million to partially fund major improvements to the Encinitas Civic Center, under a capital lease arrangement with a financial institution. Source: City of Encinitas Finance Department 111 CITY OF ENCINITAS Ratios of Outstanding Debt by Type Last Ten Fiscal Years (Continued) Business-type Activities Total Percentage Water Bonds CSD Note EHA Note Business-type Total Primary of Personal Debt Per and Notes Payable Payable Activities Government Income(1) Capita(2) $ 22,475,000 $ 8,295,000 $ 1,895,883 $32,665,883 $ 66,757,780 1.77% 1,069 21,575,000 7,900,000 1,862,347 31,337,347 64,101,799 1.68% 1,024 20,815,000 7,500,000 1,825,255 30,140,255 61,804,303 1.59% 984 20,030,000 7,085,000 1,786,769 28,901,769 79,008,142 NIA 1,254 19,340,000 6,660,000 1,723,832 27,723,832 78,354,172 N/A 1,227 18,440,000 6,220,000 1,681,534 26,341,534 74,778,983 NIA 1,166 17,545,000 5,770,000 1,638,817 24,953,817 71,304,384 NIA 1,094 16,620,000 5,300,000 1,591,681 23,511,681 69,253,581 NIA 1,063 15,660,000 4,316,361 1,544,434 21,520,795 65,502,401 N/A 1,005 14,670,000 4,279,965 1,495,415 20,445,380 70,551,756 NIA 1,083 112 CITY OF ENCINITAS Ratios of General Bonded Debt Outstanding Last Ten Fiscal Years Fiscal Outstanding General Bonded Debt Percentage Year Ended Certificates of Participation and Assessed tt) of Assessed Per June 30 Lease Revenue Bonds Valuation Value Capita 2004 $ 33,730,000 $ 7,672,708,000 0.44% 540 2005 32,450,000 8,454,341,000 0.38% 518 2006 31,105,000 9,337,494,000 0.33% 495 2007 49,410,000 10,190,502,000 0.48% 781 2008 47,960,000 10,900,257,000 0.44% 751 2009 46,005,000 11,257,079,000 0.41% 717 2010 44,165,000 11,327,568,000 0.39% 678 2011 42,705,000 11,342,197,000 0.38% 678 2012 40,700,000 11,497,857,000 0.35% 626 2013 46,660,000 11,723,928,000 0.40% 716 Notcs: Details regarding the City's outstanding debt can be found in the notes to the financial statements. General bonded debt is debt payable with governmental fund resources and general obligation bonds recorded in enterprise funds of which, the City has none. (1)Assessed valuation has been used because the actual market value of taxable propctty is not readily available in the State of California. The assessed valuation information can be found in the Assessed Value and Estimated Actual Value of Taxable Property schedule in the Statistical Section. Source: City of Encinitas Finance Department San Diego County Assessor Combined Tax Rolls 113 [THIS PAGE INTENTIONALLY LEFT BLANK] CITY OF ENCINITAS Schedule of Direct and Overlapping Bonded Debt June 30,2013 2012-13 Assessed Valuation: $11,725,285,000 City's Share of Total Debt as of Overlapping Debt June 30,2013 Applicable%(1) as of June 30,2013 OVERLAPPING TAX AND ASSESSMENT DEBT: Metropolitan Water District $ 165,085,000 0.558% $ 921,174 Cardiff School District 6,665,198 100% 6,665,198 Encinitas Unioil School District 34,080,527 67.845% 23,121,934 San Dieguito Union high School 160,000,000 24.409% 39,054,400 San Dieguito Union High School District Community Facilities Districts 37,141,906 1.840-100.% 11,723,801 City of Encinitas Community Facilities District No. 1 32,265,000 100% 32,265,000 City of Encinitas 1915 Act Bonds 275,000 100% 275,000 Olivenhain Municipal Water District,Assessment District No.96-1 14,765,000 26.375% 3,894,269 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $ 117,920,776 DIRECT AND OVERLAPPING GENERAL FUND DEBT San Diego County General Fund Obligations 399,780,000 3.068% $ 12,265,250 San Diego County Pension Obligations 753,897,748 3.068% 23,129,583 San Diego County Superintendent of Schools Obligations 17,462,500 3.068% 535,750 Mira Costa Community College District Certificates of Participation 2,405,000 15.015% 361,111 San Dieguito Union High School District General Fund Obligations 13,015,000 24.409% 3,176,831 City of Encinitas Governmental Bonded Debt $ 46,660,000 100% $ 46,660,000 TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $ 86,128,526 TOTAL DIRECT DEBT $ 46,660,000 TOTAL OVERLAPPING DEBT 157,389,301 COMBINED TOTAL DEBT(z) $ 204,049,301 (1) The percentage of overlapping applicable to the city is estimated using taxable assessed property value. Applicable percentages were estimated by determining the portion of the overlapping district's assessed value that is within the city divided by the district's total taxable assessed value. (2) Excludes tax and revenue anticipation notes,enterprise revenue,mortgage revenue and non-bonded capital lease obligations. Ratios to 2012-13 Assessed Valuation: Total Overlapping Tax and Assessment Debt........................................1.01% Total Direct Debt ($46,660,000).....................................................0.40% Combined Total Debt..........................................................................1.74% Source: California Municipal Statistics 114 CITY OF ENCINITAS Legal Debt Margin Information Last Ten Fiscal Years (in thousands) Fiscal Years 2004 2005 2006 2007 Assessed valuation $ 7,672,708 $8,454,341 $ 9,337,494 $ 10,190,502 Conversion percentage equal 25% 25% 25% 25% to 25%of Assessed valuation Adjusted assessed valuation 1,918,177 2,113,585 2,334,374 2,547,626 Debt limit percentage 15% 15% 15% 15% Debt limit 287,727 317,038 350,156 382,144 Total net debt applicable to limit: 33,730 32,450 31,105 49,410 Legal debt margin $ 253,997 $ 284,588 $ 319,051 $ 332,734 Total debt applicable to the limit as a percentage of debt limit 11.72% 10.24% 8.88% 12.93% The Government Code of the State of California provides for a legal debt limit of 15%of gross assessed valuation However,this provision was enacted when assessed valuation was based upon 25%of market value. Effective with the 1981-82 fiscal year,each parcel is now assessed at 100%or market value(as of the most recent change in ownership for that parcel). The computations shown above reflect a conversion of assessed valuation data for each fiscal year from the current full valuation perspective to the 25%level that was in effect at the time that the legal debt margin was enacted by the State of California for local governments located within the state. Notes. Details regarding the city's outstanding debt can be found in the notes to the financial statements. Source: City of Encinitas Finance Department San Diego County Assessor Combined Tax Rolls 115 CITY OF ENCINITAS Legal Debt Margin Information Last Ten Fiscal Years (in thousands) (Continued) Fiscal Years 2008 2009 2010 2011 2012 2013 $ 10,900,257 $ 11,257,079 $ 11,327,568 $ 11,342,197 $ 11,497,857 $ 11,723,928 25% 25% 25% 25% 25% 25% 2,725,064 2,814,270 2,831,892 2,835,549 2,874,464 2,930,982 15% 15% 15% 15% 15% 15% 408,760 422,141 424,784 425,332 431,170 439,647 47,960 46,005 44,165 42,705 40,700 46,660 $ 360,800 $ 376,136 $ 380,619 $ 382,627 $ 390,470 $ 392,987 11.73% 10.90% 10.40% 10.04% 9.44% 10.61% 116 CITY OF FNCINITAS Historical Debt Service Coverage Last Five Fiscal Years SAN DIEGUITO WA'T'ER O[STRICT 2009 2010 2011 2012 2013 Revenues: Operating revenues-including connection fees $11,521,897 $ 11,267,684 $ 12,574,450 $ 13,170,422 $ 13,789,636 Nonoperating revenues 1,129,594 879,477 817,872 813,610 869,568 Gross Revenues 12,651,491 12,147,161 13,392,321 13,984,032 14,659,204 Total Operating and Nonoperating Expenses 12,955,085 11,634,347 1 1,614,631 12,448,911 12,200,431 Net Income (303,594) 512,814 1,777,691 1,535,121 2,458,773 Add back........ Interest expense and other 603,748 749,704 725,936 698,908 657,963 Depreciation and amortization expense 2,217,274 1,213,640 1,196,007 1,294,904 1,476,04d Net Revenues Available for Debt Service 2,717,428 2,476,158 3,699,634 3,528,932 4,592,780 Less:Debt Service 2004 Water Revenue Refunding Bonds-Interest Charges 485,769 469,269 452,244 433,950 408,906 2004 Water Revenue Refunding Bonds-Principal Payments 540,00C 560,000 575,000 595,000 6I5,000 2007 Note Payble to Financing Authority-Interest Charges 290,748 265,157 281,494 270,352 256,744 2007 Note Payble to Financing Authority-Principal Payments 360,00 335,000 350,000 365,000 375,000 Total Debt Service 1,676,517 1,629,426 1,658,738 1,664,302 1,655,650 Coverage by Net Revenues Availablc for Debt Service 1625, 152% 223% 212% 277% Debt service coverage requirement is minimum 115%incl connection fees,100%w/o connection fees CARDIFF SANITARY DIVISION 2009 2010 2011 2012 20I3 Revenues: Operating revenues-including connection tees $ 5,062,773 S 5,049,039 $ 5,337,717 $ 5,039,818 $ 4,875,851 Nonoperating revenues 392,505 162,601 355,974 126,914 39,015 Gross Revenues 5,455,278 5,211,640 5,693,691 5,166,733 4,914,866 Total Operating and Nonoperating Expenses 2,854,368 3,569,880 3,715,529 3,310,966 3,373,704 Net hrceme 2,600,910 1,641,760 1,978,162 1,855,747 1,541,162 Add back........ Interest expense and other 302,067 285,800 267,533 248,400 142,898 Depreciation and amortization expense 303,930 912,026 932,273 404,641 560,853 Net Eevenuts Available for Debt Service 3,206,907 2,839,586 3,177,968 2,508,788 2,244,913 Less:Debi Service 2003 Note Payable to SIDPA-Interest Charges 307,200 291,800 273,800 255,000 - 2003 Note Payable to SFIPA-Principal Paymenfs 440,000 450,000 470,000 490,000 - 2011 Note Payable to SEIPA-Interest Charges - - 28,946 148,364 2011 Nate Payable to SF1PA-Principal Payments - - 25,000 546,540 Total Debi Service 747,200 741,800 743,800 798,946 694,904 Coverage by Net Revenues Available for Debt Service 429% 383% 427% 314% 323% Debt service coverage requirement is minimum 110%incl connection fees,100%w/o connection fees Sourcc: City of Encinitas Finance Department 117 CITY OF ENCINITAS Demographic and Economic Statistics Last Ten Fiscal Years %of San %Change Diego from Avg. City County Previous Median Household Unemployment Year Population Population Year Age Size Rate 2004 62,463 2% 1.9% 39.2 2.64 3.3% 2005 62,605 2% 0.2% 40.2 2.64 3.0% 2006 62,826 2% 0.4% 40.5 2.64 2.8% 2007 (53,259 2% 0.7% 41.0 2.65 3.2% 2008 63,864 2% 1.0% N/A N/A 4.2% 2009 64,145 2% 0.4% 41.7 2.69 6.9% 2010 65,171 2% 1.6% 41.6 145 N/A 2011 63,000 2% 0.0% 42.0 2.50 7.3% 20I2 65,000 2% -1.0% 42.2 2.45 9.2% 2013 65,171 2% 0.0% 41.5 2.50 5.5% N/A:Information not available Source: All information except unemployment-San Diego Association of Governments(SANDAG). Unemployment rate estimates are from California Employment Development Depattmcnt 118 CITY OF ENCINITA,S Taxable Sales by Business Type Last Seven Fiscal Years 2007 2008 2009 2010 2011 2012 2013 Autos and Transportation $ 1,388,222 $ 1,304,574 $ 1,138,428 $ 1,189,413 $ 1,330,270 $ 1,427,132 $ 1,446,737 Building and Construction 1,410,031 1,334,408 1,057,651 816,484 774,109 868,790 820,467 Business and Industry 537,220 580,488 520,656 461,247 537,840 518,699 560,723 Food and Drugs 1,01 1,095 1,039,216 979,585 931,937 945,542 995,511 1,003,491 Fuel and Service Stations 1,014,251 1,182,908 1,085,758 1,146,372 1,351,288 1,569,205 1,577,783 General Consumer Goods 3,224,175 3,042,340 2,949,625 2,836,989 2,818,809 3,117,547 3,165,746 Restaurants and Hotels 1,402,707 1,425,305 1,448,867 1,388,570 1,442,976 1,624,007 1,699,705 $ 9,987,701 $ 9,909,239 $ 9,180,770 $ 8,773,012 $ 9,200,834 $ 10,120,951 $ 10,274,652 Sonme: State of California Board of Equilization and the Hd]Company Note: Due to confidentiality issues,the names of the ten largest revenue payers are not available. The categories presented are intended to provide alternative information regarding the sources of the City's revenue. 119 CITY OF ENCINITAS Full-Time and Part-Time Employees by Function Last Five Fiscal Years Fiscal Ycars Function 2009 2010 2011 2012 2013 General government 45.45 43.00 44.25 44.55 44.75 Public safety 67.00 68.00 63.00 63.00 63.00 Public works 30.40 29.55 28.85 28.95 29,25 Engineering services 27.12 27.47 27.47 27.42 26.42 Parks and recreation 21.18 21.18 21.18 21.18 21.18 Planning and building 26.75 26.75 26.75 26.75 26.75 Water Operations 22.70 25.70 25.40 25.40 25.00 Total 240.60 241.65 236.90 237.15 236.35 The City of Encinitas has elected to show only five years of data for this schedule. Source: City of Encinitas 120 CITY OF ENCINITAS Operating Indicators by Function Last Five Fiscal Years Fiscal Years 2009 2010 2011 2012 2013 San Diego County Sheriffs Dept Criminal arrests 1,715 1,803 1,047 1,231 1,548 Traffic arrests 424 482 535 485 383 Traffic accidents 438 385 472 441 372 Traffic citations 11,974 11,714 12,024 11,349 11,381 Calls for service 19,764 21,216 20,602 20,150 20,559 Deputy initiated action 29,098 25,401 29,224 29,862 31,281 Fire: Number of emergency fire calls 113 106 96 124 102 Number of EMS/rescue 3,179 3,291 3,498 3,495 3,697 Other 1,645 1,475 1,520 1,737 1,932 Inspections 4,099 2,055 2,263 2,252 2,163 Engineering: Number of permits issued 325 301 397 392 269 Parks and recreation: Number of recreation class registrations 11,368 11,435 10,697 11,119 11,175 Number of facility rentals 491 459 377 749 421 Planning and building: Number of planning permits issued 97 181 177 202 207 Number of New Dwelling Units Issued 86 39 51 121 63 Environmental review 8 11 4 7 6 Appeals 12 1 3 3 5 Plan checks 906 805 882 948 990 Code enforcement complaints 1,973 1,667 1,645 1,270 1,199 Water: New connections 6 18 9 79 26 Average daily consumption(millions of gallons) 6.24 5.42 5.21 5.32 5.61 Sewer: New connections 14 26 14 44 50 Average daily sewage treatment(millions of gallons) 2.55 2.46 2.43 2.38 2.40 Notes: The City of Encinitas contracts with the County of San Diego Sheriffs Department to provide police protection. The City of Encinitas has elected to show only five years of data for this schedule. Source:City of Encinitas 121 CITY OF ENCINITAS Capital Asset Statistics by Function Last Five Fiscal Years Fiscal Years 2009 2010 2011 2012 2013 Police protection: Number of sub-Stations I 1 1 1 1 Fire: Fire stations 5 5 5 5 6 Public works: Streets(miles) 201 201 201 201 201 Engineering: Signalized intersections 65 63 63 63 63 Parks and recreation: Community and senior center 1 1 1 1 1 Developed parks 18 18 18 18 18 Undeveloped parks 4 4 4 4 4 Parkland acres 382 382 382 382 382 Habitat/open space acreage 87 87 87 87 87 Marine life refuge 1 1 1 1 1 Trails/streetseapes(miles) 35 41 41/10 41/10 41110 Lifeguard towers 7 7 7 7 7 Water: Water mains(miles) 166 166 168 168 168 Maximum daily capacity(millions of gallons) 15 15 15 15 15 *The City of Encinitas contracts with the County of San Diego Sheriffs Department to provide police protection. The City of Encinitas has elected to show only five years of data for this schedule. Sourec:City of Encinitas 122 Sale Dieguit0 Water Distract Summary of Operational Data The following tables are being presented as supplementary information based on requirements for bonds issued by SDWD for continuing bond disclosure certificate. 124 TABLE;1 SAN DIEGUITO WATER DISTRICT Schedule of Water Rates As of June 30,2013 Rate l�) Customer Class Residential Rate Tier Potable Recycled Single,-family residential 0-12 units $ 2.26 13-20 units 3.37 21-40 units 3.98 41+units 5.03 Multi-family residential(peer dwelling) 0-8 units 2.26 9-12 units 3.37 13-16 units 3.98 17+units 5.03 Agriculture 2.80 $ 2.38 Commercial 3.16 2.69 Government/Public 3.16 2,69 Landscaping 3.98 3.38 Construction 3.98 3.38 Source: San Dieguito Water District (1) Per Unit(one hundrod cubic feet or 748 gallons) TABLE2 SAN DIEGUITO WATER DISTRICT Iii-Monthly Meter Service Availability Charges(2) As of June 30,2013 Water Meter Servicu Infrastructure Fire Meter Service Availability Access Availability Meter Size Charge Charge Charge 518"&314" $ 33.53 $ 5.20 $ 1" 53.31 8.32 7.05 1-1/2" 102.78 15.60 13.14 2" 162.13 27.04 23.65 3" 300.64 49.92 61.38 4" 498.49 85.28 126.46 6" 993.13 156.00 360.01 8" 1,586.71 270.40 762.84 Nouree: San vreguito Water vistrict (2) San Dieguito charges a bi-monthly service availability charge,which covers the costs for the maintenance of meters,water lines,and storage facilities,to ensure that water is availahlc upon demand. This charge also covers customer service costs for meter reading and billing. The infrastructure:access charge is levied by the San Diego County Water Authority,and is collected from the customer by the District, 125 TABLE3 SAN DIEGUITO WATER DISTRICT Historic Potable Water System Revenues Last Ten Fiscal Years Meter Fiscal Potable Percent Availability Percent Year Water Sales ChangeI') Charges Change"' 2004 $ 5,762,184 8.0% $ 1,828,729 10.5% 2005 5,252,235 -8.8% 1,877,863 2.7% 2006 6,465,975 23.1% 2,061,454 9.8% 2007 7,579,205 17.2% 2,251,011 9.2% 2008 7,717,818 1.8% 2,404,547 6.8% 2009 7,525,927 -2.5% 2,453,075 2.0% 2010 7,146,854 -5.0% 2,501,264 2.0% 2011 8,205,876 14.8% 3,007,127 20.2% 2012 8,528,418 3.9% 3,196,605 6.3% 2013 9,236,462 8.3% 3,087,794 -3.4% Source: San Dieguito Water District (3) Due to the varying number of billing cycles in a fiscal year,changes year-over-year may not be exactly comparable. TABLE 4 SAN DIEGUITO WATER DISTRICT Historic Recycled Water System Revenues Last Ten Fiscal Years Meter Fiscal Recycled Percent Availability Percent Year Water Sales Change Charges Change 2004 $ 421,245 65.2% $ NIA 2005 387,607 -8.0% NIA 2006 454,145 17.2% NIA 2007 596,299 31.3% NIA 2008 600,401 0.7% NIA 2009 663,036 10.4% NIA 2010 537,654 -18.9% NIA 2011 523,397 -2.7% NIA 2012 422,925 -19.2% NIA 2013 400,244 -5.4% NIA Source: San Dieguito Water District (4) The District does not currently levy a meter availability charge for recycled customers. 126 TABLE 5 SAN DIEGUITO WATER DISTRICT Summary of Water Production by Source tsl Last fen Fiscal Years Potable Production Fiscal Local Imported Total Recycled Total Year Water Water Potable Water Production 2004 454 6,867 7,321 711 8,032 2005 1,705 5,602 7,307 595 7,902 2006 2,765 5,093 7,858 600 8,458 2007 2,706 5,692 8,398 708 9,106 2008 3,539 3,753 7,292 676 7,968 2009 3,869 3,369 7,237 694 7,931 2010 4,399 2,156 6,555 498 7,053 2011 4,434 1,901 6,335 511 6,846 2012 3,719 2,663 6,382 293 6,675 2013 4,200 2,395 6,595 309 6,904 Source: San Dieguito Water District (5) Water Production is defined as water either produced locally or purchased(expressed in acre-feet) TABLE 6 SAN DIEGUITO WATER DISTRICT Summary of Water Deliveries by Source I ast Ten Fiscal Years Fiscal Percent Percent Year Potable Increase Recycled{bJ Increase 2004 7,213 0.1% 711 66.5% 2005 6,719 -6.8% 595 -16.3% 2006 7,281 8.4% 600 0.8% 2007 7,592 4.3% 708 18.0% 2008 6,753 -11.1% 676 -4.5% 2009 6,463 -4.3% 694 2.7% 2010 5,649 -12.6% 498 -28.2% 2011 5,425 -4.0% 511 2.6% 2012 5,957 9.8% 293 -42.7% 2013 6,284 5.5% 309 5.5% Source: San Dieguito Water District (6) The comparison of recycled quantities starting in 20I2 was allected by a revised contract arrangment between the direct provider{SE]PA)and the Encinitas Ranch Goff Authority. * The differences between potable water production and deliveries represents water loss in the distribution system and/or water water pumped or used through the fire distribution system. 127 TABLE7 SAN DIEGUITO WATER DISTRICT Ten Largest Customers As of June 30,2013 Acre-Feet Percent of Customer Description Sold Water Sold City of Encinitas 113 1.8% Park PI ace Bluffs 78 1.2% Cardiff by the Sea Apartments 62 1.0% Scripps Memorial Hospital 58 0.9% Encinitas Ranch Community Association 44 0.7% Skyloft HOA 43 0.7% Cal West Enterprises 39 0.6% Seacrest Village 38 0.6% Foxpoint Farms 35 0.6% Leucadia Seabluff Village 29 0.5% Subtotal-Top 10 Customers 539 8.6% Total Acre-Feet Sold 6,284 Source: San Dieguiio WaterDistricl TABLE 8 SAN DIEGUITO WATER DISTRICT Total Service Connections by Category Last Ten Fiscal Years Fiscal Percent Percent Year Potable Increase Recycled Increase 2004 11,167 0.2% 44 12.8% 2005 11,268 09% 49 11.4% 2006 11,275 0.1% 55 12.2% 2007 11,338 0.6% 56 1.8%a 2008 11,364 0.2% 59 5.4% 2009 11,370 0.1% 68 15.3% 2010 11,388 0.2% 73 7.4% 2011 11,397 0.1% 72 -1.4% 2012 11,476 0.7% 74 2.8% 2013 11,502 0.2% 77 4.1% Source: Sari Dieguido Wader District (7) 1'hc decline of one connection in 2011 reflects the change in the contract arrangement with the Encinitas Ranch Golf Authority. 128 Cardiff Sanitary Division Summary of Operational Data The following;tables are being presented as supplementary information based on requirementsfor bonds issued to M for continuing bond disclosure certificate. 130 TABLE t CARDIFF SANITARY DI VISION Rate Schedule for Annual Sewer Charges As of June 30,2013 (lserslClass Sub Category Fixed Motor HCF Race Median Annual Median Charee New Connections(no Prior water Group I Residential Consumption history) Single Family SF $41.08 S 4.80 103.02 $ 535.58lunil Multi Family MF See below 4.80 $ 397.501unil Trailer Park TP Sec below 4.80 $ 397.501unil New Connections(no prior water Non-Residential consumption history) Commercial Group 11 See below Sec below $ 5.04 See below See below Commercial Group Ills See below See below 6.57 See below See below Commercial Group IV See below See below 9186 See below See below Multi Faluily*and Nan-Residential Fixed Meter Charge Meter Size Annual Charge Motor Size Aluual Charge 518" $ 41.08 1-112" $ 205.38 3r4" 61.61 2" 328.60 1" 102.69 3" 616.13 Multi Family=Fixed Meter Charge x 2 Water Consumption Periods To Re Used Residential-2 Lowest Periods of Water Consumption For Meter Readings Occurring 130ween Dec.-May(most recent available 5-year period) Nan-Residential(ComnlerciaD=Water Consumption Far Meter Readings Occurring Between July-June of Preceding Year Median Annual Median Usage Unit Cast HCF(New Charge(New Users1rims Sub Category (per11CF) Connections) Connections) Group 11 Commercial Snnwate,Service SW S 5.64 ------ Car Wash CW 5,04 1,520 E 7,66n.80 office Building OF 5.04 200 1,068.00 Fire Station FS 504 110 554.40 Prafessivasl Building(Doctor) PB 5.04 160 806.40 veterinary Clinic vC 5.04 ------- ------- Alhletic Gymnaziom C 5.04 1,340 6,753.60 Laundromat 1, 5.04 990 4,989.60 Deparhnent and Retail Store DRS Soo 120 604.80 Warchousc W 5.04 1,050 5,292.00 Hospital,Convaleecenl Hnme HCH 5.04 3,240 16,329.60 P�k� PB 5.04 510 2,570.40 Church-Mavbcrship Orgarazation C 5.04 440 2,2 t7.W Menrhers}iip Orgaozauon(Non-Church) MO 5.04 240 1,209.40 Social S-im, SS 5.04 160 806.40 Group 111 Commercial Hotels-Motels(withcul restaurant) HM fi.57 890 5,847-30 Repair and S-ioc Station RSS 6.57 70 459.90 Slwpping Cenler SC 6.57 1,D30 6.767.10 K-et R 6.57 90U 5,913.00 Coffee Shop CS 6S7 ------- ------- Am"scmcntPark AP 6.57 -°°-" ----"° NightdublBar NC 6.57 320 2.102.40 Commercial Laundry CL 6.57 ------- ----- Manufacluring ,Vi 6.57 180 1,182.60 Ltnaber Yard LY 6.57 Group IV Commercial 1,1.0,Motel(with restaurant) HM 936 3,130 30,861.80 Bakery(who2esaleyr'ond Processor SW 9-86 ------ ------- Supennarl,et SM 9.86 I,D30 10,155.00 Marmary MT 9.86 300 2,958 nu A�snwant R 9.86 60n 5,916.00 (1)Sewer rates are based on water consumption(fined charge based on meter size and consumption component), The consumption is based on HCF(hundred cubic feet-748 gallons). 131 TABLE 2 CARDIFF SANITARY DIVISION Historical Service Charges Billed Last Five Years Residential Commercial Commercial Single Family Fiscal Year (Tax Roll) (Tax Roll) (Manual) Total Billed Average 2009 $ 4,092,138 $ 753,503 $ 127,030 3 4,972,671 $ 682 2010 4,034,670 703,126 128,223 4,866,019 674 2011 3,984,339 628,165 127,210 4,739,715 664 2012 4,058,990 645,560 123,822 4,828,372 676 20I3 3,935,414 666,099 126,677 4,728,190 652 Cardiff Sanitary Division bills most customers through the San Diego County property tax billing service. Delinquency rates have been between 1.8%-3.0%during the period presented. Delinquencies do not apply to direct billings. 132 TABLE 3 CARDIFF SANITARY DIVISION Ten Largest Customers Fiscal Year 2012-2013 Parcel Sewer Service Percentage of Property Owner Count Chargcs Sewer Charges Scripps Health 1 $ 123,693 2.62% Collwood Pines Apartments L.P. 3 73,003 1.54% State of California Parks&Recreation 2 50,160 1.06% San Dieguito Union High Schoul District 2 45,704 0.97% Anlencia Investment Group LLC 1 44,484 0.94% 944 Regal Road LLC 1 38,116 0.81% Georges Restaurant 1 32,784 0.69% Cardiff Town Center LLC 1 26,341 0.56% West Village Inc. 1 25,085 0.53% Newport Taft Inc. l 21,793 0.46% 14 481,162 10.18% Total Billed $ 4,728,190 Source: CnrdiffSanitaryDivision TABLE 4 CARDIFF SANITARY DIVISION Historical Service Connections Fiscal Year 2012-2013 Residential Equivalent Commercial Total Connections Dwelling Industrial Total Year (Billed Parecls) Units(EDUs) EDU's EDU's 2009 6,312 6,990 1,124 8,114 20I0 6,317 7,011 1,124 8,135 2011 6,329 7,033 1,124 8,157 2012 6,334 7,067 1,154 8,221 2013 6,365 7,083 1,174 8,257 Source: Cardiff Sanitary Division 133 APPENDIX C SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS DEFINITIONS "Authority" means the Encinitas Public Financing Authority, a joint powers authority duly organized and existing under the laws of the State. "Authorized Representative" means: (a) with respect to the Authority, its Chairperson, Vice Chairperson, Executive Director, Treasurer or Secretary or any other person designated as an Authorized Representative of the Authority by a Written Certificate of the Authority signed by its Chairperson or Vice Chairperson, Executive Director or Treasurer and filed with the City and the Trustee; and (b) with respect to the City, its Mayor,Vice-Mayor, City Manager, City Clerk, Finance Director, Finance Manager, or any other person designated as an Authorized Representative of the City by a Written Certificate of the City signed by its Mayor, Vice-Mayor, City Manager, Finance Director or Finance Manager, and filed with the Authority and the Trustee. "Bond Counsel" means (a) Best Best& Krieger LLP, or (b) any other attorney or firm of attorneys appointed by or acceptable to the Authority of nationally-recognized experience in the issuance of obligations the interest on which is excludable from gross income for federal income tax purposes under the Tax Code. "Bond Fund" means the fund by that name established and held by the Trustee pursuant to the Indenture. "Bond Law" means the Marks-Roos Local Bond Pooling Act of 1985, constituting Article 4 (commencing with Section 6584) of Chapter 5 of Division 7 of Title 1 of the Government Code of the State, as in existence on the Closing Date or as thereafter amended from time to time. "Bond Year" means each twelve-month period extending from September 2 in one calendar year to October 1 of the succeeding calendar year, both dates inclusive; except that the first Bond Year shall commence on the Closing Date and extend to and including October 1, 2015. "Bonds" means the $3,095,000 aggregate principal amount of Encinitas Public Financing Authority Lease Revenue Bonds, 2014 Series A (Tax-Exempt) (Pacific View Property and Moonlight Beach Lifeguard Tower) and the $10,365,000 aggregate principal amount of Encinitas Public Financing Authority Lease Revenue Bonds, 2014 Series B (Taxable) (Pacific View Property and Moonlight Beach Lifeguard Tower), authorized by and at any time Outstanding pursuant to this Indenture. "Book-Entry Depository" means DTC or any successor as Book-Entry Depository for the Bonds, appointed pursuant to the Indenture. "Business Day" means a day (other than a Saturday or a Sunday) on which banks are not required or authorized to remain closed in the city in which the Office of the Trustee is located. "City"means the City of Encinitas, a municipal corporation organized under the laws of the State. "Closing Date" means November 18, 2014, being the date of delivery of the Bonds to the Original Purchaser. "Costs of Issuance"means all expenses incurred in connection with the authorization, issuance, sale and delivery of the Bonds and the application of the proceeds of the Bonds, including but not limited to all compensation, fees and expenses (including but not limited to fees and expenses for legal counsel) of the Authority, initial fees and expenses of the Trustee and its counsel, title insurance premiums, appraisal fees, compensation to any financial consultants or underwriters, legal fees and expenses, filing and recording costs, rating agency fees, costs of preparation and reproduction of documents and costs of printing. C-1 "Costs of Issuance Fund" means the fund by that name established and held by the Trustee pursuant to the Indenture. "Debt Service" means, during any period of computation, the amount obtained for such period by totaling the following amounts: (a) the principal amount of all Outstanding Serial Bonds coming due and payable by their terms in such period; (b) the minimum principal amount of all Outstanding Term Bonds scheduled to be redeemed by operation of mandatory sinking fund deposits in such period; and (c) the interest which would be due during such period on the aggregate principal amount of Bonds which would be Outstanding in such period if the Bonds are retired as scheduled, but deducting and excluding from such aggregate amount the amount of Bonds no longer Outstanding. "DTC"means The Depository Trust Company,New York,New York, and its successors and assigns. "Event of Default"means any of the events specified in the Indenture. "Fair Market Value" means, with respect to any investment, the price at which a willing buyer would purchase such investment from a willing seller in a bona fide, arm's length transaction (determined as of the date the contract to purchase or sell the investment becomes binding) if the investment is traded on an established securities market (within the meaning of Section 1273 of the Tax Code) and, otherwise, the term "Fair Market Value"means the acquisition price in a bona fide arm's length transaction (as referenced above) if (i) the investment is a certificate of deposit that is acquired in accordance with applicable regulations under the Tax Code, (ii) the investment is an agreement with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate (for example, a guaranteed investment contract, a forward supply contract or other investment agreement)that is acquired in accordance with applicable regulations under the Tax Code, or (iii) the investment is a United States Treasury Security - State and Local Government Series that is acquired in accordance with applicable regulations of the United States Bureau of Public Debt. "Federal Securities"means: (a) any direct general obligations of the United States of America (including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America), the payment of principal of and interest on which are unconditionally and fully guaranteed by the United States of America; (b) any obligations the principal of and interest on which are unconditionally guaranteed by the United States of America; and (c) pre-refunded municipal obligations defined as follows: Any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice: and (i)which are rated, based on the escrow, in the highest rating category of S&P and Moody's or any successors thereto; or(ii)(A)which are fully secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or obligations described in paragraphs (a) or (b) above, which fund may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (B)which fund is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable instructions referred to above, as appropriate. "Fiscal Year"means any twelve-month period extending from July 1 in one calendar year to June 30 of the succeeding calendar year, both dates inclusive, or any other twelve-month period selected and designated by the Authority as its official fiscal year period. C-2 "Indenture" means the Indenture of Trust, as originally executed or as it may from time to time be supplemented,modified or amended by any Supplemental Indenture pursuant to the provisions hereof. "Independent Accountant"means any certified public accountant or firm of certified public accountants appointed and paid by the Authority or the City, and who, or each of whom (a) is in fact independent and not under domination of the Authority or the City; (b) does not have any substantial interest, direct or indirect, in the Authority or the City; and (c) is not connected with the Authority or the City as an officer or employee of the Authority or the City but who may be regularly retained to make annual or other audits of the books of or reports to the Authority or the City. "Information Services" means in accordance with then-current guidelines of the Securities and Exchange Commission, the Electronic Municipal Market Access System (referred to as "EMMA"), a facility of the Municipal Securities Rulemaking Board (at http://emma.msrb.org), or such service or services as the Authority may designate in a certificate delivered to the Trustee. "Insurance and Condemnation Fund" means the fund by that name established and held by the Trustee pursuant to the Indenture. "Interest Account" means the account by that name established in the Bond Fund pursuant to the Indenture. "Interest Payment Date"means each April 1 and October 1 commencing April 1, 2015. "Lease Agreement" means that certain Lease Agreement, dated as of November 1, 2014, by and between the Authority, as lessor and the City, as lessee. "Mood"means Moody's Investors Service, its successors and assigns. "Net Proceeds"means all amounts derived from any policy of casualty insurance or title insurance with respect to the Leased Premises, or the proceeds of any taking of the Leased Premises or any portion thereof in eminent domain proceedings (including sale under threat of such proceedings), to the extent remaining after payment therefrom of all expenses incurred in the collection and administration thereof. "Office" means with respect to the Trustee,the corporate trust office of the Trustee at 120 S. San Pedro Street, Suite 400, Los Angeles, CA 90012, Attention: Corporate Trust Department, or at such other or additional offices as may be specified in writing to the Authority and the City, except that with respect to presentation of Bonds for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted. "Original Purchaser"means Stifel,Nicolaus & Company, Incorporated, as the original purchasers of the Bonds upon their delivery by the Trustee on the Closing Date. "Outstanding," when used as of any particular time with reference to Bonds, means (subject to the provisions of the Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except: (a) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (b) Bonds with respect to which all liability of the Authority shall have been discharged in accordance with the Indenture, including Bonds (or portions thereof); and (c) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture. "Owner,"whenever used herein with respect to a Bond, means the person in whose name the ownership of such Bond is registered on the Registration Books. "Permitted Investments" means any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein: C-3 I. Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America. 2. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): a. Farmers Home Administration (FmHA) Certificates of beneficial ownership b. Federal Housing Administration Debentures (FHA) C. General Services Administration Participation certificates d. Government National Mortgage Association (GNMA or"Ginnie Mae") GNMA- guaranteed mortgage-backed bonds GHMA- guaranteed pass-through obligations (participation certificates) (not acceptable for certain cash-flow sensitive issues.) e. U.S. Maritime Administration Guaranteed Title XI financing f. U.S. Department of Housing and Urban Development(HUD) Proj ect Notes Local Authority Bonds 3. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself): a. Federal Home Loan Bank System Senior debt obligations (Consolidated debt obligations) b. Federal Home Loan Mortgage Corporation (FHLMC or"Freddie Mae") Participation Certificates (Mortgage-backed securities) Senior debt obligations C. Federal National Mortgage Association (FNMA or "Fannie Mae") Mortgage- backed securities and senior debt obligations (excluded are stripped mortgage securities which are valued greater than par on the portion of unpaid principal). d. Student Loan Marketing Association (SLMA or"Sallie Mae") Senior debt obligations e. Resolution Funding Corp. (REFCORP) Only the interest component of REFCORP strips which have been stripped by request to the Federal Reserve Bank of New York in book entry form are acceptable. C-4 f. Farm Credit System Consolidated systemwide bonds and notes 4. Money market funds registered under the Federal Investment Company of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of AAAm- G; AAAm, or AA-m and if rated by Moody's rated Aaa, Aal or Aa2, including funds for which the Trustee, its parent holding company, if any, or any affiliates or subsidiaries of the Trustee provided investment advisory or other management services. 5. Certificates of deposit secured at all times by collateral described in (1) and/or (2) above. CD's must have a one year or less maturity. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks whose term obligations are rated "A-1" or better by S&P and"Prime-1" by Moody's which may include the Trustee and its affiliates. The collateral must be held by a third party and the bondholders must have a perfected first security interest in the collateral. 6. Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, or fully secured at all times by collateral described in (1) and/or (2) above. 7. Investment agreements with a domestic or foreign bank or corporation, the long-term debt or financial strength of which, or, in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guarantee insurance company, financial strength, of the guarantor is rated in at least the "double A" category by Moody's and S&P, and by the terms of the investment agreement: a. interest payments are to be made to the Trustee at all times and in the amounts as necessary to pay debt service (or, if the investment agreement is for the construction fund, construction draws) on the Bonds; b. the invested funds are available for withdrawal without penalty or premium, at any time upon not more than seven days' prior notice; the Issuer and the Trustee hereby agree to give or cause to be given notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid; C. the investment agreement shall state that it is the unconditional and general obligation of, and is not subordinated to any other obligation of, the provider thereof or, if the provider is a bank, the agreement or the opinion of counsel shall state that the obligation of the provider to make payments thereunder ranks pari passu with the obligations of the provider to its other depositors and its other unsecured and unsubordinated creditors; d. the Issuer or the Trustee receives the opinion of domestic counsel (which opinion shall be addressed to the Issuer and Trustee) that such investment agreement is legal, valid, binding and unenforceable upon the provider in accordance with its terms and of foreign counsel (if applicable) in a form and substance acceptable by the Issuer; e. the investment agreement shall provide that if during its term i) the provider's rating by either S&P or Moody's falls below "AA-" or "Aa3", respectively, the provider shall, at its option, within 10 days of receipt of publication of such downgrade, either (a) collateralize the investment agreement by C-5 delivering or transferring in accordance with the applicable state and federal laws (other than by means of entries on the provider's books) to the Issuer, the Trustee or a third party acting solely as agent therefor (the "Holder of the Collateral") collateral free and clear of any third party liens or claims the market value of which collateral is maintained at levels and upon such conditions as would be acceptable to S&P and Moody's to maintain an "A" rating in an "A" rated structured financing (with a market value approach); or (b) repay the principal of and accrued but unpaid interest on the investment (including such other amounts as are required to permit the Trustee to receive the initially contemplated yield through the term of the Agreement), or (c) assign its obligations thereunder to a financial counter-party, acceptable to the Issuer, and rated in the double A category by both Moody's and S&P; and ii) the provider's rating by either S&P or Moody's is withdrawn or suspended or falls below "A" or "A3", respectively, the provider must, at the direction of the Issuer or the Trustee (who shall give such direction if so directed by the Issuer), within 10 days of receipt of such direction, repay the principal of and accrued but unpaid interest on the investment, in either case with no penalty or premium to the Issuer or Trustee. f. the investment agreement shall state and an opinion of counsel shall be rendered, in the event collateral is required to be pledged by the provider under the terms of the investment agreement, at the time such collateral is delivered, that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof(in the case of bearer securities, this means the Holder of the Collateral is in possession); or g. the investment agreement must provide that if during its term i) the provider shall default in its payment obligations, the provider's obligation under the investment agreement shall, at the direction of the Issuer or the Trustee (who shall give such direction if so directed by the Issuer), be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the Issuer or Trustee, as appropriate; and ii) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. ("event of insolvency"), the provider's obligations shall automatically be accelerated and the amounts invested and accrued but unpaid interest thereon shall be repaid to the Issuer or Trustee, as appropriate. 8. Commercial paper rated at the time of purchase "Prime-1" by Moody's and "A-l" or better by S&P. 9. Bonds or notes issued by any state or municipality which are rated by Moody's and S&P in the highest long-term rating categories assigned by such agencies unless such obligations are issued by the State, in which case such obligations are rated in one of the two highest long-term rating categories of S&P and Moody's. 10. Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of"Prime-1" or "A3" or better by Moody's and"A-1", "A-" or better by S&P. C-6 11. Repurchase agreements with financial institutions insured by the FDIC or FSLIC; or any broker-dealer with "retail customers" which falls under the jurisdiction of the Securities Investors Protection Corporation (SIPC); or a bank or other financial institution rated in the top two rating categories by two or more rating agencies; provided that: (a) the over-collateralization is at one hundred and two percent (102%) computed weekly, consisting of such securities as described in this section, item (1) through (4); (b) a third party custodian, the Trustee or the Federal Reserve Bank shall have possession of such obligations; (c)the Trustee shall have perfected a first priority security interest in such obligations; and (d) failure to maintain the requisite collateral percentage will require the Trustee to liquidate the collateral. 12. Pre-refunded municipal bonds rated "Aaa" by Moody's and "AAA" by S&P. If, however, the issue is only rated by S&P (i.e., there is no Moody's rating), then the pre-refunded bonds must have been pre-refunded with cash, direct U.S. or U.S. guaranteed obligations, or AAA rated pre- refunded municipals to satisfy this condition. 13. State of California Local Agency Investment Fund (LAIF). "Principal Account" means the account by that name established in the Bond Fund pursuant to the Indenture. "Project" means the public capital improvements described in the Indenture as such description may be amended from time to time. "Project Costs" means all costs of payment of, or reimbursement for, acquisition, construction and financing of the Project, including but not limited to, architect and engineering fees, construction contractor payments, costs of feasibility and other reports, inspection costs, permit fees, filing and recording costs, printing costs, reproduction and binding costs, fees and charges of the Trustee, legal fees and charges, financial and other professional consultant fees in connection with the foregoing. "Record Date"means,with respect to any Interest Payment Date,the fifteenth(15th) calendar day of the month preceding such Interest Payment Date whether or not such day is a Business Day. "Redemption Fund"means the fund by that name established pursuant to the Indenture. "Registration Books" means the records maintained by the Trustee pursuant to the Indenture for the registration and transfer of ownership of the Bonds. "Representation Letter"means the letter of representations from the Authority to, or other instrument or agreement of the Authority with, a Book-Entry Depository in which the Authority, among other things, makes certain representations to such Depository with respect to the Bonds,the payment thereof and delivery of notices with respect thereto. "Revenues"means: (a) all amounts received by the Authority or the Trustee pursuant to or with respect to the Lease Agreement, including, without limiting the generality of the foregoing, all of the Additional Lease Payments (including both timely and delinquent payments, any late charges, and whether paid from any source), but excluding any amounts payable under the Lease Agreement; and (b) all interest, profits or other income derived from the investment of amounts in any fund or account established pursuant to the Indenture. "S&P" means Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business, its successors and assigns. "Securities Depositories" means The Depository Trust Company, 55 Water Street, 50'h Floor, New York, NY 10041-0099, Attention: Call Notification Department, Fax (212) 855-7232; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other C-7 securities depositories as the Authority may designate in a Written Certificate of the Authority delivered to the Trustee. "Serial Bonds"* means the Series A Bonds maturing on October 1 in each of the years 2015 through 2029, inclusive and the Series B Bonds maturing on October 1 in each of the years 2015 through 2024, inclusive. "Series A Bonds" means the $3,095,000 aggregate principal amount of Encinitas Public Financing Authority 2014 Lease Revenue Bonds, Series A (Tax-Exempt). "Series B Bonds" means the $10,365,000 aggregate principal amount of Encinitas Public Financing Authority 2014 Lease Revenue Bonds, Series B (Taxable). "Sinking Account" means the account by that name established and held by the Trustee pursuant to the Indenture. "State"means the State of California. "Supplemental Indenture" means any indenture hereafter duly authorized and entered into between the Authority and the Trustee, supplementing, modifying or amending the Indenture; but only if and to the extent that such Supplemental Indenture is specifically authorized under the Indenture. "Tax Code"means the Internal Revenue Code of 1986, as amended. "Tax Regulations" means temporary and permanent regulations promulgated under or with respect to Sections 103 and 141 through 150, inclusive, of the Tax Code. "Term Bonds"* means the Series A Bonds maturing October 1, 2034, October 1, 2039 and October 1, 2044 and the Series B Bonds maturing October 1, 2029, October 1, 2034, October 1, 2039 and October 1,2044. "Trustee"means MUFG Union Bank,N.A., a national banking association organized and existing under the laws of the United States of America, or its successor, as Trustee hereunder as provided in the Indenture. "Undertaking to Provide Continuing Disclosure" means, as applicable, that certain Certificate of the Authority or the City, as applicable,by that name and dated as of the Closing Date and referred to, in the case of the Authority, in the Indenture, and in the case of the City,in the Lease Agreement. "Written Certificate," "Written Request" and "Written Requisition" of the Authority or the City mean, respectively, a written certificate, request or requisition signed in the name of the Authority or the City by its Authorized Representative. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. COSTS OF ISSUANCE AND PROJECT FUND Establishment and Application of Costs of Issuance Fund. The Trustee shall establish, maintain and hold in trust a separate fund designated as the "Costs of Issuance Fund." The moneys in the Costs of Issuance Fund shall be used and withdrawn by the Trustee to pay the Costs of Issuance upon submission of Written Requisitions of the Authority to the Trustee stating the person to whom payment is to be made,the amount to be paid, the purpose for which the obligation was incurred and that such payment is a proper charge against said fund. Each such Written Request of the Authority shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have no duty to confirm the accuracy of such facts. On May 1, 2015, or upon the earlier Written Request of the Authority, all amounts remaining in the Costs of Issuance Fund shall be transferred by the Trustee to the Acquisition and Construction Fund. Acquisition and Construction Fund. The Trustee shall establish, maintain and hold in trust a separate fund to be known as the "Acquisition and Construction Fund" and within such Fund there shall be established C-8 the "Series A Account" and the "Series B Account." Except as otherwise provided herein, moneys in the Acquisition and Construction Fund shall be used solely for the acquisition and construction by the Authority of a portion of the Project. The Trustee shall disburse moneys in the Acquisition and Construction Fund from time to time to pay Project Costs (or to reimburse the Authority or the City, for payment of Project Costs as specified in the Agency Agreement) upon receipt by the Trustee of a Written Requisition of the Authority or the City which: (a) states with respect to each disbursement to be made (i) the requisition number, (ii) the name and address of the person, firm or corporation to whom payment will be made, (iii)the amount to be disbursed, (iv) that each obligation mentioned therein is a proper charge against the Acquisition and Construction Fund and has not previously been disbursed by the Trustee from amounts in the Acquisition and Construction Fund, (v) that all conditions precedent set forth in the Lease Agreement with respect to such disbursement have been satisfied, and (vi) that the amount of such disbursement is for a Project Cost and (b) specifies in reasonable detail the nature of the obligation, in the form set forth in the Indenture. Each such Written Request of the Authority shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have no duty to confirm the accuracy of such facts. Upon the filing with the Trustee of a Written Certificate of the Authority stating that the Project has been completed or that all Written Requisitions intended to be filed by the Authority have been filed, the Trustee shall withdraw all amounts then on deposit in the Acquisition and Construction Fund and transfer such amounts to the Bond Fund. Any funds deposited into the Bond Fund shall cause a corresponding proportionate credit to Lease Payments due from the City. Notwithstanding the foregoing provisions of the Indenture, upon the occurrence and continuation of an Event of Default, the Trustee shall immediately withdraw all amounts then on deposit in the Acquisition and Construction Fund and apply such amounts in accordance with the provisions of the Indenture. REVENUES; FUNDS AND ACCOUNTS; PAYMENT OF PRINCIPAL AND INTEREST Pledge and Assignment;Bond Fund. (a) Subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth herein, all of the Revenues and any other amounts (including proceeds of the sale of the Bonds) held in any fund or account established pursuant to the Indenture are hereby pledged to secure the payment of the principal of and interest on the Bonds in accordance with their terms and the provisions of the Indenture. Said pledge shall constitute a lien on and security interest in such assets and shall attach, be perfected and be valid and binding from and after the Closing Date, without any physical delivery thereof or further act. (b) The Authority transfers in trust, grants a security interest in and assigns to the Trustee, for the benefit of the Owners from time to time of the Bonds, all of the Revenues and all of the rights of the Authority in the Lease Agreement. The Trustee shall be entitled to and, subject to Article VIII of the Indenture, shall collect and receive all of the Revenues, and any Revenues collected or received by the Authority shall be deemed to be held, and to have been collected or received, by the Authority as the agent of the Trustee and shall forthwith be paid by the Authority to the Trustee. The Trustee also shall be entitled to and shall, subject to the provisions of the Indenture, take all steps, actions and proceedings which the Trustee determines to be reasonably necessary in its judgment to enforce, either jointly with the Authority or separately, all of the rights of the Authority and all of the obligations of the City under the Lease Agreement. (c) Subject to the Indenture, all Revenues shall be promptly deposited by the Trustee upon receipt thereof in a special fund designated as the "Bond Fund"which the Trustee shall establish, maintain and hold in trust; except that all moneys received by the Trustee and required under the Indenture or under the Lease Agreement to be deposited in the Redemption Fund or the Insurance and Condemnation Fund shall be promptly deposited in such Funds. All Revenues deposited with the Trustee shall be held, disbursed, allocated and applied by the Trustee only as provided in the Indenture. Allocation of Revenues. On or before each date on which principal of or interest on the Bonds becomes due and payable, the Trustee shall transfer from the Bond Fund and deposit into the following respective accounts (each of which the Trustee shall establish and maintain within the Bond Fund), the following amounts C-9 in the following order of priority, the requirements of each such account (including the making up of any deficiencies in any such account resulting from lack of Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any transfer is made to any account subsequent in priority: (a) The Trustee shall deposit in the Interest Account an amount required to cause the aggregate amount on deposit in the Interest Account to be at least equal to the amount of interest becoming due and payable on such date on all Bonds then Outstanding. (b) The Trustee shall deposit in the Principal Account an amount required to cause the aggregate amount on deposit in the Principal Account to equal the principal amount of the Bonds coming due and payable on such date. (c) The Trustee shall deposit in the Sinking Account an amount equal to the aggregate principal amount of the Term Bonds required to be redeemed on such date, if any, pursuant to the Indenture. Application of Interest Account. All amounts in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying interest on the Bonds as it shall become due and payable (including accrued interest on any Bonds purchased or redeemed prior to maturity pursuant to the Indenture). Application of Principal Account. All amounts in the Principal Account shall be used and withdrawn by the Trustee solely to pay the principal amount of the Bonds at their respective maturity dates. Application of Sinking Account. All moneys on deposit in the Sinking Account shall be used and withdrawn by the Trustee for the sole purpose of redeeming or purchasing (in lieu of redemption) Term Bonds pursuant to the Indenture. Application of Redemption Fund. When required the Trustee shall establish and maintain the Redemption Fund, amounts in which shall be used and withdrawn by the Trustee solely for the purpose of paying the principal of on the Bonds to be redeemed pursuant to the Indenture; provided, however, that at any time prior to giving notice of redemption of any such Bonds, the Trustee may apply such amounts to the purchase of Bonds at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as shall be directed pursuant to a Written Request of the Authority received prior to the selection of Bonds for redemption, except that the purchase price (exclusive of accrued interest) may not exceed the redemption price then applicable to the Bonds. Insurance and Condemnation Fund. (a) Establishment of Fund. Upon the receipt of any proceeds of insurance or eminent domain with respect to any portion of the Leased Premises, the Trustee shall establish and maintain a separate Insurance and Condemnation Fund,to be held and applied as hereinafter set forth in the Indenture. (b) Application of Insurance Proceeds. Any proceeds of insurance against accident to or destruction of the Leased Premises collected by the City in the event of any such accident or destruction shall be applied in accordance with the Lease Agreement. The City shall cause any such proceeds to be paid to the Trustee for deposit in the Insurance and Condemnation Fund. If the City fails to determine and notify the Trustee in writing of its determination, within forty-five (45) days following the date of such deposit,to replace, repair, restore, modify or improve the Leased Premises,then such proceeds shall be promptly transferred by the Trustee to the Redemption Fund and applied to the redemption of Bonds pursuant to the Indenture; provided, however, that such redemption will occur only if the fair rental value of the remaining portion of the Leased Premises is sufficient to allow the City to continue to make Lease Payments in amounts sufficient to pay debt service on the Bonds that remain Outstanding after such redemption. Notwithstanding the foregoing sentence, however, in the event of damage or destruction of the Leased Premises in full, the proceeds of such insurance shall be used by the City to rebuild or replace the Leased Premises if such proceeds are not sufficient, together C-10 with other available funds then held by the Trustee, to redeem all of the Outstanding Bonds. All proceeds deposited in the Insurance and Condemnation Fund and not so transferred to the Redemption Fund shall be applied to the prompt replacement, repair, restoration, modification or improvement of the damaged or destroyed portions of the Facilities by the City, upon receipt of Written Requisitions of the City as agent for the Authority (i) stating with respect to each payment to be made (A) the requisition number, (B) the name and address of the person to whom payment is due, (C) the amount to be paid and (D) that each obligation mentioned therein has been properly incurred, is a proper charge against the Insurance and Condemnation Fund, has not been the basis of any previous withdrawal; (ii) specifying in reasonable detail the nature of the obligation; and (iii) accompanied by a bill or a statement of account for such obligation. Each such Written Request of the Authority shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have no duty to confirm the accuracy of such facts. Any balance of the proceeds remaining after such work has been completed as certified by the City as agent for the Authority shall be paid to the City. (c) Application of Eminent Domain Proceeds. If all or any part of the Leased Premises shall be taken by eminent domain proceedings (or sold to a government threatening to exercise the power of eminent domain) the proceeds shall be applied in accordance with the Lease Agreement. The City shall cause any such proceeds to be paid to the Trustee for deposit in the Insurance and Condemnation Fund, to be applied and disbursed by the Trustee as follows: (i) If the City has not given written notice to the Trustee, within forty-five (45) days following the date on which such proceeds are deposited with the Trustee, of its determination that such proceeds are needed for the replacement of the Leased Premises or such portion thereof, the Trustee shall transfer such proceeds to the Redemption Fund to be applied towards the redemption of the Bonds pursuant to the Indenture. (ii) If the City has given written notice to the Trustee, within forty-five (45) days following the date on which such proceeds are deposited with the Trustee, of its determination that such proceeds are needed for replacement of the Leased Premises or such portion thereof, the Trustee shall pay to the City, or to its order, from said proceeds such amounts as the City may expend for such replacement, upon the filing of Written Requisitions of the City as agent for the Authority in the form and containing the provisions set forth in the Indenture and upon which the Trustee may conclusively rely. Investments. All moneys in any of the funds or accounts established with the Trustee pursuant to the Indenture shall be invested by the Trustee solely in Permitted Investments. Such investments shall be directed by the Authority pursuant to a Written Request of the Authority filed with the Trustee at least two (2) Business Days in advance of the making of such investments (which Written Request shall certify that the investments constitute Permitted Investments). In the absence of any such directions from the Authority, the Trustee shall invest any such moneys in Permitted Investments described in clause (4) of the definition thereof. Permitted Investments purchased as an investment of moneys in any fund shall be deemed to be part of such fund or account. All interest or gain derived from the investment of amounts in any of the funds or accounts established hereunder shall be deposited in the Bond Fund. For purposes of acquiring any investments hereunder, the Trustee may commingle funds held by it hereunder. The Trustee, or an affiliate,may act as principal or agent in the acquisition or disposition of any investment and may impose its customary charges therefor. The Trustee shall incur no liability for losses arising from any investments made pursuant to the Indenture. Permitted Investments that are registered securities shall be registered in the name of the Trustee. The Authority covenants that all investments of amounts deposited in any fund or account created by or pursuant to the Indenture, or otherwise containing proceeds of the Bonds, shall be acquired and disposed of at the Fair Market Value thereof. The Trustee shall furnish the Authority with periodic cash transaction statements which include detail for all investment transactions effected by the Trustee or brokers selected by the Authority. Upon the Authority's election, such statements will be delivered via the Trustee's online service and upon electing such C-11 service, paper statements will be provided only upon request. The Authority waives the right to receive brokerage confirmations of security transactions effected by the Trustee as they occur,to the extent permitted by law. The Authority further understands that trade confirmations for securities transactions effected by the Trustee will be available upon request and at no additional cost and other trade confirmations may be obtained from the applicable broker. Valuation and Disposition of Investments. For the purpose of determining the amount in any fund or account, all Permitted Investments credited to such fund or account shall be valued at the Fair Market Value thereof, provided,however,that investments in funds or accounts (or portions thereof)that are subject to a yield restriction under applicable provisions of the Tax Code shall be valued at their present value (within the meaning of Section 148 of the Tax Code), consisting generally of the cost thereof. The Trustee shall have no duty in connection with the determination of Fair Market Value other than to follow the (i) investment directions of the Authority and (ii) its normal practices in the purchase, sale and determining the value of Permitted Investments. PARTICULAR COVENANTS Punctual Payment. The Authority shall punctually pay or cause to be paid the principal of and interest and premium (if any) on all the Bonds in strict conformity with the terms of the Bonds and of the Indenture, according to the true intent and meaning thereof, but only out of Revenues and other assets pledged for such payment as provided in the Indenture. Extension of Payment of Bonds. The Authority shall not directly or indirectly extend or assent to the extension of the maturity of any of the Bonds or the time of payment of any claims for interest by the purchase of such Bonds or by any other arrangement, and in case the maturity of any of the Bonds or the time of payment of any such claims for interest shall be extended, such Bonds or claims for interest shall not be entitled, in case of any default hereunder, to the benefits of the Indenture, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest thereon which shall not have been so extended. Nothing in the Indenture shall be deemed to limit the right of the Authority to issue Bonds for the purpose of refunding any Outstanding Bonds, and such issuance shall not be deemed to constitute an extension of maturity of the Bonds. Against Encumbrances. The Authority shall not create, or permit the creation of, any pledge, lien, charge or other encumbrance upon the Revenues and other assets pledged or assigned under the Indenture while any of the Bonds are Outstanding, except the pledge and assignment created by the Indenture. Subject to this limitation, the Authority expressly reserves the right to enter into one or more other indentures for any of its corporate purposes, and reserves the right to issue other obligations for such purposes. Power to Issue Bonds and Make Pledge and Assignment. The Authority is duly authorized pursuant to law to issue the Bonds and to enter into the Indenture and to pledge and assign the Revenues and other assets purported to be pledged and assigned, respectively, under the Indenture in the manner and to the extent provided in the Indenture. The Bonds and the provisions of the Indenture are and will be the legal, valid and binding special obligations of the Authority in accordance with their terms, and the Authority and the Trustee shall at all times, subject to the provisions of Article VIII and to the extent permitted by law, defend, preserve and protect said pledge and assignment of Revenues and other assets and all the rights of the Bond Owners under the Indenture against all claims and demands of all persons whomsoever. Accounting Records and Financial Statements. The Trustee shall at all times keep, or cause to be kept, proper books of record and account, prepared in accordance with corporate trust industry standards, in which complete and accurate entries shall be made of all transactions made by it relating to the proceeds of Bonds, the Revenues, the Lease Agreement and all funds and accounts established pursuant to the Indenture. Such books of record and account shall be available for inspection by the Authority and the City, during business hours and under reasonable circumstances. The Trustee shall deliver a monthly account of the funds and accounts to the Authority in accordance with the Indenture, provided that the Trustee shall not be obligated to deliver any C-12 accounting of any fund or account that (a)has a balance of zero and (b)has not had any activity since the last reporting date. Additional Obligations. The Authority may issue additional bonds, notes or other indebtedness shall be issued or incurred which are payable out of the Revenues in whole or in part pursuant to the Indenture, for the purpose of financing any construction of any building for any other municipal purpose, so long as no Event of Default hereunder has occurred and is continuing and provided that the conditions of the Lease Agreement have been satisfied. Tax Covenants. (a) Private Activity Bond Limitation. The Authority shall assure that the proceeds of the Series A Bonds are not so used as to cause the Series A Bonds to satisfy the private business tests of Section 141(b)of the Tax Code or the private loan financing test of Section 141(c) of the Tax Code. (b) Federal Guarantee Prohibition. The Authority shall not take any action or permit or suffer any action to be taken if the result of the same would be to cause any of the Series A Bonds to be "federally guaranteed"within the meaning of Section 149(b)of the Tax Code. (c) No Arbitrage. The Authority shall not take, or permit or suffer to be taken by the Trustee or otherwise, any action with respect to the proceeds of the Series A Bonds which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the Closing Date would have caused the Series A Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Tax Code. (d) Maintenance of Tax-Exemption. The Authority shall take all actions necessary to assure the exclusion of interest on the Series A Bonds from the gross income of the Owners of the Series A Bonds to the same extent as such interest is permitted to be excluded from gross income under the Tax Code as in effect on the Closing Date. (e) Rebate of Excess Investment Earnings. The Authority shall calculate or cause to be calculated all amounts of excess investment earnings with respect to the Series A Bonds which are required to be rebated to the United States of America pursuant to Section 148(f) of the Tax Code, at the times and in the manner required pursuant to the Tax Code. The Authority shall pay or cause to be paid when due an amount equal to excess investment earnings to the United States of America in such amounts, at such times and in such manner as may be required pursuant to the Tax Code, such payments to be made from amounts provided by the City for such purpose pursuant to the Lease Agreement. The Authority shall keep or cause to be kept, and retain or cause to be retained for a period of six (6) years following the retirement of the Series A Bonds, records of the determinations made pursuant to this subsection (e). The Trustee shall have no duty to monitor the compliance by the Authority with any of the covenants contained in this subsection(e). Lease Agreement. Subject to the Indenture,the Trustee shall promptly collect all amounts due from the City pursuant to the Lease Agreement. Subject to the provisions of the Indenture,the Trustee shall enforce, and take all steps, actions and proceedings which the Trustee determines to be reasonably necessary for the enforcement of all of its rights thereunder as assignee of the Authority and for the enforcement of all of the obligations of the City under the Lease Agreement. Waiver of Laws. The Authority shall not at any time insist upon or plead in any manner whatsoever, or claim or take the benefit or advantage of, any stay or extension law now or at any time hereafter in force that may affect the covenants and agreements contained in the Indenture or in the Bonds, and all benefit or advantage of any such law or laws is hereby expressly waived by the Authority to the extent permitted by law. Further Assurances. The Authority will make, execute and deliver any and all such further indentures, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate C-13 the performance of the Indenture and for the better assuring and confirming the rights and benefits provided in the Indenture to the Bond Owners. Leased Premises. If an event of abatement occurs pursuant to the Lease Agreement, the City shall use its best efforts to the extent permissible under the laws of the State of California to make all lease payments in excess of the amount of rental interruption insurance, if necessary, in order to ensure the reconstruction, repair, restoration,modification or improvement of the Leased Premises. EVENTS OF DEFAULT AND REMEDIES Events of Default. The following events shall be Events of Default hereunder: (a) Default in the due and punctual payment of the principal of any Bonds when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption,by acceleration, or otherwise. (b) Default in the due and punctual payment of any installment of interest on any Bonds when and as the same shall become due and payable. (c) Default by the Authority in the observance of any of the other covenants, agreements or conditions on its part in the Indenture or in the Bonds contained, if such default shall have continued for a period of thirty(30) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Authority by the Trustee; provided, however, that if in the reasonable opinion of the Authority the default stated in the notice can be corrected, but not within such thirty (30) day period, such default shall not constitute an Event of Default hereunder if the Authority shall commence to cure such default within such sixty (60) day period and thereafter diligently and in good faith cure such failure in a reasonable period of time. (d) The occurrence and continuation of an event of default under and as defined in the Lease Agreement. No Acceleration Upon Event of Default. If any Event of Default shall occur there shall not be any right on the part of the Trustee or the Bondholders to declare the principal of all of the Bonds then Outstanding, and the interest accrued thereon,to be due and payable immediately. Application of Revenues and Other Funds After Default. Notwithstanding anything to the contrary contained herein, if an Event of Default shall occur and be continuing, all Revenues and any other funds then held or thereafter received by the Trustee under any of the provisions of the Indenture shall be applied by the Trustee as follows and in the following order: (a) To the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Owners of the Bonds and payment of reasonable fees, charges and expenses of the Trustee (including reasonable fees and disbursements of its counsel) incurred in and about the performance of its powers and duties under the Indenture; (b) To the payment of the principal of and interest then due on the Bonds (upon presentation of the Bonds to be paid, and stamping or otherwise noting thereon of the payment if only partially paid, or surrender thereof if fully paid) in accordance with the provisions of the Indenture, as follows: First: To the payment to the persons entitled thereto of all installments of interest then due in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and C-14 Second: To the payment to the persons entitled thereto of the unpaid principal of any Bonds which shall have become due, whether at maturity or by acceleration or redemption,with interest on the overdue principal at the rate borne by the respective Bonds (to the extent permitted by law), and, if the amount available shall not be sufficient to pay in full all the Bonds, together with such interest, then to the payment thereof ratably, according to the amounts of principal due on such date to the persons entitled thereto,without any discrimination or preference. Trustee to Represent Bond Owners. The Trustee is irrevocably appointed(and the successive respective Owners of the Bonds, by taking and holding the same, shall be conclusively deemed to have so appointed the Trustee) as trustee and true and lawful attorney-in-fact of the Owners of the Bonds for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Owners under the provisions of the Bonds, the Indenture and applicable provisions of any law. Upon the occurrence and continuance of an Event of Default or other occasion giving rise to a right in the Trustee to represent the Bond Owners,the Trustee may, or upon the written request of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding, and upon being indemnified to its satisfaction therefor, the Trustee shall, proceed to protect or enforce its rights or the rights of such Owners by such appropriate action, suit, mandamus or other proceedings as it shall deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained herein, or in aid of the execution of any power herein granted, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Trustee or in such Owners under the Bonds,the Indenture or any other law. Upon instituting such proceeding, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the Revenues and other assets pledged under the Indenture,pending such proceedings. All rights of action under the Indenture or the Bonds or otherwise may be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in the name of the Trustee for the benefit and protection of all the Owners of such Bonds, subject to the provisions of the Indenture. Bond Owners'Direction of Proceedings. Anything in the Indenture to the contrary notwithstanding,the Owners of a majority in aggregate principal amount of the Bonds then Outstanding shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, and upon indemnification of the Trustee to its reasonable satisfaction,to direct the method of conducting all remedial proceedings taken by the Trustee, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Indenture, and that the Trustee shall have the right to decline to follow any such direction which in the opinion of the Trustee would expose it to liability. Limitation on Bond Owners' Right to Sue. Notwithstanding any other provision of the Indenture, no Owner of any Bonds shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Indenture, the Lease Agreement or any other applicable law with respect to such Bonds, unless (a) such Owner shall have given to the Trustee written notice of the occurrence of an Event of Default; (b) the Owners of a majority in aggregate principal amount of the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers hereinbefore granted or to institute such suit, action or proceeding in its own name; (c) such Owner or Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d)the Trustee shall have failed to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee; and (e) no direction inconsistent with such written request shall have been given to the Trustee during such sixty (60) day period by the Owners of a majority in aggregate principal amount of the Bonds then Outstanding. Such notification, request, tender of indemnity and refusal or omission are hereby declared, in every case,to be conditions precedent to the exercise by any Owner of Bonds of any remedy hereunder or under law; it being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Indenture or the rights of any other Owners of Bonds, or to enforce any right under the Bonds, the Indenture, the Lease Agreement or other C-15 applicable law with respect to the Bonds, except in the manner herein provided, and that all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained in the manner provided in the Indenture and for the benefit and protection of all Owners of the Outstanding Bonds, subject to the provisions of the Indenture. Absolute Obligation of Authority. Nothing in any other provision of the Indenture or in the Bonds contained shall affect or impair the obligation of the Authority, which is absolute and unconditional, to pay the principal of and interest and premium (if any) on the Bonds to the respective Owners of the Bonds at their respective dates of maturity, or upon call for redemption, as herein provided, but only out of the Revenues and other assets herein pledged therefor, or affect or impair the right of such Owners, which is also absolute and unconditional,to enforce such payment by virtue of the contract embodied in the Bonds. Termination of Proceedings. In case any proceedings taken by the Trustee or any one or more Bond Owners on account of any Event of Default shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee or the Bond Owners, then in every such case the Authority, the Trustee and the Bond Owners, subject to any determination in such proceedings, shall be restored to their former positions and rights hereunder, severally and respectively, and all rights, remedies, powers and duties of the Authority,the Trustee and the Bond Owners shall continue as though no such proceedings had been taken. Remedies Not Exclusive. No remedy herein conferred upon or reserved to the Trustee or to the Owners of the Bonds is intended to be exclusive of any other remedy or remedies, and each and every such remedy, to the extent permitted by law, shall be cumulative and in addition to any other remedy given hereunder or now or hereafter existing at law or in equity or otherwise. No Waiver of Default. No delay or omission of the Trustee or of any Owner of the Bonds to exercise any right or power arising upon the occurrence of any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and every power and remedy given by the Indenture to the Trustee or to the Owners of the Bonds may be exercised from time to time and as often as may be deemed expedient. THE TRUSTEE Duties, Immunities and Liabilities of Trustee. (a) The Trustee shall, prior to an Event of Default, and after the curing of all Events of Default which may have occurred, perform such duties and only such duties as are expressly and specifically set forth in the Indenture and no implied duties or covenants shall be read into the Indenture against the Trustee. The Trustee shall, during the existence of any Event of Default (which has not been cured), exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) The Authority may remove the Trustee at any time unless an Event of Default shall have occurred and then be continuing, and the Authority shall remove the Trustee if at any time requested to do so by the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding (or their attorneys duly authorized in writing) or if at any time the Trustee shall cease to be eligible in accordance with the Indenture, or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or its property shall be appointed, or any public officer shall take control or charge of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by giving written notice of such removal to the Trustee and the City and thereupon shall appoint a successor Trustee by an instrument in writing. Any such removal shall be made upon at least thirty (30) days' prior written notice to the Trustee. Upon giving such written notice of removal, the Authority shall promptly appoint a successor Trustee by an instrument in writing. (c) The Trustee may at any time resign by giving written notice of such resignation to the Authority and to the City, and by giving the Bond Owners notice of such resignation by mail at the addresses shown on the C-16 Registration Books. Upon receiving such notice of resignation,the Authority shall promptly appoint a successor Trustee by an instrument in writing. (d) Any removal or resignation of the Trustee and appointment of a successor Trustee shall become effective upon acceptance of appointment by the successor Trustee; provided, however, that no removal resignation or termination of the Trustee shall take effect until a successor shall be appointed. If no successor Trustee shall have been appointed and have accepted appointment within forty-five (45) days of giving notice of removal or notice of resignation as aforesaid, the Authority shall, and the Trustee may, petition any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Trustee. Any successor Trustee appointed under the Indenture, shall signify its acceptance of such appointment by executing and delivering to the Authority and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee, with like effect as if originally named Trustee herein; but, nevertheless at the Written Request of the Authority or the request of the successor Trustee, such predecessor Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under the Indenture and shall pay over,transfer, assign and deliver to the successor Trustee any money or other property subject to the trusts and conditions herein set forth. Upon request of the successor Trustee, the Authority shall execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such moneys, estates, properties, rights, powers, trusts, duties and obligations. Upon acceptance of appointment by a successor Trustee as provided in this subsection,the Authority shall mail or cause the successor Trustee to mail a notice of the succession of such Trustee to the trusts hereunder to the Bond Owners at the addresses shown on the Registration Books. If the Authority fails to mail such notice within fifteen (15) days after acceptance of appointment by the successor Trustee,the successor Trustee shall cause such notice to be mailed at the expense of the Authority. (e) Any Trustee appointed under the Indenture shall be a corporation or association organized and doing business under the laws of any state or the United States of America or the District of Columbia, authorized under such laws to exercise corporate trust powers, which shall have (or, in the case of a corporation included in a bank holding company system, the related bank holding company shall have) a combined capital and surplus of at least Seventy-Five Million Dollars ($75,000,000), and subject to supervision or examination by federal or State agency, so long as any Bonds are Outstanding. If such corporation publishes a report of condition at least annually pursuant to law or to the requirements of any supervising or examining agency above referred to then for the purpose of this subsection (e),the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this subsection (e), the Trustee shall resign immediately in the manner and with the effect specified in this Section. (f) The Authority covenants that it will maintain a Trustee qualified under the provisions of the foregoing subsection(e), so long as any Bonds are Outstanding. Merger or Consolidation. Any bank, association or trust company into which the Trustee may be merged or converted or with which it may be consolidated or any bank, association or trust company resulting from any merger, conversion or consolidation to which it shall be a party or any bank, association or trust company to which the Trustee may sell or transfer all or substantially all of its corporate trust business,provided such bank, association or trust company shall be eligible under the Indenture shall be the successor to such Trustee, without the execution or filing of any paper or any further act, anything herein to the contrary notwithstanding. Liability of Trustee. (a) The recitals of facts herein and in the Bonds contained shall not be taken as statements of the Authority, and the Trustee shall not assume responsibility for the correctness of the same, or make any C-17 representations as to the validity or sufficiency of the Indenture,the Bonds or the Lease Agreement,nor shall the Trustee incur any responsibility in respect thereof, other than as expressly stated herein in connection with the respective duties or obligations herein or in the Bonds assigned to or imposed upon it. The Trustee shall, however, be responsible for its representations contained in its certificate of authentication on the Bonds. The Trustee shall not be liable in connection with the performance of its duties hereunder, except for its own negligence. The Trustee may become the Owner of Bonds with the same rights it would have if it were not Trustee, and, to the extent permitted by law, may act as depository for and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of Bond Owners, whether or not such committee shall represent the Owners of a majority in principal amount of the Bonds then Outstanding. (b) The Trustee shall not be liable for any error of judgment made in good faith by a responsible officer,unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts. (c) The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Owners of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under the Indenture. (d) The Trustee shall not be liable for any action taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by the Indenture. (e) The Trustee shall not be deemed to have knowledge of any Event of Default hereunder, or any other event which, with the passage of time, the giving of notice, or both, would constitute an Event of Default hereunder unless and until it shall have actual knowledge thereof, or shall have received written notice thereof, at its Office. Except as otherwise expressly provided herein, the Trustee shall not be bound to ascertain or inquire as to the performance or observance by the Authority or the City of any of the terms, conditions, covenants or agreements herein, under the Lease Agreement or of any of the documents executed in connection with the Bonds, or as to the existence of an Event of Default or an event which would,with the giving of notice, the passage of time, or both, constitute an Event of Default. The Trustee shall not be responsible for the validity, effectiveness or priority of any collateral given to or held by it. Without limiting the generality of the foregoing, the Trustee shall not be required to ascertain or inquire as to the performance or observance by the City and the Authority of the terms, conditions, covenants or agreements set forth in the Lease Agreement, other than the covenants of the City to make Additional Lease Payments to the Trustee when due and to file with the Trustee, when due, such reports and certifications as the City is required to file with the Trustee thereunder. (f) No provision of the Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it is not assured to its satisfaction that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (g) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (h) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request or direction of Owners pursuant to the Indenture, unless such Owners shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. No permissive power, right or remedy conferred upon the Trustee hereunder shall be construed to impose a duty to exercise such power, right or remedy. (i) Whether or not therein expressly so provided, every provision of the Indenture and the Lease Agreement relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of the Indenture. C-18 0) The Trustee shall not be concerned with or accountable to anyone for the subsequent use or application of any moneys which shall be released or withdrawn in accordance with the provisions of the Indenture. (k) The Trustee makes no representation or warranty, expressed or implied as to the title, value, design, compliance with specifications or legal requirements, quality, durability, operation, condition, merchantability or fitness for any particular purpose for the use contemplated by the Authority or the City of the Leased Premises. In no event shall the Trustee be liable for incidental, indirect, special or consequential damages in connection with or arising from the Lease Agreement or the Indenture for the existence, furnishing or use of the Leased Premises. (1) The Trustee may establish such funds and accounts hereunder as it deems necessary or appropriate to perform its obligations under the Indenture. (m) The Trustee agrees to accept and act upon facsimile transmission of written instructions and/or directions pursuant to the Indenture provided, however, that: (a) subsequent to such facsimile transmission of written instructions and/or directions the Trustee shall forthwith receive the originally executed instructions and/or directions, (b) such originally executed instructions and/or directions shall be signed by a person as may be designated and authorized to sign for the party signing such instructions and/or directions, and (c)the Trustee shall have received a current incumbency certificate containing the specimen signature of such designated person. (n) The Trustee shall not be considered in breach of or in default in its obligations under the Indenture or progress in respect thereto in the event of enforced delay ("unavoidable delay") in the performance of such obligations due to unforeseeable causes beyond its control and without its fault or negligence, including, but not limited to, Acts of God or of the public enemy or terrorists, acts of a government, acts of the other parry, fires, floods, epidemics, quarantine restrictions, strikes, freight embargoes, earthquakes, explosion, mob violence, riot, inability to procure or general sabotage or rationing of labor, equipment, facilities, sources of energy, material or supplies in the open market, litigation or arbitration involving a party or others relating to zoning or other governmental action or inaction pertaining to the Project, malicious mischief, condemnation, and unusually severe weather or delays of suppliers or subcontractors due to such causes or any similar event and/or occurrences beyond the control of the Trustee. (o) The Trustee shall have no responsibility or liability with respect to any information, statements or recital in any offering memorandum or other disclosure material prepared or distributed with respect to the issuance of these Bonds. Right to Rely on Documents. The Trustee shall be protected in acting upon any notice, resolution, request, requisition, consent, order, certificate, report, opinion, bonds or other paper or document believed by them to be genuine and to have been signed or presented by the proper party or parties. The Trustee may consult with counsel, who may be counsel of or to the Authority,with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it hereunder in good faith and in accordance therewith. The Trustee may treat the Owners of the Bonds appearing in the Registration Books as the absolute owners of the Bonds for all purposes and the Trustee shall not be affected by any notice to the contrary. Whenever in the administration of the trusts imposed upon it by the Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Indenture, such matter(unless other evidence in respect thereof be specifically prescribed in the Indenture) may be deemed to be conclusively proved and established by a Written Certificate, Written Request or Written Requisition of the Authority or the City, and such Written Certificate, Written Request or Written Requisition shall be full warrant to the Trustee for any action taken or suffered in good faith under the provisions of the Indenture in reliance upon such Written Certificate,Written Request or Written Requisition, but in its discretion C-19 the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may deem reasonable. Preservation and Inspection of Documents. All documents received by the Trustee under the provisions of the Indenture shall be retained in their respective possession and shall be subject at all reasonable times to the inspection of the Authority,the City and any Bond Owner, and their agents and representatives duly authorized in writing,at reasonable hours and under reasonable conditions. Compensation and Indemnification. The Authority shall pay to the Trustee (solely from Miscellaneous Rent) from time to time the compensation for all services rendered under the Indenture and also all reasonable expenses and disbursements, incurred in and about the performance of its powers and duties under the Indenture. The Authority shall indemnify, defend and hold harmless the Trustee and its officers, directors, agents and employees, against any loss, liability or expense incurred without negligence or willful misconduct on its part, arising out of or in connection with the acceptance or administration of this trust, including costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers hereunder. As security for the performance of the obligations of the Authority under the Indenture and the obligation of the City to make Additional Rental Payments to the Trustee, the Trustee shall have a lien prior to the lien of the Bonds upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of or interest on particular Bonds. The rights of the Trustee and the obligations of the Authority under the Indenture shall survive the discharge of the Bonds and the Indenture and the resignation or removal of the Trustee. MODIFICATION OR AMENDMENT Amendments Permitted. (a) The Indenture and the rights and obligations of the Authority and of the Owners of the Bonds and of the Trustee may be modified or amended from time to time and at any time by an indenture or indentures supplemental thereto, which the Authority and the Trustee may enter into when the written consent of the Owners of a majority in aggregate principal amount of all Bonds then Outstanding shall have been filed with the Trustee. No such modification or amendment shall (i) extend the fixed maturity of any Bonds, or reduce the amount of principal thereof or extend the time of payment, or change the method of computing the rate of interest thereon, or extend the time of payment of interest thereon, without the consent of the Owner of each Bond so affected, or (ii) reduce the aforesaid percentage of Bonds the consent of the Owners of which is required to effect any such modification or amendment, or permit the creation of any lien on the Revenues and other assets pledged under the Indenture prior to or on a parity with the lien created by the Indenture except as permitted herein, or deprive the Owners of the Bonds of the lien created by the Indenture on such Revenues and other assets (except as expressly provided in the Indenture), without the consent of the Owners of all of the Bonds then Outstanding. It shall not be necessary for the consent of the Bond Owners to approve the particular form of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof. (b) The Indenture and the rights and obligations of the Authority, of the Trustee and the Owners of the Bonds may also be modified or amended from time to time and at any time by a Supplemental Indenture, which the Authority and the Trustee may enter into without the consent of any Bond Owners, if the Trustee has been furnished an opinion of counsel that the provisions of such Supplemental Indenture shall not materially adversely affect the interests of the Owners of the Bonds, including, without limitation, for any one or more of the following purposes: (i) to add to the covenants and agreements of the Authority contained in the Indenture or to add other covenants and agreements thereafter to be observed,to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power herein reserved to or conferred upon the Authority; C-20 (ii) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Indenture, or in regard to matters or questions arising under the Indenture, as the Authority may deem necessary or desirable, provided that such modification or amendment does not materially adversely affect the interests of the Bond Owners, in the opinion of Bond Counsel filed with the Trustee; (iii) to modify, amend or supplement the Indenture in such manner as to permit the qualification hereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute; (iv) to modify, amend or supplement the Indenture in such manner as to cause interest on the Bonds to remain excludable from gross income under the Tax Code; or (v) to facilitate the issuance of additional bonds of the Authority secured by Lease Payments of the City pursuant to the Lease Agreement. (c) The Trustee may in its discretion, but shall not be obligated to, enter into any such Supplemental Indenture authorized by the Indenture which materially adversely affects the Trustee's own rights, duties or immunities under the Indenture or otherwise. (d) Prior to the Trustee entering into any Supplemental Indenture hereunder, there shall be delivered to the Trustee an opinion of Bond Counsel stating, in substance,that such Supplemental Indenture has been adopted in compliance with the requirements of the Indenture and that the adoption of such Supplemental Indenture will not, in and of itself, adversely affect the exclusion from gross income for purposes of federal income taxes of interest on the Bonds. Effect of Supplemental Indenture. Upon the execution of any Supplemental Indenture, the Indenture shall be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under the Indenture of the Authority, the Trustee and all Owners of Bonds Outstanding shall thereafter be determined, exercised and enforced subject in all respects to such modification and amendment, and all the terms and conditions of any such Supplemental Indenture shall be deemed to be part of the terms and conditions of the Indenture for any and all purposes. Endorsement of Bonds; Preparation of New Bonds. Bonds delivered after the execution of any Supplemental Indenture pursuant to this Article may, and if the Trustee so determines shall, bear a notation by endorsement or otherwise in form approved by the Authority and the Trustee as to any modification or amendment provided for in such Supplemental Indenture, and, in that case, upon demand on the Owner of any Bonds Outstanding at the time of such execution and presentation of his Bonds for the purpose at the Office of the Trustee or at such additional offices as the Trustee may select and designate for that purpose, a suitable notation shall be made on such Bonds. If the Supplemental Indenture shall so provide, new Bonds so modified as to conform, in the opinion of the Authority and the Trustee, to any modification or amendment contained in such Supplemental Indenture, shall be prepared and executed by the Authority and authenticated by the Trustee, and upon demand on the Owners of any Bonds then Outstanding shall be exchanged at the Office of the Trustee, without cost to any Bond Owner, for Bonds then Outstanding, upon surrender for cancellation of such Bonds, in equal aggregate principal amount of the same series and maturity. Amendment of Particular Bonds. The provisions of the Indenture shall not prevent, any Bond Owner from accepting any amendment as to the particular Bonds held by him. DEFEASANCE Discharge of Indenture. Any or all of the Outstanding Bonds may be paid by the Authority in any of the following ways, provided that the Authority also pays or causes to be paid any other sums payable by the Authority: C-21 (a) by paying or causing to be paid the principal of and interest and premium (if any) on such Bonds,as and when the same become due and payable; (b) by depositing with the Trustee, in trust, at or before maturity,money or securities in the necessary amount(as provided in the Indenture)to pay or redeem such Bonds; or (c) by delivering to the Trustee,for cancellation by it, all of such Bonds. If the Authority shall also pay or cause to be paid all other sums payable hereunder by the Authority, then and in that case, at the election of the Authority (evidenced by a Written Certificate of the Authority, filed with the Trustee, signifying the intention of the Authority to discharge all such indebtedness and the Indenture), and notwithstanding that any of such Bonds shall not have been surrendered for payment, the Indenture and the pledge of Revenues and other assets made under the Indenture with respect to such Bonds and all covenants, agreements and other obligations of the Authority under the Indenture with respect to such Bonds shall cease, terminate, become void and be completely discharged and satisfied. In such event, upon the Written Request of the Authority,the Trustee shall execute and deliver to the Authority all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee shall pay over, transfer, assign or deliver to the City all moneys or securities or other property held by it pursuant to the Indenture which are not required for the payment or redemption of any of such Bonds not theretofore surrendered for such payment or redemption. Discharge of Liability on Bonds. Upon the deposit with the Trustee, in trust, at or before maturity, of money or securities in the necessary amount (as provided in the Indenture) to pay or redeem any Outstanding Bonds (whether upon or prior to the maturity or the redemption date of such Bonds), provided that, if such Bonds are to be redeemed prior to maturity, notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice, then all liability of the Authority in respect of such Bonds shall cease, terminate and be completely discharged, and the Owners thereof shall thereafter be entitled only to payment out of such money or securities deposited with the Trustee as aforesaid for their payment, subject,however,to the provisions of the Indenture. The Authority may at any time surrender to the Trustee for cancellation by it any Bonds previously issued and delivered, which the Authority may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired. Deposit of Money or Securities with Trustee. Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Trustee in the funds and accounts established pursuant to the Indenture and shall be: (a) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount of such Bonds and all unpaid interest thereon to the redemption date; or (b) non-callable Federal Securities,the principal of and interest on which when due will, in the written opinion of an Independent Accountant filed with the City, the Authority and the Trustee, provide money sufficient to pay the principal of and interest and premium (if any) on the Bonds to be paid or redeemed, as such principal, interest and premium become due, provided that in the case of Bonds which are to be redeemed prior to the maturity thereof,notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice; C-22 provided, in each case, that(i) the Trustee shall have been irrevocably instructed (by the terms of the Indenture or by Written Request of the Authority) to apply such money to the payment of such principal, interest and premium (if any) with respect to such Bonds, and (ii) the Authority shall have delivered to the Trustee an opinion of Bond Counsel to the effect that such Bonds have been discharged in accordance with the Indenture (which opinion may rely upon and assume the accuracy of the Independent Accountant's opinion referred to above). Unclaimed Funds. Notwithstanding any provisions of the Indenture, and subject to applicable provisions of State law, any moneys held by the Trustee in trust for the payment of the principal of, or interest on, any Bonds and remaining unclaimed for two (2) years after the principal of such Bonds has become due and payable (whether at maturity or upon call for redemption or by acceleration as provided in the Indenture), if such moneys were so held at such date, or two (2) years after the date of deposit of such moneys if deposited after said date when such Bonds became due and payable, shall be repaid to the Authority free from the trusts created by the Indenture, and all liability of the Trustee with respect to such moneys shall thereupon cease; provided/however,that before the repayment of such moneys to the Authority as aforesaid, the Trustee may (at the cost of the City) first mail to the Owners of Bonds which have not yet been paid, at the addresses shown on the Registration Books, a notice, in such form as may be deemed appropriate by the Trustee with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the Authority of the moneys held for the payment thereof. LEASE AGREEMENT Definitions. "Event of Default"means any of the events of default defined as such in the Lease Agreement. "Facilities" means all of the buildings, improvements and facilities at any time situated on the Site and described in the Lease Agreement. "Fiscal Year"means the twelve month period beginning on July 1 of any year and ending on June 30 of the next succeeding year, or any other twelve month period established by the City as its fiscal year pursuant to written notice filed with the Authority and the Trustee. "Hazardous Substance" means any substance, pollutant or contamination included in such (or any similar) term under any federal, state or local statute, law, ordinance, code or regulation now in effect or hereafter enacted or amended. "Lease Payment Date" means, with respect to any Interest Payment Date, the thirtieth (30th) calendar day of the month preceding such Interest Payment Date. "Lease Payments" means the amounts payable by the City pursuant to the Lease Agreement, including any prepayment thereof pursuant thereto and including any amounts payable upon a delinquency in the payment thereof. ,,Leased Premises"means, collectively,the Site and the Facilities, subject to the provisions of the Lease Agreement. "Miscellaneous Rent" means the amounts of additional rental which are payable by the City pursuant to the Lease Agreement. "Permitted Encumbrances" means, as of any time: (a) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the City may permit to remain unpaid pursuant to Article V; (b) the Lease Agreement, the Indenture and any other agreement or other document contemplated hereunder to C-23 be recorded against the Leased Premises including any amendment to this Lease pursuant to Section 8.3(e) hereof, (c) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law; and (d) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record and which the City certifies in writing will not materially impair the use of the Leased Premises for their intended purposes. "Project" means the acquisition of the Pacific View Property and the improvement of the Moonlight Beach Lifeguard Tower. "Site"means all of the land described in the Lease Agreement. "Term"means the time during which the Lease Agreement is in effect. Representations, Covenants And Warranties (a) Due Organization and Existence. The City is a municipal corporation duly organized and validly existing under the laws of the State, has full legal right, power and authority under the laws of the State to enter into the Lease Agreement and to carry out and consummate all transactions contemplated hereby and thereby, and by proper action the City has duly authorized the execution and delivery of the Lease Agreement. (b) Due Execution. The representatives of the City executing the Lease Agreement have been fully authorized to execute the same pursuant to a resolution duly adopted by the City Council of the City. (c) Valid, Binding and Enforceable Obligations. The Lease Agreement has been duly authorized, executed and delivered by the City and constitutes the legal,valid and binding agreement of the City enforceable against the City in accordance with the terms hereof. (d) No Conflicts. The execution and delivery of the Lease Agreement, the consummation of the transactions herein contemplated and the fulfillment of or compliance with the terms and conditions hereof, do not and will not conflict with or constitute a violation or breach of or default(with due notice or the passage of time or both) under any applicable law or administrative rule or regulation, or any applicable court or administrative decree or order, or any indenture, mortgage, deed of trust, lease, contract or other agreement or instrument to which the City is a party or by which it or its properties are otherwise subject or bound, or result in the creation or imposition of any prohibited lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of the City, which conflict, violation, breach, default, lien, charge or encumbrance would have consequences that would materially and adversely affect the consummation of the transactions contemplated by the Lease Agreement or the financial condition, assets,properties or operations of the City. (e) Consents and Approvals. No consent or approval of any trustee or holder of any indebtedness of the City or of the voters of the City, and no consent, permission, authorization, order or license of, or filing or registration with, any governmental authority is necessary in connection with the execution and delivery of the Lease Agreement, or the consummation of any transaction herein contemplated, except as have been obtained or made and as are in full force and effect. (f) No Litigation. There is no action, suit, proceeding, inquiry or investigation before or by any court or federal, state, municipal or other governmental authority pending or, to the knowledge of the City after reasonable investigation, threatened against or affecting the City or the assets, properties or operations of the City which, if determined adversely to the City or its interests, would have a material and adverse effect upon the consummation of the transactions contemplated by or the validity of the Lease Agreement, or upon the financial condition, assets,properties or operations of the City, and the City is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental authority, which default might have C-24 consequences that would materially and adversely affect the consummation of the transactions contemplated by the Lease Agreement or the financial conditions, assets, properties or operations of the City. (g) Status of Leased Premises. The acquisition, construction and equipping of the Facilities have been completed in accordance with all requirements of the City, and the Facilities are fully functional, operational, and in sound condition, excepting only reasonable wear and tear. No event which constitutes, or which with the passage of time if not cured would constitute, an Event of Default has occurred and is continuing. (h) Essentiality. The Leased Premises constitutes property that is essential to carrying out the governmental functions of the City. The Authority makes the following covenants, representations and warranties to the City as of the date of the execution and delivery of the Lease Agreement: (a) Due Organization and Existence. The Authority is a joint powers authority duly organized and existing under and by virtue of the laws of the State; has power to enter into the Lease Agreement and the Indenture; is possessed of full power to own and hold, improve and equip real and personal property, and to lease and lease back the same; and has duly authorized the execution and delivery of each of the aforesaid agreements and such agreements constitute the legal, valid and binding agreements of the Authority, enforceable against the Authority in accordance with their respective terms. (b) Due Execution. The representatives of the Authority executing the Lease Agreement and the Indenture are fully authorized to execute the same pursuant to official action taken by the governing body of the Authority. (c) Valid Binding and Enforceable Obligations. The Lease Agreement and the Indenture have been duly authorized, executed and delivered by the Authority and constitute the legal, valid and binding agreements of the Authority, enforceable against the Authority in accordance their respective terms. (d) No Conflicts. The execution and delivery of the Lease Agreement and the Indenture, the consummation of the transactions herein and therein contemplated and the fulfillment of or compliance with the terms and conditions hereof and thereof, do not and will not conflict with or constitute a violation or breach of or default (with due notice or the passage of time or both) under any applicable law or administrative rule or regulation, or any applicable court or administrative decree or order, or any indenture, mortgage, deed of trust, lease, contract or other agreement or instrument to which the Authority is a parry or by which it or its properties are otherwise subject or bound, or result in the creation or imposition of any prohibited lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of the Authority, which conflict, violation, breach, default, lien, charge or encumbrance would have consequences that would materially and adversely affect the consummation of the transactions contemplated by the Lease Agreement and the Indenture or the financial condition, assets,properties or operations of the Authority. (e) Consents and Approvals. No consent or approval of any trustee or holder of any indebtedness of the Authority, and no consent, permission, authorization, order or license of, or filing or registration with, any governmental authority is necessary in connection with the execution and delivery of the Lease Agreement or the Indenture, or the consummation of any transaction herein or therein contemplated, except as have been obtained or made and as are in full force and effect. (f) No Litigation. There is no action, suit, proceeding, inquiry or investigation before or by any court or federal, state, municipal or other governmental authority pending or, to the knowledge of the Authority after reasonable investigation, threatened against or affecting the Authority or the assets, C-25 properties or operations of the Authority which, if determined adversely to the Authority or its interests, would have a material and adverse effect upon the consummation of the transactions contemplated by or the validity of the Lease Agreement or the Indenture, or upon the financial condition, assets, properties or operations of the Authority, and the Authority is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental authority, which default might have consequences that would materially and adversely affect the consummation of the transactions contemplated by the Lease Agreement or the Indenture or the financial conditions, assets,properties or operations of the Authority. Financing of Project. In order to pay the Authority's lease payment for the Leased Premises hereunder, on the Closing Date,the Authority shall cause the Project to be constructed or acquired in the manner prescribed by the City. The Authority and the City shall execute all documents and take all action as may be required to accomplish the construction and acquisition of the Project. The City shall provide lawfully available funds to complete the portions of the Project not financed with the proceeds of the Bonds. Payment of Costs of Issuance. Payment of all Costs of Issuance shall be made from the moneys deposited with the Trustee in the Costs of Issuance Fund, which moneys shall be disbursed for such purpose in accordance with the Indenture. Any Costs of Issuance for the payment of which insufficient funds shall be available on deposit in the Costs of Issuance Fund, shall be paid by the City. Lease; Term Of The Lease Agreement, Rental Payments Lease by Authority and Lease Back to City. (a) In consideration of the payment of a lease payment of$13,460,000 by the Authority less the Underwriter's discount, and in consideration of the execution of the Lease Agreement by the City, and other good and valuable consideration, the City leases to the Authority, and the Authority leases from the City, the Leased Premises for the Term of the Lease Agreement, plus one week following the end of the Term of the Lease Agreement. (b) The Authority leases the Leased Premises to the City, and the City leases the Leased Premises from the Authority,upon the terms and conditions set forth in the Lease Agreement. (c) The City takes possession of the Leased Premises on the Closing Date. Term of Lease Agreement. The Term of the Lease Agreement shall commence on the Closing Date and shall end on October 1, 2044, unless such term is extended as hereinafter provided or unless Lease Payments have been paid or prepaid in full or provision shall have been made for such payment pursuant to the Lease Agreement. If on October 1, 2044, the Indenture shall not be discharged by its terms or if the Lease Payments payable hereunder shall have been abated at any time and for any reason,then the Term of the Lease Agreement shall be extended until the earlier of October 1, 2055, or the date the Indenture shall be discharged by its terms. If prior to October 1, 2044, the Indenture shall be discharged by its terms and any amounts then owed to the Trustee and the Insurer have been paid in full,the Term of the Lease Agreement shall thereupon end. Lease Payments; Security Deposit. (a) Obligation to Pay. In consideration of the lease and lease back by the Authority of the Leased Premises and in consideration of the issuance of the Bonds by the Authority for the purpose of constructing and acquiring the Project, and subject to the provisions of the Lease Agreement, the City agrees to pay to the Authority, its successors and assigns, as rental for the use and occupancy of the Leased Premises during each Fiscal Year, the Lease Payments (denominated into components of principal and interest) for the Leased Premises in the respective amounts specified in Exhibit B hereto, to be due and payable on the fifteenth day prior to each respective Lease Payment Date specified in the Lease Agreement. Any amount held in the Bond Fund,the Interest Account,the Sinking Account or the Principal Account(other than amounts resulting from the prepayment of the Lease Payments in part but not in whole pursuant to the Lease Agreement) on any Lease C-26 Payment Date shall be credited towards the Lease Payment then due and payable. The Lease Payments coming due and payable in any Fiscal Year shall be for the use of the Leased Premises for such Fiscal Year. (b) Effect of Prepayment. In the event that the City prepays all Lease Payments in full pursuant to the Lease Agreement, the City's obligations under the Lease Agreement shall thereupon cease and terminate, including but not limited to the City's obligation to pay Lease Payments under the Lease Agreement. In the event that the City prepays the Lease Payments in part but not in whole pursuant to the Lease Agreement the Authority shall provide, or cause to be provided, to the Trustee and the City a revised schedule of Lease Payments due after such partial prepayment, which revised schedule of Lease Payments shall be sufficient to provide for the scheduled payment of remaining principal of and interest on the Bonds, and which schedule shall represent an adjustment to the schedule of Lease Payments set forth in the Lease Agreement after taking into account said partial prepayment. (c) Rate on Overdue Payments. In the event the City should fail to make any of the payments required in the Lease Agreement, the payment in default shall continue as an obligation of the City until the amount in default shall have been fully paid, and the City agrees to pay the same with interest thereon, to the extent permitted by law, from the date of default to the date of payment at the rate per annum equal to the actual interest rate on the Bonds. (d) Fair Rental Value. The Lease Payments and Miscellaneous Rent coming due and payable hereunder in each Fiscal Year shall constitute the total rental for the Leased Premises for each Fiscal Year and shall be paid by the City in each Fiscal Year for and in consideration of the right of the use and occupancy of, and the continued quiet use and enjoyment of, the Leased Premises during such Fiscal Year. The parties have agreed and determined that the net present value of such Lease Payments and the annual payment of Miscellaneous Rent for the Leased Premises do not exceed the fair rental value of the Leased Premises. In making such determination, consideration has been given to the obligations of the parties under the Lease Agreement, the uses and purposes which may be served by the Leased Premises and the benefits therefrom which will accrue to the City and the general public. (e) Source of Payments; Budget and Appropriation. The Lease Payments shall be payable from any source of available funds of the City, subject to the provisions of the Lease Agreement. The City covenants to take such action as may be necessary to include all Lease Payments and Miscellaneous Rent due in a Fiscal Year hereunder in each of its budgets for such Fiscal Year during the Term of the Lease Agreement and to make the necessary annual appropriations for all such Lease Payments and Miscellaneous Rent. The covenants on the part of the City herein contained shall be deemed to be and shall be construed to be ministerial duties imposed by law and it shall be the duty of each and every public official of the City to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements in the Lease Agreement agreed to be carried out and performed by the City. The City and the Authority understand and intend that the obligation of the City to pay Lease Payments, Miscellaneous Rent, and other payments hereunder constitutes a current expense of the City and shall not in any way be construed to be a debt of the City in contravention of any applicable constitutional or statutory limitation or requirement concerning the creation of indebtedness by the City, nor shall anything contained herein constitute a pledge of the general tax revenues, funds or moneys of the City. Lease Payments and Miscellaneous Rent due hereunder shall be payable only from current funds which are budgeted and appropriated, or otherwise legally available, for the purpose of paying Lease Payments, Miscellaneous Rent, or other payments due hereunder as consideration for use of the Leased Premises during the Fiscal Year for which such funds were budgeted and appropriated or otherwise made legally available for such purpose. The Lease Agreement shall not create an immediate indebtedness for any aggregate payments which may become due hereunder. The City has not pledged the full faith and credit of the City,the State or any agency or department thereof to the payment of the Lease Payments or any other payments due hereunder,the Bonds or the interest thereon. (f) Assignment. The City understands and agrees that all Lease Payments have been assigned by the Authority to the Trustee in trust, pursuant to the Indenture, for the benefit of the Owners of the Bonds, and C-27 the City hereby assents to such assignment. The Authority hereby directs the City, and the City hereby agrees,to pay all of the Lease Payments to the Trustee at its Office. (g) Security Deposit. Notwithstanding any other provision of the Lease Agreement, the City may on any date secure the payment of the Lease Payments in whole or in part by depositing with the Trustee an amount of cash which,together with other available amounts, is either(i) sufficient to pay such Lease Payments, including the principal and interest components thereof, in accordance with the related Lease Payment schedule set forth in the Lease Agreement, or (ii) invested in whole or in part in non callable Federal Securities in such amount as will, in the opinion of an Independent Accountant, together with interest to accrue thereon and together with any cash which is so deposited, be fully sufficient to pay such Lease Payments when due hereunder or on any optional prepayment date pursuant to the Lease Agreement, as the City shall instruct at the time of said deposit. Said security deposit shall be deemed to be and shall constitute a special fund for the payment of Lease Payments in accordance with the provisions of the Lease Agreement. In connection with the making of any such security deposit, the Authority shall take, and shall cause the Trustee to take, any actions necessary to remove such appropriate portions of the Leased Premises from the lien of the Lease Agreement. (h) Delinquent Lease Payments. Any delinquent Lease Payment shall be made to the Trustee for application as set forth in the Indenture. Optional Prepayment. The City shall have the option to prepay the principal components of the Lease Payments in whole, or in part in any integral multiple of$5,000, on any date on or after September 30, 2024, with respect to the Series A Bonds Lease Payments and September 30, 2022, with respect to the Series B Lease Payments, by paying a prepayment price equal to the aggregate principal components of the Lease Payments to be prepaid, together with a prepayment premium equal to the premium (if any) required to be paid on the corresponding redemption of the Bonds pursuant to Section 4.01(a) of the Indenture and together with accrued interest to the prepayment date. Such prepayment price (except the interest portion thereof, which shall be deposited into the Interest Account) shall be deposited by the Trustee in the Redemption Fund to be applied to the optional redemption of Bonds pursuant to Section 4.01(a) of the Indenture. The City shall give the Authority and the Trustee written notice of its intention to exercise its option not less than fifteen (15) days in advance of the date of exercise. Notwithstanding any such prepayment, as long as any Bonds remain Outstanding or any Miscellaneous Rent payments remain unpaid, the City shall not be relieved of its obligations hereunder as to such Bonds or such Miscellaneous Rent. Quiet Enjoyment. During the Term of the Lease Agreement, the Authority shall provide the City with quiet use and enjoyment of the Leased Premises, and the City shall, during such Term, peaceably and quietly have and hold and enjoy the Leased Premises without suit, trouble or hindrance from the Authority, except as expressly set forth in the Lease Agreement. The Authority will, at the request of the City and at the City's cost, join in any legal action in which the City asserts its right to such possession and enjoyment to the extent the Authority may lawfully do so. Notwithstanding the foregoing, the Authority shall have the right to inspect the Leased Premises as provided in the Lease Agreement. Title. During the Term of the Lease Agreement, the Authority shall hold a leasehold in the Leased Premises, and in any and all additions which comprise fixtures, repairs, replacements or modifications to the Leased Premises, except for those fixtures, repairs, replacements or modifications which are added to the Leased Premises by the City at its own expense and which may be removed without damaging the Leased Premises and except for any items added to the Leased Premises by the City pursuant to the Lease Agreement. All right,title and interest of the Authority in and to the Leased Premises shall be transferred to and vested in the City if(a)the City pays all of the Lease Payments and Miscellaneous Rent during the Term of the Lease Agreement as the same become due and payable, or if the City posts a security deposit for payment of the Lease Payments pursuant to the Lease Agreement or prepays the Lease Payments pursuant to the Lease Agreement, and (b) if the City has paid in full all of the Miscellaneous Rent coming due and payable as of the date of such prepayment; and provided in any event that no Event of Default shall have occurred and be continuing. The Authority agrees to take any and all steps and execute and record any and all documents reasonably required by the City to consummate any such transfer of title. C-28 Miscellaneous Rent. In addition to the Lease Payments,the City shall pay when due the following items of Miscellaneous Rent: (a) all fees and expenses incurred by the Authority in connection with or by reason of its leasehold estate in the Leased Premises as and when the same become due and payable; (b) all reasonable compensation to the Trustee pursuant to the Indenture for all services rendered under the Indenture and for all reasonable expenses, charges, costs, liabilities, legal fees and other disbursements incurred in and about the performance of its powers and duties under the Indenture; (c) the reasonable fees and expenses of such accountants, consultants, attorneys and other experts as may be engaged by the Authority or the Trustee to prepare audits, financial statements, reports, opinions or provide such other services required under the Lease Agreement or the Indenture; and (d) the reasonable out of pocket expenses of the Authority in connection with the execution and delivery of the Lease Agreement or the Indenture, or in connection with the issuance of the Bonds, including, but not limited to, amounts payable pursuant to the Indenture and including but not limited to any and all expenses incurred in connection with the authorization, issuance, sale and delivery of the Bonds, or incurred by the Authority in connection with any litigation which may at any time be instituted involving the Lease Agreement, the Bonds, the Indenture or any of the other documents contemplated hereby or thereby, or otherwise incurred in connection with the administration of the Lease Agreement. Substitution or Release of Leased Premises. The City shall have, and is hereby granted, the option at any time and from time to time during the Term of the Lease Agreement, to substitute other land, facilities or improvements (the "Substitute Leased Premises") for the Leased Premises or any portion thereof(the "Released Premises") from the lien of the Lease Agreement, provided that the City shall satisfy all of the following requirements which are hereby declared to be conditions precedent to such substitution or release: (a) The City shall provide written notification of such substitution or release to the Rating Agencies, which notice shall contain the certification that all conditions set forth in the Lease Agreement are met with respect to such substitution or release. (b) The City shall take all actions and shall execute all documents required to subject the Substitute Leased Premises to the terms and provisions of the Lease Agreement, including the filing with the Authority and the Trustee an amended Exhibit A which adds thereto a description of the Substitute Leased Premises and deletes therefrom the description of the Released Premises, as applicable. (c) (i) In the case of a substitution, the City shall determine and certify in writing to the Authority and the Trustee that the fair rental value of the Substitute Leased Premises is at least equal to the net present value of remaining Lease Payments and that the Substitute Leased Premises are essential to the governmental functions of the City. (ii) In the case of a release, the City shall determine and certify in writing to the Authority and the Trustee that the value of the remaining Leased Premises after removal of the Released Premises is at least equal to the net present value of remaining Lease Payments. (d) In the case of a substitution, the City shall certify in writing to the Authority and the Trustee that the estimated useful life of the Substitute Leased Premises at least extends to the date on which the final Lease Payment becomes due and payable hereunder. C-29 (e) In the case of a substitution, the City shall obtain a CLTA policy of title insurance meeting the requirements of the Lease Agreement with respect to any real property portion of the Substitute Leased Premises. (f) In the case of a substitution, the substitution of the Substitute Leased Premises shall not cause the City to violate any of its covenants, representations and warranties made herein. (g) The City shall obtain and cause to be filed with the Trustee and the Authority an opinion of Bond Counsel stating that such substitution or release is permitted hereunder and does not cause interest on the Series A Bonds to become includable in the gross income of the Bond Owners for federal income tax purposes. From and after the date on which all of the foregoing conditions precedent to such substitution or release are satisfied, the Term of the Lease Agreement shall cease with respect to the Released Premises, as applicable, and shall be continued with respect to the Substitute Leased Premises and the remaining Leased Premises and all references herein to the Released Premises shall apply with full force and effect to the Substitute Leased Premises. The City shall not be entitled to any reduction, diminution, extension or other modification of the Lease Payments whatsoever as a result of such substitution or release. Maintenance; Taxes;Insurance; Use Limitations;And Other Matters Maintenance, Utilities, Taxes and Assessments. Throughout the Term of the Lease Agreement, as part of the consideration for the rental of the Leased Premises, all improvement, repair and maintenance of the Leased Premises shall be the responsibility of the City and the City shall pay for or otherwise arrange for the payment of all utility services supplied to the Leased Premises which may include, without limitation, janitor service, security, power, gas, telephone, light, heating, water and all other utility services, and shall pay for or otherwise arrange for the payment of the cost of the repair and replacement of the Leased Premises resulting from ordinary wear and tear or want of care on the part of the City or any assignee or sublessee thereof. In exchange for the Lease Payments, the Authority agrees to provide only the Leased Premises, as more specifically set forth in the Lease Agreement. The City waives the benefits of subsections 1 and 2 of Section 1932 and subsection 4 of Section 1933 of the California Civil Code, but such waiver shall not limit any of the rights of the City under the terms of the Lease Agreement. The City shall also pay or cause to be paid all taxes and assessments of any type or nature, if any, charged to the Authority or the City affecting the Leased Premises or the respective interests or estates therein; provided that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years,the City shall be obligated to pay only such installments as are required to be paid during the Term of the Lease Agreement as and when the same become due. The City may, at the City's expense and in its name, in good faith contest any such taxes, assessments, utility and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom unless the Authority shall notify the City that, in the opinion of independent counsel,by nonpayment of any such items,the interest of the Authority in the Leased Premises will be materially endangered or the Leased Premises or any part thereof will be subject to loss or forfeiture, in which event the City shall promptly pay such taxes, assessments or charges or provide the Authority with full security against any loss which may result from nonpayment, in form satisfactory to the Authority. Modification of Leased Premises. The City shall, at its own expense, have the right to make additions, modifications and improvements to the Leased Premises. All additions, modifications and improvements to the Leased Premises shall thereafter comprise part of the Leased Premises and be subject to the provisions of the Lease Agreement. Such additions, modifications and improvements shall not in any way damage the Leased Premises, or result in an abatement of Lease Payments or cause the Leased Premises to be used for purposes other than those authorized under the provisions of State and federal law; and the City shall file with the Trustee and the Leased Premises, upon completion of any additions, modifications and improvements made thereto C-30 pursuant to the Lease Agreement, shall be of a value which is not substantially less than the value of the Leased Premises immediately prior to the making of such additions,modifications and improvements. The City will not permit any mechanic's or other lien to be established or remain against the Leased Premises for labor or materials furnished in connection with any remodeling, additions, modifications, improvements, repairs, renewals or replacements made by the City pursuant to the Lease Agreement; provided that if any such lien is established and the City shall first notify or cause to be notified the Authority of the City's intention to do so,the City may in good faith contest any lien filed or established against the Leased Premises, and in such event may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom and shall provide the Authority with full security against any loss or forfeiture which might arise from the nonpayment of any such item, in form satisfactory to the Authority. The Authority will cooperate fully in any such contest,upon the request and at the expense of the City. Public Liability and Property Damage Insurance. The City shall maintain or cause to be maintained throughout the Term of the Lease Agreement, but only if and to the extent available from reputable insurers at reasonable cost in the reasonable opinion of the City, a standard comprehensive general insurance policy or policies in protection of the Authority, City, and their respective members, officers, agents, employees and assigns. Said policy or policies shall provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of$100,000 (subject to a deductible clause of not to exceed $25,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy or policies in the amount of$3,000,000 (subject to a deductible clause of not to exceed $25,000) covering all such risks. Such policy or policies shall provide coverage in such liability limits and be subject to such deductibles as the City shall deem adequate and prudent. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the City, and may be maintained in whole or in part in the form of self insurance by the City, subject to the provisions of the Lease Agreement, or in the form of the participation by the City in a joint powers agency or other program providing pooled insurance. In the case of the City's self-insurance of public liability and workers' compensation,the City may maintain a self-insured retention, and pay up to $500,000 of each liability claim and up to $350,000 of each worker's compensation claim, so long as the provisions of the Lease Agreement. The proceeds of such liability insurance shall be applied by the City toward extinguishment or satisfaction of the liability with respect to which paid. Casualty Insurance. The City shall procure and maintain, or cause to be procured and maintained, throughout the Term of the Lease Agreement, insurance against loss or damage to any Facilities by fire and lightning, with extended coverage and vandalism and malicious mischief insurance. Said extended coverage insurance, if required, shall, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance, and shall include earthquake coverage if such coverage is available at reasonable cost from reputable insurers in the judgment of the City's risk manager. Such insurance shall be in an amount at least equal to the lesser of(a) one hundred percent (100%) of the replacement cost of the Facilities; or (b) the aggregate unpaid principal components of the Lease Payments. Such insurance may be subject to such deductibles as the City shall deem prudent. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the City, and may be maintained in whole or in part in the form of the participation by the City in a joint powers agency or other program providing pooled insurance. The Net Proceeds of such insurance shall be applied as provided in the Lease Agreement. Each policy of insurance to be maintained by the City pursuant to the Lease Agreement shall (a)provide for the full payment of insurance proceeds up to the applicable dollar limit in connection with damage to the Leased Premises and shall, under no circumstances, be contingent upon the degree of damage sustained at other facilities owned or leased by the City; and(b) explicitly waive any co-insurance penalty. Rental Interruption Insurance. The City shall procure and maintain, or cause to be procured and maintained,throughout the Term of the Lease Agreement, rental interruption or use and occupancy insurance to cover loss, total or partial, of the use of the Leased Premises, as a result of any of the hazards covered by the insurance required by the Lease Agreement, in an amount at least equal to the maximum Lease Payments C-31 coming due and payable during any future twenty-four(24)month period. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the City, and may be maintained in whole or in part in the form of the participation by the City in a joint powers agency or other program providing pooled insurance. The proceeds of such insurance, if any, shall be paid to the Trustee and deposited in the Bond Fund, and shall be applied for the uses and purposes set forth in Article V of the Indenture. Recordation Hereof Title Insurance. On or before the Closing Date the City shall, at its expense, (a) cause the Lease Agreement, or a memorandum hereof in form and substance approved by Bond Counsel, to be recorded in the office of the San Diego County Recorder; and (b) obtain a CLTA policy of title insurance insuring the Authority's leasehold estate and the City's sub-leasehold estate hereunder, subject only to Permitted Encumbrances, in an amount at least equal to the aggregate principal amount of the Bonds. All Net Proceeds received under said policy shall be deposited with the Trustee in the Redemption Fund and shall be applied to the redemption of the Bonds pursuant to the Indenture. Net Proceeds of Insurance; Form of Policies. (a) Each policy of insurance maintained pursuant to the Lease Agreement shall name the Trustee as loss payee so as to provide that all proceeds thereunder shall be payable to the Trustee. The Authority,the City and the Trustee shall be named insureds of the policy. The City shall pay or cause to be paid when due the premiums for all insurance policies required by the Lease Agreement. All such policies shall provide that the Trustee shall be given thirty (30) days' notice of each expiration, any intended cancellation thereof or reduction of the coverage provided thereby. The Trustee shall not be responsible for the sufficiency or amount of any insurance or self insurance herein required and shall be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss. (b) In the event that any insurance maintained pursuant to the Lease Agreement shall be provided in the form of self insurance, the City shall file with the Trustee annually, within ninety (90) days following the close of each Fiscal Year, a statement of the risk manager of the City or an independent insurance adviser engaged by the City identifying the extent of such self-insurance and stating the determination that the City maintains sufficient reserves with respect thereto. In the event that any such insurance shall be provided in the form of self insurance by the City,the City shall not be obligated to make any payment with respect to any insured event except from such reserves. The Trustee shall not be responsible for the sufficiency or adequacy of any insurance herein required and shall be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss agreed to by the Trustee. (c) If the City shall fail to perform any of its obligations under the Lease Agreement, the Authority or the Trustee may, but shall not be obligated to,take such action as may be necessary to cure such failure, including the advancement of money, and the City shall be obligated to repay all such advances as soon as possible, with interest at the rate payable by the Authority on the Bonds from the date of the advance to the date of repayment. (d) The City shall annually certify in writing to the Trustee that all insurance policies required to be maintained under this Lease are in full force and effect. Installation of Personal Property. The City may, at any time and from time to time, in its sole discretion and at its own expense, install or permit to be installed items of equipment or other personal property in or upon any portion of the Leased Premises. All such items shall remain the sole property of the City, in which neither the Authority nor the Trustee shall have any interest, and may be modified or removed by the City at any time provided that the City shall repair and restore any and all damage to the Leased Premises resulting from the installation, modification or removal of any such items. Nothing in the Lease Agreement shall prevent the City from purchasing or leasing items to be installed pursuant to the Lease Agreement under a lease or conditional sale agreement, or subject to a vendor's lien or security agreement, as security for the unpaid portion of the purchase price thereof,provided that no such lien or security interest shall attach to any part of the Leased Premises. C-32 Liens. Neither the City nor the Authority shall, directly or indirectly, create, incur, assume or suffer to exist any mortgage, pledge, lien, charge, encumbrance or claim on or with respect to any portion of the Leased Premises, other than the respective rights of the Authority and the City as provided herein and other than Permitted Encumbrances. Except as expressly provided in the Lease Agreement, the City and the Authority shall promptly, at their own expense,take such action as may be necessary to duly discharge or remove any such mortgage, pledge, lien, charge, encumbrance or claim, for which it is responsible, if the same shall arise at any time. The City shall reimburse the Authority for any expense incurred by it in order to discharge or remove any such mortgage,pledge, lien, charge,encumbrance or claim. Tax Covenants. (a) Private Activity Bond Limitation. The City shall assure that the proceeds of the Bonds are not so used as to cause the Series A Bonds to satisfy the private business tests of Section 141(b) of the Tax Code or the private loan financing test of Section 141(c) of the Tax Code. (b) Federal Guarantee Prohibition. The City shall not take any action or permit or suffer any action to be taken if the result of the same would be to cause any of the Series A Bonds to be "federally guaranteed" within the meaning of Section 149(b)of the Tax Code. (c) No Arbitrage. The City shall not take, or permit or suffer to be taken by the Trustee or otherwise, any action with respect to the proceeds of the Series A Bonds which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the Closing Date would have caused the Series A Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Tax Code. (d) Maintenance of Tax Exemption. The City shall take all actions necessary to assure the exclusion of interest on the Bonds from the gross income of the Owners of the Series A Bonds to the same extent as such interest is permitted to be excluded from gross income under the Tax Code as in effect on the Closing Date. Payment of Rebatable Amounts. The City agrees to furnish all information to, and cooperate fully with, the Authority and their respective officers, employees, agents and attorneys, in order to assure compliance with the provisions of the Indenture. In the event that the Authority shall determine, pursuant to the Indenture, that any amounts are due and payable to the United States of America thereunder and that neither the Authority nor the Trustee has on deposit an amount of available moneys (excluding moneys on deposit in the funds and accounts established for the payment of the principal of or interest or redemption premium, if any, on the Series A Bonds)to make such payment,the Authority shall promptly notify the City of such fact. Upon receipt of any such notice, the City shall promptly pay the amounts determined by the Authority to be due and payable to the United States of America under the Indenture, such payments to be made in accordance with the applicable provisions of the Tax Code. Continuing Disclosure. The City hereby covenants and agrees that it will comply with and carry out all of the provisions of its Undertaking to Provide Continuing Disclosure with respect to the Bonds, as originally executed and as it may be amended from time to time in accordance with the terms thereof Notwithstanding any other provision of the Lease Agreement, failure of the City to comply with such Undertaking to Provide Continuing Disclosure shall not be considered an Event of Default; however, any Bondholder may take such actions, as provided in such Undertaking to Provide Continuing Disclosure,as may be necessary and appropriate to cause the City to comply with its obligations under such Undertaking to Provide Continuing Disclosure. Damage, Destruction And Eminent Domain;Use Of Net Proceeds Application of Net Proceeds. (a) Deposit in Insurance and Condemnation Fund. Pursuant to the Indenture, the Trustee shall deposit the Net Proceeds of any insurance required by the Lease Agreement and the proceeds of the title C-33 insurance required by the Lease Agreement in the Insurance and Condemnation Fund promptly upon receipt thereof The City and/or the Authority shall transfer to the Trustee any other Net Proceeds received by the City and/or Authority in the event of any taking by eminent domain or condemnation with respect to the Leased Premises, for deposit in the Insurance and Condemnation Fund. (b) Disbursement for Replacement or Repair of the Leased Premises. Upon receipt of the certification described in paragraph (1) below and the requisition described in paragraph (2) below,the Trustee is required by the Indenture to disburse moneys in the Insurance and Condemnation Fund to the person, firm or corporation named in the requisition as provided in the Indenture. (1) Certification. An Authorized Representative of the City must provide to the Authority and the Trustee a certificate stating that: (i) Sufficiency of Net Proceeds. The Net Proceeds available for such purpose, together with any other funds supplied by the City for such purpose, are sufficient to repair or replace the Leased Premises to a use which will have an annual fair rental value not less than the maximum annual Lease Payments and Miscellaneous Rent through the term of the Lease (assuming that the Miscellaneous Rent due in the future will equal the Miscellaneous Rent paid prior to such date) due, and (ii) Timely Completion. In the event that damage, destruction,title defect or taking results in an abatement of Lease Payments, such replacement or repair can be fully completed within a period not in excess of the period in which rental interruption insurance proceeds as described in the Lease Agreement, together with other legally available funds, will be available to pay in fill all Lease Payments coming due during such period. (2) Requisition. An Authorized Representative of the City must state with respect to each payment to be made (i) the requisition number, (ii) the name and address of the person, firm or corporation to whom payment is due, (iii)the amount to be paid, and(iv)that each obligation mentioned therein has been properly incurred, is a proper charge against the Insurance and Condemnation Fund, has not been the basis of any previous withdrawal, and specifying in reasonable detail the nature of the obligation. Any balance of the Net Proceeds remaining after such replacement or repair has been completed shall be disbursed as provided in the Indenture. (c) Disbursement for Prepayment. If an Authorized Representative of the City notifies the Trustee in writing of the City's determination that the certification provided in the Lease Agreement cannot be made or replacement or repair of any portion of the Leased Premises is not economically feasible or in the best interest of the City to repair or replace the Leased Premises, then the City shall deposit with the Trustee an amount which when combined with the Net Proceeds will prepay enough Lease Payments and result in a corresponding prepayment of such that the fair rental value of the remaining portion of the Leased Premises is sufficient to provide for payment of the Lease Payments remaining under the Lease Agreement and that Bonds which remain Outstanding under the Indenture correspond to the remaining Lease Payments, after such Net Proceeds and such deposit by the City are applied to redeem Bonds and under the Indenture. The Trustee is required by the Indenture to promptly transfer the Net Proceeds in respect of such portion to the Redemption Fund as provided in the Indenture and apply them to the prepayment of Lease Payments as provided in the Lease Agreement which shall cause the redemption of the Bonds as provided in the Indenture. Abatement of Lease Payments in the Event of Damage or Destruction. The Lease Payments allocable to the Leased Premises shall be abated during any period in which by reason of damage or destruction (other than by eminent domain which is hereinbefore provided for) there is substantial interference with the use and occupancy of the Leased Premises or any portion thereof The amounts of the Lease Payments under such circumstances may not be less than the amounts of the unpaid Lease Payments, unless such unpaid amounts are determined to be greater than the fair rental value of the portions of the Leased Premises not damaged or destroyed, based upon the opinion of an MAI appraiser with expertise in valuing such properties or other appropriate method of valuation, in which event the Lease Payments shall be abated such that they represent C-34 said fair rental value. Such abatement shall continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction. In the event of any such damage or destruction, the Lease Agreement shall continue in full force and effect and the Authority waives any right to terminate the Lease Agreement by virtue of any such damage and destruction. Notwithstanding the foregoing,there may be no abatement of Lease Payments to the extent that(a)the proceeds of rental interruption insurance, are available to pay Lease Payments; or (b) amounts in the Bond Fund are available to pay Debt Service payable from Lease Payments which would otherwise be abated. Assignment, Subleasing And Amendment Assignment by the Authority. The Authority's rights under the Lease Agreement, including the right to receive and enforce payment of the Lease Payments to be made by the City under the Lease Agreement, have been pledged and assigned to the Trustee for the benefit of the Owners of the Bonds pursuant to the Indenture, to which pledge and assignment the City hereby consents. The assignment of the Lease Agreement to the Trustee is solely in its capacity as Trustee under the Indenture and the duties, powers and liabilities of the Trustee in acting hereunder shall be subject to the provisions of the Indenture, including, without limitation,the provisions of the Lease Agreement. Assignment and Subleasing by the City. The Lease Agreement may not be assigned by the City. The City may sublease the Leased Premises or any portion thereof,but only with the written consent of the Authority and subject to all of the following conditions: (a) the Lease Agreement and the obligation of the City to make Lease Payments hereunder shall remain obligations of the City; (b) the City shall, within thirty (30) days after the delivery thereof, furnish or cause to be furnished to the Authority and the Trustee a true and complete copy of such sublease; (c) no such sublease by the City shall cause the Leased Premises to be used for a purpose other than as may be authorized under the provisions of the laws of the State; and (d) the City shall furnish the Authority and the Trustee with a written opinion of Bond Counsel, stating that such sublease is permitted by the Lease Agreement and the Indenture, and will not cause the interest on the Bonds to become included in gross income for federal income tax purposes. Amendment of the Lease Agreement. The Authority and the City may at any time amend or modify any of the provisions of the Lease Agreement, but only (a) with the prior written consent of a majority in aggregate principal amount of the Outstanding Bonds, or (b) without the consent of any of the Bond Owners, but only if such amendment or modification is for any one or more of the following purposes: (a) to add to the covenants and agreements of the City contained in the Lease Agreement, other covenants and agreements thereafter to be observed, or to limit or surrender any rights or power herein reserved to or conferred upon the City; (b) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained herein, or in any other respect whatsoever as the Authority and the City may deem necessary or desirable, provided that, in the opinion of Bond Counsel, such modifications or amendments will not materially adversely affect the interests of the Owners of the Bonds; (c) to amend any provision thereof relating to the Tax Code, to any extent whatsoever but only if and to the extent such amendment will not adversely affect the exclusion from gross income of interest on the Bonds under the Tax Code, in the opinion of Bond Counsel; C-35 (d) to amend the description of the Leased Premises set forth in Exhibit A hereto to reflect accurately the property originally intended to be included therein, or in connection with any substitution or release pursuant to the Lease Agreement; or (e) to obligate the City to pay additional amounts of rental hereunder for the use and occupancy of the Leased Premises,provided that(A)no Event of Default has occurred and is continuing under this Lease, (B) such additional amounts of rental do not cause the total rental payments made by the City hereunder to exceed the fair rental value of the Leased Premises, as set forth in a certificate of a Authorized Representative of the City filed with the Trustee and the Authority, (C) the City shall have obtained and filed with the Trustee and the Authority a Written Certificate of an Authorized Representative of the City showing that the fair rental value of the Leased Premises is not less than the sum of the aggregate unpaid principal components of the Lease Payments and the aggregate principal components of such additional amounts of rental, and (D) such additional amounts of rental are pledged or assigned for the payment of any bonds, notes, leases or other obligations the proceeds of which shall be applied to finance the construction or acquisition of land, facilities or other improvements which are authorized pursuant to the laws of the State. Events Of Default,Remedies Events of Default Defined. The following shall be "Events of Default"under the Lease Agreement: (a) Failure by the City to pay any Lease Payment required to be paid hereunder at the time specified in the Lease Agreement. (b) Failure by the City to make any Miscellaneous Rent payment required under the Lease Agreement and the continuation of such failure for a period of thirty (30) days. (c) Failure by the City to observe and perform any covenant, condition or agreement on its part to be observed or performed, other than as referred to in the preceding clauses (a) or (b), for a period of thirty (30) days after written notice specifying such failure and requesting that it be remedied has been given to the City by the Authority or the Trustee; provided, however, that if in the reasonable opinion of the City the failure stated in the notice can be corrected, but not within such sixty (60) day period, such failure shall not constitute an Event of Default if the City shall commence to cure such failure within such sixty (60) day period and thereafter diligently and in good faith shall cure such failure in a reasonable period of time. (d) The filing by the City of a voluntary petition in bankruptcy, or failure by the City promptly to lift any execution, garnishment or attachment, or adjudication of the City as a bankrupt, or assignment by the City for the benefit of creditors, or the entry by the City into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the City in any proceedings instituted under the provisions of applicable federal bankruptcy law, or under any similar acts which may hereafter be enacted. Remedies on Default. Whenever any Event of Default referred to in the Lease Agreement shall have happened and be continuing, it shall be lawful for the Authority to exercise any and all remedies available pursuant to law or granted pursuant to the Lease Agreement; provided, however, that notwithstanding anything to the contrary herein or in the Indenture,there shall be no right under any circumstances to accelerate the Lease Payments or otherwise declare any Lease Payments not then in default to be immediately due and payable or to terminate the Lease Agreement or to cause the leasehold interest of the Authority or the subleasehold interest of the City in the Site to be sold, assigned or otherwise alienated. Each and every covenant hereof to be kept and performed by the City is expressly made a condition and upon the breach thereof the Authority may exercise any and all rights of entry and re-entry upon the Leased Premises. In the event of such default and notwithstanding any reentry by the Authority, the City shall, as herein expressly provided, continue to remain liable for the payment of the Lease Payments and/or damages for breach of the Lease Agreement and the performance of all C-36 conditions herein contained, and in any event such rent and damages shall be payable to the Authority at the time and in the manner as provided,to wit: (a) The City agrees to and shall remain liable for the payment of all Lease Payments and the performance of all conditions herein contained and shall reimburse the Authority for any deficiency arising out of the releasing of the Leased Premises, or, in the event the Authority is unable to relet the Leased Premises, then for the full amount of all Lease Payments to the end of the Term of the Lease Agreement,but said Lease Payments and/or deficiency shall be payable only at the same time and in the same manner as hereinabove provided for the payment of Lease Payments hereunder, notwithstanding such entry or reentry by the Authority or any suit in unlawful detainer, or otherwise, brought by the Authority for the purpose of effecting such re entry or obtaining possession of the Leased Premises or the exercise of any other remedy by the Authority. (b) The City irrevocably appoints the Authority as the agent and attorney in fact of the City to enter upon and re lease the Leased Premises in the event of default by the City in the performance of any covenants herein contained to be performed by the City and to remove all personal property whatsoever situated upon the Leased Premises to place such property in storage or other suitable place in the County of San Diego, for the account of and at the expense of the City, and the City hereby exempts and agrees to save harmless the Authority from any costs, loss or damage whatsoever arising or occasioned by any such entry upon and re leasing of the Leased Premises and the removal and storage of such property by the Authority or its duly authorized agents in accordance with the provisions herein contained. (c) The City hereby waives any and all claims for damages caused or which may be caused by the Authority in re entering and taking possession of the Leased Premises as herein provided and all claims for damages that may result from the destruction of or injury to the Leased Premises and all claims for damages to or loss of any property belonging to the City that may be in or upon the Leased Premises. (d) The City agrees that the terms of the Lease Agreement constitute full and sufficient notice of the right of the Authority to re lease the Leased Premises in the event of such re entry without effecting a surrender of the Lease Agreement, and further agrees that no acts of the Authority in effecting such releasing shall constitute a surrender or termination of the Lease Agreement irrespective of the term for which such re leasing is made or the terms and conditions of such re leasing, or otherwise. (e) The City further waives the right to any rental obtained by the Authority in excess of the Lease Payments and hereby conveys and releases such excess to the Authority as compensation to the Authority for its services in re leasing the Leased Premises. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Authority is intended to be exclusive and every such remedy shall be cumulative and shall, except as herein expressly provided to the contrary, be in addition to every other remedy given under the Lease Agreement or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Authority to exercise any remedy reserved to it in the Lease Agreement it shall not be necessary to give any notice, other than such notice as may be required in the Lease Agreement or by law. Agreement to Pay Attorneys' Fees and Expenses. In the event either party to the Lease Agreement should default under any of the provisions hereof and the nondefaulting party should employ attorneys or incur other expenses for the collection of moneys or the enforcement or performance or observance of any obligation or agreement on the part of the defaulting party herein contained, the defaulting party agrees that it will on demand therefor pay to the nondefaulting party the reasonable fees of such attorneys and such other expenses so incurred by the nondefaulting party. C-37 No Additional Waiver bnplied by One Waiver. In the event any agreement contained in the Lease Agreement should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. Trustee and Bondholder to Exercise Rights. Such rights and remedies as are given to the Authority under the Lease Agreement have been assigned by the Authority to the Trustee under the Indenture, to which assignment the City hereby consents. Such rights and remedies shall be exercised by the Trustee and the Owners of the Bonds as provided in the Indenture. C-38 APPENDIX D FORMS OF OPINIONS OF BOND COUNSEL FORM OF SERIES A BOND COUNSEL OPINION [Closing Date] Encinitas Public Financing Authority 505 Vulcan Avenue Encinitas, CA 92024 Re: $3,095,000 Encinitas Public Financing Authority 2014 Lease Revenue Bonds, Series A(Tax-Exempt) (Pacific View Property and Moonlight Beach Lifeguard Tower) Ladies and Gentlemen: We have reviewed the Constitution and laws of the State of California and certain proceedings taken by the Encinitas Public Financing Authority (the "Authority") in connection with the issuance by the Authority of the Encinitas Public Financing Authority 2014 Lease Revenue Bonds (Pacific View Property and Moonlight Beach Lifeguard Tower) being $3,095,000 Series A (Tax-Exempt) (the "Bonds"). Such Bonds are issued concurrently with the Authority's $10,365,000 2014 Lease Revenue Bonds, Series B (Taxable) (the "Series B Bonds"), pursuant to the provisions of Article 4 of Chapter 5 of Division 7 of Title 1 of the California Government Code (the "Law") and pursuant to an Indenture of Trust, dated as of November 1, 2014 (the "Indenture of Trust"), by and between MUFG Union Bank, N.A., as trustee (the "Trustee"), and the Authority. The proceeds of the Bonds will be applied by the Authority to finance improvements to public safety facilities within the City of Encinitas (the "City"). The Authority and the City have entered into a Lease Agreement, dated as of November 1, 2014 (the "Lease Agreement"), whereby the City has leased from the Authority certain City facilities and property (the "Leased Premises") and the City will make Lease Payments for the Leased Premises to the Authority. Pursuant to the Indenture of Trust, the Lease Payments have been assigned by the Authority to the Trustee and will be used by the Trustee to pay the principal of and interest on the Bonds. We have examined the Indenture of Trust,the Lease Agreement and such certified proceedings and other documents and materials as we deem necessary to render this opinion. As to questions of fact material to our opinion, we have relied upon the certified proceedings and other certifications of public officials furnished to us without undertaking to verify the same by independent investigation. Based upon the foregoing,we are of the opinion,under existing law,that: The Authority is a joint powers authority duly organized and validly existing under the laws of the State of California, with power to enter into the Indenture of Trust and the Lease Agreement, to perform the agreements on its part contained therein and to issue the Bonds; The Bonds constitute the valid and legally binding special obligations of the Authority enforceable in accordance with their terms and payable solely from the sources provided therefor in the Indenture of Trust; The Indenture of Trust and the Lease Agreement have been duly approved by the Authority and constitute the valid and legally binding obligations of the Authority enforceable against the Authority in accordance with their respective terms; D-1 The Indenture of Trust establishes a lien on and pledge of the Revenues (as such term is defined in the Indenture of Trust) which consist of Lease Payments and other funds pledged thereby for the security of the Bonds, in accordance with the terms of the Indenture of Trust; Interest on the Bonds is exempt from California personal income taxation. The Internal Revenue Code of 1986, as amended (the "Code"), sets forth certain investment, rebate and related requirements which must be met subsequent to the delivery of the Bonds for the interest received by the owners of the Bonds to be and remain excluded from gross income for purposes of federal income taxation. Noncompliance with such requirements could cause the interest on the Bonds to be subject to federal income taxation retroactive to the date of delivery of the Bonds. Pursuant to the Indenture of Trust the Authority has covenanted to comply with the requirements of the Code. Assuming compliance with the aforementioned covenant,we are of the opinion that,under existing statutes, regulations, rulings and court decisions,the interest on the Bonds is excluded from gross income for purposes of federal income taxation. Interest on the Bonds is not a specific preference item for purposes of the alternative minimum tax provisions of the Code. We are further of the opinion that interest on the Bonds received by corporations will be included in corporate adjusted current earnings, a portion of which may increase the alternative minimum taxable income of such corporations. Although the interest on the Bonds is excluded from gross income for purposes of federal income taxation, the accrual or receipt of interest on the Bonds, or any portion thereof, may otherwise affect the federal income tax liability of the recipient. The extent of these other tax consequences will depend on the recipient's particular tax status or other items of income or deduction. We express no opinion regarding any such consequences. Our opinions, expressed herein, may be affected by action taken (or not taken) on events occurring (or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person,whether any such actions or events are taken or occur. The rights of the owners of the Bonds and the enforceability of the Bonds and the Indenture of Trust may be subject to bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and their enforcement may be subject to the exercise of judicial discretion in accordance with general principles of equity. Respectfully submitted, D-2 FORM OF SERIES B BOND COUNSEL OPINION [Closing Date] Encinitas Public Financing Authority 505 Vulcan Avenue Encinitas, CA 92024 Re: $10,365,000 Encinitas Public Financing Authority Lease Revenue Bonds, 2014 Series B (Taxable) (Pacific View Property and Moonlight Beach Lifeguard Tower) Ladies and Gentlemen: We have reviewed the Constitution and laws of the State of California and certain proceedings taken by the Encinitas Public Financing Authority (the "Authority") in connection with the issuance by the Authority of the Encinitas Public Financing Authority 2014 Lease Revenue Bonds (Pacific View Property and Moonlight Beach Lifeguard Tower) being $10,365,000 Series B (Taxable) (the "Bonds"). Such Bonds are issued concurrently with the Authority's $3,095,000 2014 Lease Revenue Bonds, Series A (Tax-Exempt) (the "Series A Bonds"), pursuant to the provisions of Article 4 of Chapter 5 of Division 7 of Title 1 of the California Government Code (the "Law") and pursuant to an Indenture of Trust, dated as of November 1, 2014 (the "Indenture of Trust"), by and between MUFG Union Bank, N.A., as trustee (the "Trustee"), and the Authority. The proceeds of the Bonds will be applied by the Authority to finance the acquisition of property within the City of Encinitas (the "City"). The Authority and the City have entered into a Lease Agreement, dated as of November 1, 2014 (the "Lease Agreement"), whereby the City has leased from the Authority certain City facilities and property (the "Leased Premises") and the City will make Lease Payments for the Leased Premises to the Authority. Pursuant to the Indenture of Trust,the Lease Payments have been assigned by the Authority to the Trustee and will be used by the Trustee to pay the principal of and interest on the Bonds.We have examined the Indenture of Trust, the Lease Agreement and such certified proceedings and other documents and materials as we deem necessary to render this opinion. As to questions of fact material to our opinion, we have relied upon the certified proceedings and other certifications of public officials furnished to us without undertaking to verify the same by independent investigation. Based upon the foregoing,we are of the opinion,under existing law,that: The Authority is a joint powers authority duly organized and validly existing under the laws of the State of California, with power to enter into the Indenture of Trust and the Lease Agreement, to perform the agreements on its part contained therein and to issue the Bonds; The Bonds constitute the valid and legally binding special obligations of the Authority enforceable in accordance with their terms and payable solely from the sources provided therefor in the Indenture of Trust; The Indenture of Trust and the Lease Agreement have been duly approved by the Authority and constitute the valid and legally binding obligations of the Authority enforceable against the Authority in accordance with their respective terms; The Indenture of Trust establishes a lien on and pledge of the Revenues (as such term is defined in the Indenture of Trust) which consist of Lease Payments and other funds pledged thereby for the security of the Bonds, in accordance with the terms of the Indenture of Trust; Interest on the Bonds is exempt from California personal income taxation. D-3 Interest on the Bonds is not excluded from gross income for federal income tax purposes. Except as stated in the preceding three paragraphs,we express no opinion as to any federal or state tax consequences of the ownership or disposition of the Bonds. Furthermore, we express no opinion as to any federal, state or local tax law consequences with respect to the Bonds, or the interest thereon, if any action is taken with respect to the Bonds or the proceeds thereof predicated or permitted upon the advice or approval of bond counsel other than ourselves. Our opinions are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof.We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above. To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. Our opinions, expressed herein, may be affected by action taken (or not taken) on events occurring (or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person,whether any such actions or events are taken or occur. The rights of the owners of the Bonds and the enforceability of the Bonds and the Indenture of Trust may be subject to bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and their enforcement may be subject to the exercise of judicial discretion in accordance with general principles of equity. Respectfully submitted, D-4 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement (the "Disclosure Agreement") is executed and delivered by the City of Encinitas (the "City") and the Encinitas Public Financing Authority (the "Authority")in connection with the issuance of the Authority's $13,460,000 aggregate principal amount 2014 Lease Revenue Bonds (Pacific View Property and Moonlight Beach Lifeguard Tower) (the `Bonds"). The Bonds have been issued pursuant to an Indenture of Trust dated as of November 1, 2014, between the Authority and MUFG Union Bank, N.A., as trustee (the "Trustee") (the "Indenture"). The City and the Authority covenant and agree as follows: Section 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the City and the Authority for the benefit of the holders and beneficial owners of the Bonds. Section 2. Definitions. (a) "Annual Report" means any Annual Report provided by the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement. (b) "Dissemination Agent"means,initially,Applied Best Practices, as Dissemination Agent, or any successor Dissemination Agent designated in writing by the City which has filed with the City a written acceptance of such designation. (c) "Participating Underwriter" means Stifel, Nicolaus & Company, Incorporated, or any other financial institution required to comply with the Rule in connection with the reoffering of the Bonds. (d) "Official Statement" means the Official Statement dated November 4, 2014, prepared in connection with the issuance of the Bonds. (e) "Repository"means the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system, and any other Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. (f) "Rule" means Rule 15c2-12 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. (g) "Significant Events" shall mean any of the events listed in Section 5 of this Disclosure Agreement. (h) "MSRB"means the Municipal Securities Rulemaking Board. The current address of the MSRB is 1640 King Street, 4300, Alexandria, Virginia 22314, Attn: The Interim CDI System, telephone: (202) 223- 9503. (i) "SEC"means the Securities and Exchange Commission. Section 3. Provision of Annual Reports. (a) The City shall, or shall cause the Dissemination Agent to, not later than March 1 in each year while the Bonds are outstanding commencing on March 1, 2015, provide to each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. Not later than fifteen (15) business days prior to said date, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). The Annual Report may be submitted as a single document or separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report. E-1 (b) If the City is unable to provide to the Repository an Annual Report by the date required in subsection(a),the City shall send a notice to the MSRB in substantially the form attached as Exhibit A hereto. (c) The Dissemination Agent shall: (i) Determine each year prior to the date for providing the Annual Report the name and address of the Repository; and(if the Dissemination Agent is other than the City). (ii) File a report with the City certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and listing all Repositories to which it was provided. Section 4. Content of Annual Reports. The City's Annual Report shall contain or incorporate by reference the following: (a) A copy of its annual financial statements prepared in accordance with generally accepted accounting principles, audited by a firm of certified public accountants. If audited annual financial statements are not available by the time specified in Section 3(a) above, unaudited financial statements will be provided as part of the Annual Report and audited financial statements will be provided when and if available. In such an event, the Disclosure Agreement shall contain a statement as to the estimated date on which the City's audited financial statements are expected to be available. (b) The following information, to the extent not included in the audited financial statements of the City, shall include the following: (i) information concerning the actual revenues, expenditures and beginning and ending fund balances relating to the General Fund of the City for the most recently completed Fiscal Year, including information showing tax revenue collections by source (Table A-9); (ii) information showing the aggregate principal amount of long-term bonds, leases and other obligations of the City which are payable out of the General Fund of the City, as of the close of the most recently completed Fiscal Year(Table A-7); (iii) information concerning the assessed valuation of properties within the City for the most recently completed Fiscal Year, showing the valuation for secured, public utility and unsecured property (Table A-11); (iv) information showing the total secured property tax levy and actual amounts collected for the most recently completed Fiscal Year(Table A-12); and (v) information showing the balance sheet of the General Fund of the City as of the close of the most recently completed Fiscal Year, including categorized assets, liabilities and reserved and unreserved fund balances (Table A-8). (c) In addition to any of the information expressly required to be provided under paragraphs (a) and (b) of this Section, the City shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made,not misleading. Any or all of the items listed above may be incorporated by reference from other documents, including official statements of debt issues of the City or related public entities, which have been submitted to each of the Repositories or the SEC. If the document incorporated by reference is a final official statement, it must be available from the MSRB. The City shall clearly identify each such document incorporated by reference. E-2 Section 5. Reporting of Significant Events. (a) Pursuant to the provisions of this Section 5,the City and the Authority shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds in a timely manner not in excess of 10 business days after the occurrence of the event: 1. principal and interest payment delinquencies. 2. tender offers. 3. defeasances. 4. rating changes. 5. adverse tax opinions, or the issuance by the Internal Revenue Service of proposed or final determinations of taxability, or Notices of Proposed Issue (IRS Form 5701-TEB). 6. unscheduled draws on the debt service reserves reflecting financial difficulties. 7. unscheduled draws on credit enhancement reflecting financial difficulties. 8. substitution of the credit or liquidity providers or their failure to perform. 9. bankruptcy, insolvency, receivership or similar event of the City or Authority. For the purposes of the event identified in this Section 5(a)(9),the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for the City or Authority in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City or Authority, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City or Authority. (b) Pursuant to the provisions of this Section 5, the City and Authority shall give, or cause to be given,notice of the occurrence of any of the following events with respect to the Bonds, if material: 1. non-payment related defaults. 2. modifications to rights of bondholders. 3. optional, contingent or unscheduled note calls. 4. unless described under Section 5(a)(5) above, material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds. 5. release, substitution or sale of property securing repayment of the Bonds. 6. the consummation of a merger, consolidation, or acquisition involving the City or Authority or the sale of all or substantially all of the assets of the City or Authority, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms. 7. Appointment of a successor or additional trustee or paying agent with respect to the Bonds or the change of name of such a trustee or paying agent. E-3 (c) Whenever the City or Authority obtains knowledge of the occurrence of a Listed Event under Section 5(b) hereof, the City or Authority shall as soon as possible determine if such event would be material under applicable federal securities laws. (d) If the City or Authority determines that knowledge of the occurrence of a Listed Event under Section 5(c)hereof would be material under applicable federal securities laws,the City or Authority shall(i)file a notice of such occurrence with the Repository in a timely manner not in excess of 10 business days after the occurrence of the event or (ii) provide notice of such reportable event to the Dissemination Agent in format suitable for filing with the Repository in a timely manner not in excess of 10 business days after the occurrence of the event. The Dissemination Agent shall have no duty to independently prepare or file any report of Listed Events. The Dissemination Agent may conclusively rely on the City's or Authority's determination of materiality pursuant to Section 5(c). Section 6. Termination of Reporting Obligation. The City's and the Authority's obligations under this Disclosure Agreement shall be in effect from and after the execution and delivery of the Bonds and shall extend to the earlier of(i) the date all principal and interest on the Bonds shall have been deemed paid pursuant to the terms of the Indenture; (ii) the date that the City and the Authority shall no longer constitute an "obligated person"within the meaning of the Rule. Section 7. Enforcement. The obligations of the City and the Authority hereunder shall be for the benefit of the Participating Underwriter and the Owners of the Bonds, including Beneficial Owners of the Bonds. Unless otherwise required by law, no owners of the Bonds shall be entitled to damages for the City's or the Authority's non-compliance with its undertakings set forth in this Disclosure Agreement; however, the Participating Underwriter, and Owners of the Bonds, including Beneficial Owners of the Bonds, may enforce specific performance of such undertakings by any judicial proceeding available. Breach of the undertakings of the City and the Authority hereunder shall not constitute an event of default under the Indenture and none of the rights and remedies provided by the Indenture with respect to an event of default, shall be available to the Participating Underwriter, Owners of the Bonds, including Beneficial Owners. Section 8. Dissemination Agent; Duties. The City or the Authority may, from time to time, appoint or engage a Dissemination Agent to assist the City in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement. The obligations of the City under this Disclosure Agreement shall survive resignation or removal of the Dissemination Agent. The Dissemination Agent shall be paid compensation by the Authority for its services provided hereunder in accordance with its schedule of fees as amended from time to time and shall be reimbursed by the Authority all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. Neither the Dissemination Agent nor the Trustee shall have any duty or obligation to review any information provided to it hereunder or shall be deemed to be acting in any fiduciary capacity for the Authority, the owners of the Bonds or any other party. Any company succeeding to all or substantially all of the Dissemination Agent's corporate trust business shall be the successor to the Dissemination Agent hereunder without the execution or filing of any document or any further act. Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the City and the Authority may amend this Disclosure Agreement, and any provision of this Disclosure Agreement may be waived, if (i) such amendment or waiver does not, in and of itself, cause the undertakings herein to violate the Rule, but taking into account any subsequent change in or official interpretation of the Rule and the amendment or waiver either(i) is approved by the Owners of the Bonds in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Owners, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Owners or E-4 Beneficial Owners of the Bonds. The City shall provide notice of any such amendment or waiver to each Repository. In the event of any amendment or waiver of a provision of this Disclosure Agreement, the City shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the City. In addition, if the amendment related to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5 and (ii) the Annual Report for the year in which the change is made should represent a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the formed accounting principles. Section 10. Default. In the event of a failure of the City or the Authority to comply with any provision of this Disclosure Agreement, the Trustee at the written direction of the Participating Underwriter or the Owners of at least 25%aggregate principal amount of Outstanding Bonds, shall, or any Owner or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Agreement, but only to the extent funds have been provided to it or it has been otherwise indemnified to its satisfaction from any cost, liability, expense or additional charges of the Trustee whatsoever, including, without limitation, fees and expenses of its attorney. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement shall be an action to compel performance. Section 11. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the City of the Authority from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of an event other than a Significant Event, in addition to that which is required by this Disclosure Agreement. If the City chooses to include any information in any Annual Report or notice of the occurrence of an event other than a Significant Event in addition to what is specifically required by this Disclosure Agreement, the City shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Significant Event. Section 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the City, the Authority, the Trustee, the Dissemination Agent, the Underwriter and Owners and Beneficial Owners from time to time of the Bonds, and shall create not rights in any other person or entity. E-5 Section 13. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. DATE: November 18, 2014 CITY OF ENCINITAS By: Authorized Signature ENCINITAS PUBLIC FINANCING AUTHORITY By: Authorized Signature ACCEPTED BY: APPLIED BEST PRACTICES, as Dissemination Agent By: Authorized Signature E-6 EXHIBIT A NOTICE TO REPOSITORY OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Encinitas Public Financing Authority (the "Issuer") Issue: 2014 Lease Revenue Bonds (Pacific View Property and Moonlight Beach Lifeguard Tower) Date of Delivery: November 18, 2014 NOTICE IS HEREBY GIVEN that the Issuer has not provided an Annual Report with respect to the above-referenced Bonds as required by resolution of the governing board of the Issuer and by the Continuing Disclosure Agreement executed on by the Issuer and the City of Encinitas. The Issuer anticipates that the Annual Report will be filed on or before Dated: ENCINITAS PUBLIC FINANCING AUTHORITY By: Authorized Signature E-7 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX F BOOK ENTRY PROVISIONS The information in this Appendix concerning DTC and DTC's book-entry only system has been obtained from sources that the Authority and the Underwriter believe to be reliable, but neither the Authority or the Underwriter take any responsibility for the completeness or accuracy thereof. The following description of the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal, premium, if any, and interest on the Bonds to DTC Participants or Beneficial Owners, confirmation and transfers of beneficial ownership interests in the Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered bond will be issued for each annual maturity of the Bonds, each in the aggregate principal amount of such annual maturity, and will be deposited with DTC. DTC, the world's largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a"clearing corporation"within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries)that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust& Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks,trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has a Standard & Poor's rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond (`Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive bonds representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to F-1 whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the Authority or the Trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Trustee, or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede &Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. A Bond Owner shall give notice to elect to have its Bonds purchased or tendered, through its Participant, to the Trustee, and shall effect delivery of such Bonds by causing the Direct Participant to transfer the Participant's interest in the Bonds, on DTC's records,to the Trustee. The requirement for physical delivery of Bonds in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Bonds are transferred by Direct Participants on DTC's records and followed by a book- entry credit of tendered Bonds to the Trustee's DTC account. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Trustee. Under such circumstances, in the event that a successor depository is not obtained,physical certificates are required to be printed and delivered. The Authority may decide to discontinue use of the system of book-entry only transfers through DTC (or a successor securities depository). In that event,bonds will be printed and delivered to DTC. THE TRUSTEE, AS LONG AS A BOOK-ENTRY ONLY SYSTEM IS USED FOR THE BONDS, WILL SEND ANY NOTICE OF REDEMPTION OR OTHER NOTICES TO OWNERS ONLY TO DTC. ANY FAILURE OF DTC TO ADVISE ANY DTC PARTICIPANT, OR OF ANY DTC PARTICIPANT TO NOTIFY ANY BENEFICIAL OWNER, OF ANY NOTICE AND ITS CONTENT OR EFFECT WILL NOT AFFECT THE VALIDITY OF SUFFICIENCY OF THE PROCEEDINGS RELATING TO THE REDEMPTION OF THE BONDS CALLED FOR REDEMPTION OR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE. F-2 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] z n z y rn b r n z z n z O y O y �C ha 0 r rn by O z d rn b n n b O b y �C z d O O z r y by n r O d �S Mixed Sources fk 16 Product g—p ft.w 11.n ged O - fo s ntr Iled sources and "gd.dcwood or fiber. Printed by:ImageMaster,LLC www.imagemaster.com u