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08. Official Statement NEW ISSUE—BOOK-ENTRY ONLY RATING:S&P: "AA+" See"RATING"herein. In the opinion of Best Best&Krieger LLP,Riverside, California,Bond Counsel,subject,however, to certain qualifications described herein, under existing law, the interest on the Bonds is not excluded from gross income for federal income tax purposes.. Interest on the Bonds is exempt from State of California personal income taxes. See the caption"TAX MATTERS." $9,505,000 ENCINITAS PUBLIC FINANCING AUTHORITY 2021 FEDERALLY TAXABLE LEASE REVENUE REFUNDING BONDS SERIES A (Pacific View Property) Dated: Date of Delivery Due: October 1,as shown on inside cover The 2021 Federally Taxable Lease Revenue Refunding Bonds,Series A(Pacific View Property)(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 October 1, 2021,and principal payable on the Bonds will be paid by U.S. Bank National Association,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 refunding a portion of certain bonds issued to acquire a property known as Pacific View Property.and to pay costs of issuance. 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 First Amended and Supplemental Lease Agreement,dated as of July 1,2021(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. The Leased Premises are also encumbered under the 2014 Lease (defined herein)in connection with the Authority's $2,690,000 outstanding 2014 Lease Revenue Bonds (Pacific View School and Moonlight Beach Lifeguard Tower), Series A and the portion of the Prior Bonds, defined herein, which will remain outstanding in the amount of $455,000 and lease payments payable with respect to the Lease Agreement are payable on a parity with the 2014 Lease. 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. 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 July 1,2021 (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 IN CONTRAVENTION 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 IN CONTRAVENTION 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. Kutak Rock LLP,Irvine,California,will pass upon certain matters on behalf of the Underwriter. 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 July 28,2021. 4* Hilltop5ecurities RH11"Hokkgs Cnmpwq. Dated: July 13,2021 $9,505,000 ENCINITAS PUBLIC FINANCING AUTHORITY 2021 FEDERALLY TAXABLE LEASE REVENUE REFUNDING BONDS SERIES A (Pacific View Property) MATURITY SCHEDULE $5,515,000 Serial Bonds (Base CUSIP : 292521) Maturity Date (October 1) Principal Amount* Interest Rate Yield Price CUSIP 2021 $ 80,000 0.350% 0.350% 100.000 GK1 2022 105,000 0.400 0.400 100.000 GL9 2023 345,000 0.500 0.500 100.000 GM7 2024 345,000 0.790 0.790 100.000 GN5 2025 350,000 1.020 1.020 100.000 GP0 2026 355,000 1.270 1.270 100.000 GQ8 2027 360,000 1.460 1.460 100.000 GR6 2028 365,000 1.660 1.660 100.000 GS4 2029 370,000 1.840 1.840 100.000 GT2 2030 380,000 1.990 1.990 100.000 GU9 2031 385,000 2.090 2.090 100.000 GV7 2032 395,000 2.240 2.240 100.000 GW5 2033 405,000 2.340 2.340 100.000 GX3 2034 415,000 2.375 2.440 99.269 GY1 2035 425,000 2.375 2.540 98.044 GZ8 2036 435,000 2.500 2.640 98.256 HA2 $1,870,000 2.970% Term Bond Maturing October 1, 2040, Yield: 2.970%, Price: 100.000, CUSIP : HB0 $2,120,000 3.070% Term Bond Maturing October 1, 2044, Yield: 3.070%, Price: 100.000, CUSIP : HC8 Copyright 2021. 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. ENCINITAS PUBLIC FINANCING AUTHORITY AUTHORITY BOARD OF DIRECTORS Catherine S. Blakespear, Chairperson Tony Kranz, Vice Chairperson Kellie Hinze, Member Joy Lyndes, Member Joe Mosca, Member ENCINITAS CITY COUNCIL Catherine S. Blakespear, Mayor Tony Kranz, Deputy Mayor Kellie Hinze, Council Member Joy Lyndes, Council Member Joe Mosca, Council Member AUTHORITY/CITY STAFF Pamela Antil, Executive Director/City Manager Teresa S. McBroome, Treasurer/Director of Finance Kathy Hollywood, Secretary/City Clerk Leslie Devaney, Authority Counsel/Interim City Attorney SPECIAL SERVICES Bond Counsel & Disclosure Counsel Best Best & Krieger LLP Riverside, California Municipal Advisor Fieldman, Rolapp & Associates, Inc. Irvine, California Trustee U.S. Bank National Association Los Angeles, California Verification Agent Causey Demgen & Moore P.C. 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 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 -i- INTRODUCTION ............................................. 1 General ......................................................... 1 The Authority and the City .......................... 1 Security for the Bonds ................................. 2 Abatement .................................................... 2 Redemption .................................................. 2 Continuing Disclosure ................................. 3 COVID-19 Impact ....................................... 3 Forward-Looking Statements ....................... 4 Summary of Terms ...................................... 4 THE AUTHORITY ........................................... 4 THE CITY ......................................................... 4 THE FINANCING PLAN ................................. 6 Refunding 2014 Lease Revenue Bonds ....... 6 SOURCES AND USES OF FUNDS ................ 6 Sources and Uses of Funds .......................... 6 Debt Service Schedule ................................. 7 THE LEASED PREMISES ............................... 8 The Leased Premises .................................... 8 Substitution of Leased Premises .................. 8 Lease Payment Schedule .............................. 9 THE BONDS .................................................. 10 Description of the Bonds ........................... 10 Redemption ................................................ 11 Book-Entry System .................................... 12 SECURITY FOR THE BONDS ..................... 13 General ....................................................... 13 Lease Payments .......................................... 13 Additional Bonds ....................................... 14 Appropriation; Use of Leased Premises ..... 14 Abatement .................................................. 15 Action on Default ....................................... 15 Miscellaneous Rent .................................... 15 Insurance .................................................... 16 No Reserve Account .................................. 16 RISK FACTORS ............................................. 16 No Tax Pledge ............................................ 17 Appropriation ............................................. 17 No Limit on Additional General Fund Obligations ............................................ 17 Abatement and Eminent Domain ............... 17 No Reserve Fund ........................................ 18 Sufficiency of Lease Payments .................. 18 Increasing Retirement Related Costs ......... 18 Dependence on State for Certain Revenues ............................................... 18 Limited Recourse on Lease Default ........... 18 Limitation on Enforcement of Remedies; No Acceleration .................. 18 Seismic, Topographic and Climatic Conditions ............................................. 19 Hazardous Substances ................................ 20 Risk of Uninsured Loss .............................. 20 Property Tax Allocation by the State; Changes in Law ..................................... 20 Bankruptcy and Foreclosure ....................... 21 Secondary Market Risk .............................. 21 No Liability of Authority to the Owners .... 21 Cybersecurity .............................................. 22 CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS ....................................... 23 Limitations on Revenues ............................ 23 Expenditures and Appropriations ............... 25 Voter Initiatives .......................................... 26 Unitary Property ......................................... 27 Proposition 26 ............................................. 27 Future Initiatives ......................................... 28 TAX MATTERS ............................................. 28 CONTINUING DISCLOSURE ....................... 31 CERTAIN LEGAL MATTERS ...................... 32 LITIGATION .................................................. 32 MUNICIPAL ADVISOR ................................ 32 FINANCIAL STATEMENTS ......................... 32 RATING .......................................................... 32 UNDERWRITING .......................................... 32 MISCELLANEOUS ........................................ 34 APPENDIX A - CITY FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION ................................. A-1 APPENDIX B - CITY’S AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2019-20 ..................... B-1 APPENDIX C - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS ...................... C-1 APPENDIX D - FORM OF OPINION OF BOND COUNSEL ............................... D-1 APPENDIX E - FORM OF CONTINUING DISCLOSURE AGREEMENT ........... E-1 APPENDIX F - BOOK-ENTRY PROVISIONS ...................................... F-1 City of Encinitas Location Map Municipal Boundary ��•L._.J - Freeways QQ//mow 'j Major Roads l r•� i f-1 i I• i i J I t i - i I �i N Miles 0 1 2 4 OFFICIAL STATEMENT $9,505,000 ENCINITAS PUBLIC FINANCING AUTHORITY 2021 FEDERALLY TAXABLE LEASE REVENUE REFUNDING BONDS SERIES A (Pacific View Property) 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 2021 Federally Taxable Lease Revenue Refunding Bonds, Series A (Pacific View Property) (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 July 1, 2021 (the “Indenture”), between the Authority and U.S. Bank National Association (the “Trustee”). Proceeds of the Bonds will be used to refund a portion of the outstanding bonds which were issued to finance the Project as described herein under “THE FINANCING PLAN,” and to pay costs of issuance of the 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 First Amended and Supplemental Lease Agreement (the “Lease Agreement”), dated as of July 1, 2021, between the City and the Authority, for certain real property and the improvements thereon (the “Leased Premises”), which Lease Agreement amends and supplements a Lease Agreement, dated as of November 1, 2014 (the “2014 Lease”), by and between the City and the Authority. 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 25 miles north of the City of San Diego. The California Department of Finance has estimated that the City has a population of approximately 62,289, as of January 1, 2021. For other selected information concerning the City, see “THE CITY” herein and APPENDIX A – “CITY FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION” and APPENDIX B – “CITY’S AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2019-20” 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, the Cardiff 2 Sanitation District (all of which have since been absorbed into the City) 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 Leased Premises are also encumbered under the 2014 Lease in connection with the Authority’s $2,690,000 outstanding 2014 Lease Revenue Bonds (Pacific View School and Moonlight Beach Lifeguard Tower), Series A (the “Prior Series A Bonds”) and the maturities of the Prior Bonds in 2021 and 2022 in the amount of $455,000, and lease payments payable with respect to the Lease Agreement are payable on a parity with the 2014 Lease. 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 IN CONTRAVENTION 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. 3 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 2020-21 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 enumerated events by the City is summarized in APPENDIX E – “FORM OF CONTINUING DISCLOSURE AGREEMENT.” For the last five years, the City and its related entities are currently in compliance with all continuing disclosure obligations. COVID-19 Impact The COVID-19 pandemic significantly affected the local, state and world economies. While the Governor of California reopened the State on June 15, 2021, an emergency order remains in place to ensure that the State can respond to evolving conditions. The City cannot currently predict the extent or duration of the COVID-19 pandemic, if any outbreaks will occur or what ultimate impact it may have on the City’s future financial condition or operations. The temporary and permanent business closures caused by the COVID-19 pandemic have led to a stark increase in unemployment across the County and the nation. The economic costs may be very significant for the City and the region’s economy. Restaurants, retail stores and other non-essential businesses temporarily or permanently closed and, unemployment figures became elevated. According to the State Employment Development Department, the County’s unemployment rate was 9.1% in December 2020 while the City’s unemployment was lower at 5.8%. The impacts from the COVID-19 pandemic on the City’s general fund revenues in Fiscal Year 2019-20 will continue into Fiscal Year 2020-21 and potentially several fiscal years beyond depending on the pace of recovery of the local economy to the levels which existed prior to the outbreak of the COVID-19 pandemic. However, with the City’s strong property values and the City’s balanced and diverse sales tax generators, property taxes and sales tax are expected to continue to offset any negative impacts that the City has experienced from other revenue categories. On June 11, 2021, the Governor rescinded the stay at home order and blueprint for reopening, such that all of California is open. However, business and local agencies continue to exercise some discretion as they open for business. See the captions “CITY FINANCIAL INFORMATION — General Economic Condition and Outlook of the City” and “CITY FINANCIAL INFORMATION — Major Revenues.” On March 11, 2021, President Biden signed the American Rescue Plan Act (the “Rescue Act”) which includes $1.9 trillion of funding for individuals, businesses and state and local governments to mitigate the impacts of the COVID-19 pandemic. The City expects to receive approximately $8.1 million in Rescue Act funding over the current fiscal year and fiscal year 2021-22. There are many variables that will continue to contribute to the economic impact of the COVID-19 pandemic and the recovery therefrom, including the length of time social distancing measures are in place, the effectiveness of State and Federal governments’ relief programs and the timing for the containment and treatment of COVID-19. Certain historical information set forth in APPENDIX A - CITY FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION may not reflect the impacts of the federal, state and local responses to the COVID-19 pandemic. Further, projected information set forth in this Official Statement, including under the caption APPENDIX A - CITY FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION, may be negatively affected in unpredictable and material ways by the continuing impacts to the governmental responses to the COVID-19 pandemic. See APPENDIX A - CITY FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION and “RISK FACTORS—COVID-19 Pandemic.” 4 Forward-Looking Statements This Official Statement speaks only as of its date as set forth on the cover, and the information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Authority or the City since the date of this Official Statement. Further, 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 Finance Director, 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 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.encinitasca.gov. 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. 5 For other selected information concerning the City, see “THE CITY” herein and APPENDIX A – “CITY FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION” and APPENDIX B – “CITY’S AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2019-20” attached hereto. 6 THE FINANCING PLAN Refunding 2014 Lease Revenue Bonds The Authority is selling the Bonds, in part, to provide moneys (together with other available funds of the Authority) necessary to currently refund and defease a portion of its $9,130,000 outstanding 2014 Lease Revenue Bonds (Pacific View School and Moonlight Beach Lifeguard Tower), Series B (Taxable) (the “Prior Bonds”). The maturities of the Prior Bonds in 2021 and 2022 will remain outstanding in the aggregate amount of $455,000. A portion of the proceeds of the Bonds, along with certain remaining funds from the Prior Bonds, will be transferred to U.S. Bank National Association, as successor in interest to MUFG Union Bank, N.A., the trustee for the Prior Bonds (the “Prior Trustee”). Proceeds deposited with the Prior Trustee will be used by the Prior Trustee to pay the redemption price of the Prior Bonds, plus accrued interest, on October 1, 2022. See “ESTIMATED SOURCES AND USES OF FUNDS” herein. Upon deposit of such proceeds and other moneys with the Prior Trustee, the Prior Bonds will no longer be deemed outstanding. The moneys and securities held by the Prior Trustee are pledged to the payment of the Prior Bonds, and are not available to pay principal of or interest on the Bonds. Pacific View Property In 2014, the City purchased approximately 2.8 acres and existing structures of a site referred to as Pacific View Elementary School (the “Pacific View Property”) from 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 was $10,000,000, and since the acquisition by the City, the City has not changed or improved the property. SOURCES AND USES OF FUNDS Sources and Uses of Funds The table below sets forth the estimated sources and uses of funds with respect to the Bonds and funds related to the Prior Bonds. Source of Funds Total Principal Amount of Bonds $9,505,000.00 Less: Original Issue Discount (18,933.05) Total $9,486,066.95 Uses of Funds Escrow for Prior Bonds $9,278,974.30 Costs of Issuance Fund(1) 207,092.65 Total $9,486,066.95 _______________________ (1) Costs of Issuance include printing costs, fees of rating agency, municipal advisor, bond counsel and disclosure counsel, underwriter’s discount, trustee’s fees and expenses and other costs relating to the issuance of the Bonds. 7 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 inside 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 (October 1) Principal Interest Total Annual Debt Service 2021 $ 80,000 $ 37,928.36 $ 117,928.36 2022 105,000 216,453.50 321,453.50 2023 345,000 216,033.50 561,033.50 2024 345,000 214,308.50 559,308.50 2025 350,000 211,583.00 561,583.00 2026 355,000 208,013.00 563,013.00 2027 360,000 203,504.50 563,504.50 2028 365,000 198,248.50 563,248.50 2029 370,000 192,189.50 562,189.50 2030 380,000 185,381.50 565,381.50 2031 385,000 177,819.50 562,819.50 2032 395,000 169,773.00 564,773.00 2033 405,000 160,925.00 565,925.00 2034 415,000 151,448.00 566,448.00 2035 425,000 141,591.76 566,591.76 2036 435,000 131,498.00 566,498.00 2037 445,000 120,623.00 565,623.00 2038 460,000 107,406.50 567,406.50 2039 475,000 93,744.50 568,744.50 2040 490,000 79,637.00 569,637.00 2041 505,000 65,084.00 570,084.00 2042 525,000 49,580.50 574,580.50 2043 535,000 33,463.00 568,463.00 2044 555,000 17,038.50 572,038.50 Total $9,505,000 $3,383,276.12 $12,888,276.12 8 THE LEASED PREMISES The Leased Premises The Leased Premises consists of the City’s Fire Station No. 5 and the Encinitas Community and Senior Center. 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 6,948 square feet and was constructed in 2000. The building has a 2-bay apparatus garage with roll up doors. The current insured value of Fire Station No. 5 is $2,301,211. Community Center. The Encinitas Community and Senior Center is located at 1140 Oakcrest Park Dr., and is approximately 38,386 square feet. The Community Center was built in 2002 and has been operated continuously by the City. The Community 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 current insured value of the Community Center is $15,346,325. The City is also leasing the Leased Premises from the Authority pursuant to the 2014 Lease which was entered into in connection with the issuance of the Prior Bonds and the Prior Series A Bonds. The Lease Agreement represents an amendment and supplement to the 2014 Lease. Therefore, Lease Payments payable by the City on the Lease Agreement and the 2014 Lease will be payable on a parity basis. 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 Rating Agencies; (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 which adds thereto a description of the Substitute Leased Premises and deletes therefrom the description of the Former Leased Premises or the Released 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 remaining Lease Payments after such substitution 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 to the Authority and the Trustee that the fair rental value of the remaining Leased Premises after removal of the Released 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 serve the public purposes of the City and constitute property which the City is permitted to lease under the laws of the State; 9 (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 hereunder; (f) In the case of a substitution, the City shall obtain a CLTA policy of title insurance in accordance with the Lease Agreement; (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 herein; 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 under the Lease Agreement. 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. Lease Payment Schedule The following table presents the lease payment schedule for the City which secure the 2014 A Bonds and remaining Prior Bonds and the Bonds based on the maturity date and interest rate set forth on the 2014 Lease and the inside cover of this Official Statement, assuming no redemptions other than mandatory sinking fund redemptions are made. 10 CITY OF ENCINITAS COMBINED LEASE PAYMENT SCHEDULE Annual Lease Payment Date 2014B Remaining Lease Payment 2021 Total Lease Payment Total Lease Payments 2021 $232,112.50 $ 117,928.36 $ 350,040.86 2022 237,475.00 321,453.50 558,928.50 2023 - 561,033.50 561,033.50 2024 - 559,308.50 559,308.50 2025 - 561,583.00 561,583.00 2026 - 563,013.00 563,013.00 2027 - 563,504.50 563,504.50 2028 - 563,248.50 563,248.50 2029 - 562,189.50 562,189.50 2030 - 565,381.50 565,381.50 2031 - 562,819.50 562,819.50 2032 - 564,773.00 564,773.00 2033 - 565,925.00 565,925.00 2034 - 566,448.00 566,448.00 2035 - 566,591.76 566,591.76 2036 - 566,498.00 566,498.00 2037 - 565,623.00 565,623.00 2038 - 567,406.50 567,406.50 2039 - 568,744.50 568,744.50 2040 - 569,637.00 569,637.00 2041 - 570,084.00 570,084.00 2042 - 574,580.50 574,580.50 2043 - 568,463.00 568,463.00 2044 - 572,038.50 572,038.50 Total $469,587.50 $12,888,276.12 $13,357,863.62 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 October 1, 2021, 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. 11 Redemption Optional Redemption. The Bonds maturing on or before October 1, 2031 shall not be subject to redemption prior to their respective stated maturities. The Bonds maturing on or after October 1, 2032 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, 2031, 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 Term Bonds maturing October 1, 2040 and October 1, 2044, are each subject to mandatory redemption, in part by lot, from Sinking Account payments set forth in the following schedule on October 1, 2037 and October 1, 2041, respectively, 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 Term Bonds have been redeemed pursuant to subsections (b) or (c) below, 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 Term Bonds so redeemed pursuant to this subsection (a) 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. Term Bonds Maturing October 1, 2040 Mandatory Sinking Fund Redemption Date (October 1) Principal Amount to Be Redeemed 2037 $445,000 2038 460,000 2039 475,000 2040 490,000 Term Bonds Maturing October 1, 2044 Mandatory Sinking Fund Redemption Date (October 1) Principal Amount to Be Redeemed 2041 $505,000 2042 525,000 2043 535,000 2044 555,000 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. 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. 12 Selection of Bonds for Redemption. Except for Sinking Account Redemption as described above, whenever provision is made in the Indenture 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 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. For purposes of such selection, the Trustee shall treat each Bond as consisting of separate $5,000 portions and each such portion shall be subject to redemption as if such portion were a separate Bond. 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, and to the Securities Depositories and to one or more of the Information Services. Each notice of redemption shall state the date of the notice, the redemption date, the place or places of redemption, whether less than all of the Bonds (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. In case of an optional redemption as described above, notice of redemption shall be given only if such notice expressly states that such redemption is conditional on receipt by the Trustee of sufficient moneys on the redemption date to pay off the Bonds being redeemed. 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. Notice of redemption of Bonds shall be given by the Trustee, at the expense of the Authority, for and on behalf of the Authority. Partial Redemption of Bonds. Upon surrender of any Bonds redeemed in part only, the Authority shall execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the Authority, a new Bond or Bonds of authorized denominations equal in aggregate principal amount to the unredeemed portion of the Bonds surrendered. Effect of Redemption. Notice of redemption having been duly given as aforesaid, 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 this 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 Bonds 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 13 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. 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 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 $9,505,000 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 LEVY 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. 14 Lease Payments are required to be made by the City under the Lease Agreement on each Interest Payment Date (individually, a “Lease Payment Date”), for use and possession of the 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 FUNDS – Debt Service Schedule.” Additional Bonds The Authority is authorized in the Indenture, without the consent of the Bondholders, 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 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 by the City 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 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 City 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. 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 In addition to the Lease Payments, the City shall pay when due the following items of Miscellaneous Rent: 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; all compensation and indemnification due 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; 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 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. 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 $100,000 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. 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. 17 No Tax Pledge The Bonds are special obligations of the Authority, payable solely from Lease Payments and the other assets pledged under the Indenture. Neither the faith and credit nor the taxing power of the Authority, the City or the State, or any political subdivision thereof, is pledged to the payment of the Bonds. The Authority has no taxing power. 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 Authority, 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 are 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 fund 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 fund 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 fund 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 the period that the Leased Premises are being replaced, repaired or reconstructed, then such payments of principal and interest 18 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. Increasing Retirement Related Costs The City is required to make contributions to CalPERS and to the OPEB Benefit plan for City employees and retirees. Such obligations are a significant financial obligation of the City and could increase in the future. Actual contribution rates will depend on a variety of factors, including but not limited to actual investment returns and future changes to benefits or actuarial assumptions. The City notes that pension contributions in future years may increase as a result of losses in CalPERS’ portfolio resulting from stock market declines in the wake of the COVID-19 outbreak. See the captions “INTRODUCTION—COVID-19 Impact” and “RISK FACTORS— COVID-19 Pandemic.” There can be no assurances that actual increases in required contributions will not be higher than the amounts which are currently projected by the City. Dependence on State for Certain Revenues A number of the City’s general fund revenues are collected and dispersed by the State (such as sales taxes and the VLF) or allocated in accordance with State law (most importantly, property taxes). Therefore, State budget decisions can have an impact on City finances. In the event of a material economic downturn in the State, including as a result of the COVID-19 outbreak that is discussed under the captions “INTRODUCTION— COVID-19 Impact” and “RISK FACTORS—COVID-19 Pandemic,” there can be no assurance that any resulting revenue shortfalls to the State will not reduce revenues to local governments (including the City) or shift financial responsibility for programs to local governments as part of the State’s efforts to address any such related State financial difficulties. See the caption “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS — Proposition 22.” Limited Recourse on Lease Default If an event of default occurs and is continuing under the Lease Agreement, there is no remedy of acceleration of any Lease Payments which have not come due, and no right for the Authority to terminate the Lease Agreement and re-let the Leased Premises. The sole remedy provided for in the Lease Agreement is to exercise any action at law or in equity necessary or desirable to collect the amounts due under the Lease Agreement. 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 re-letting and could be of little value to others. Furthermore, 19 it is not certain whether a court would permit the exercise of the remedies of repossession and leasing with respect thereto. The rights of the Owners of the Bonds are subject to the limitations on legal remedies against cities in the State, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. 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 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. The Project is located on the western, or coastal, side of Interstate 5, and is not considered at significant risk. 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. 20 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. 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 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 1A 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 1A and beginning in Fiscal Year 2008-09, the State could, upon gubernatorial proclamation of fiscal hardship and following approval 21 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 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. 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. 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 Cybersecurity Municipal agencies, like other business entities, face significant risks relating to the use and application of computer software and hardware. Recently, there have been significant cybersecurity incidents affecting municipal agencies, including a freeze affecting computer systems of the City of Atlanta, an attack on the City of Baltimore’s 911 system, an attack on the Colorado Department of Transportation’s computers and an attack that resulted in the temporary closure of the Port of Los Angeles’ largest terminal. The City, like many other public and private entities, relies on a large and complex technology environment to conduct its operations. As a recipient and provider of personal, private, or sensitive information, the City is subject to multiple cyber threats including, but not limited to, hacking, viruses, malware and other attacks on computer and other sensitive digital networks and systems. Entities or individuals may attempt to gain unauthorized access to the City’s digital systems for the purposes of misappropriating assets or information or causing operational disruption and damage. The City has not experienced an attack on its computer systems which resulted in a breach of its cybersecurity systems in the last five years. The City has implemented measures to protect against cybersecurity attacks including coverage by a 24/7 security operations center for monitoring and mitigation service, but no assurances can be given that the City’s efforts to manage cyber threats and attacks will be successful or that any such attack will not materially impact the operations or finances of the City. As such, the City works with the San Diego Law Enforcement Coordination Center, Department of Homeland Security, and Cybersecurity and Infrastructure Security Agency to stay informed of current threats and cyber hygiene best practices. The City also maintains insurance for cyber-related liability. Limitation on Sources of Revenues; Additional Expenditures There are limitations on the ability of the City to increase revenues payable to the City’s General Fund. The ability of the City to increase taxes is limited by Article XIII A, Article XIII B, Article XIII C, Article XIII D and Proposition 62. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS.” In addition to limitations that have been imposed on the ability of the City to raise revenues, State and federally mandated expenditures by City’s for justice, health and welfare have increased. There can be no assurances that state or federal actions affecting the City will not have a material adverse financial impact on the City. COVID-19 Pandemic The COVID-19 pandemic significantly affected the local, state and world economies. The Governor of California reopened the State on June 15, 2021, however, an emergency order remains in place to ensure that the State can respond to evolving conditions. The City cannot currently predict the extent or duration of the COVID- 19 pandemic, if any outbreaks will occur or what ultimate impact it may have on the City’s future financial condition or operations. General. The City’s General Fund revenue sources were impacted by the health-related and economic impacts of the COVID-19 pandemic. Efforts to respond to and mitigate the spread of COVID-19 have had a severe impact on the State and local economy and triggered a recession. There have been many fiscal challenges attributed to the global COVID-19 pandemic, including a projected gross domestic product decline, historic increases in unemployment claims in the region, travel restrictions and a decline in consumer spending resulting from temporary closures of businesses providing non-essential goods and services. Due to the City’s low reliance on tourism, strong housing values, and an increase in sales tax due to increased construction, online sales and car sales, the City’s general fund revenues did not decline and increased slightly compared to the previous year. The COVID-19 pandemic and the efforts to mitigate its spread have resulted in impacted City general fund revenues from recent levels. Additionally, uncertainty exists with inflation, and federal and international policies that may result in further declines in the future. See the captions “INTRODUCTION—COVID-19 Impact” and “RISK FACTORS—COVID-19 Pandemic.” 23 The temporary and permanent business closures caused by the COVID-19 pandemic have led to a stark increase in unemployment across the County and the nation. The economic costs may be very significant for the City and the region’s economy. Restaurants, retail stores and other non-essential businesses temporarily or permanently closed and, unemployment figures became elevated. According to the State Employment Development Department, the County’s unemployment rate was 9.1% in December 2020 and the City’s unemployment was lower at 5.8%. Collection of Taxes. On March 30, 2020, the Governor issued Executive Order N-40-20, which delayed the deadline for the filing and payment of sales and use taxes by 90 days for all but the largest taxpayers. Under Executive Order N-40-20 and a subsequent notice form the California Department of Tax and Fee Administration, businesses with less than $5 million in taxable annual sales are authorized to defer up to $50,000 in sales tax and enter into a 12-month, zero interest payment plan. The Governor has also issued an Executive Order for waivers of late penalties on property taxes. Such efforts to relieve the financial impact of the COVID-19 pandemic on taxpayers have resulted in delayed revenue collection by the City. On May 6, 2020 in response to the COVID-19 pandemic, the Governor issued Executive Order N-61-20 to allow qualified taxpayers to request relief of penalties on property taxes for owner occupied residential real property and real property owned and operated by a taxpayer that qualifies as a small business under the Small Business Administration’s Regulations, Code of Federal Regulations Title 13, section 121.201. To be eligible for penalty relief taxpayers must fall into one of two categories: (i) owner occupied residential real property; or (ii) real property owned and operated by a taxpayer qualified as a small business. For homeowners requesting penalty relief on property taxes for a residential real property that the homeowner occupies, the homeowner may qualify for penalty relief if all of the following are true: (i) taxes on real property were current as of March 4, 2020; (ii) the homeowner was unable to pay on time and that inability was due to a COVID-19 pandemic related impact; (iii) the homeowner was able to submit payment of the original tax amount due with the request for relief; and (iv) the homeowner’s request is received by the Treasurer-Tax Collector within 30 days after the circumstances that prevented payment have concluded. If the homeowner satisfies all of the criteria, they may submit a Request for Penalty Cancellation – COVID-19 Impact Form to request penalty relief and must provide documentation to support the request. To be eligible for penalty relief for real property owned and operated by a taxpayer as a qualified small business, the taxpayer may qualify for penalty relief if all of the following are true: (i) taxes on the real property were current as of March 4, 2020; (ii) the business was unable to pay on time and that inability was due to a COVID-19 related impact; (iii) the taxpayer is able to submit payment of the original tax amount due with the request for relief; and (iv) the taxpayer’s request is received by the Treasurer-Tax Collector within 30 days after the circumstances that prevented payment have concluded. If the taxpayer satisfies all of the criteria, they may submit a Request for Penalty Cancellation – COVID-19 Impact Form to request penalty relief and will need to provide documentation to support their request. The impacts from the COVID-19 pandemic on the City’s general fund revenues in Fiscal Year 2019-20 will continue into Fiscal Year 2020-21 and potentially several fiscal years beyond depending on the pace of recovery of the local economy to the levels which existed prior to the outbreak of the COVID-19 pandemic. However, with the City’s strong property values and the City’s balanced and diverse sales tax generators, property taxes and sales tax are expected to continue to offset any negative impacts that the City has experienced from other revenue categories. On June 11, 2021, the Governor rescinded the stay at home order and blueprint for reopening, such that all of California is open. However, business and local agencies continue to exercise some discretion as they open for business. See the captions “CITY FINANCIAL INFORMATION—General Economic Condition and Outlook of the City” and “CITY FINANCIAL INFORMATION—Major Revenues.” CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS Limitations on Revenues Article XIIIA 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 24 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 XIIIC and Article XIIID 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 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. 25 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. 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 26 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 1A of 2004. Proposition 1A 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 1A 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. 27 Proposition 1A 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 1A 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 1A 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. Proposition 26 On November 2, 2010, voters in the State approved Proposition 26. Proposition 26 amends Article XIIIC of the State Constitution to expand the definition of "tax" to include "any levy, charge, or exaction of any kind imposed by a local government" except the following: (1) a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege; (2) a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product; (3) a charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof; (4) a charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property; (5) A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law; (6) a charge imposed as a condition of property development; and (7) assessments and property-related fees imposed in accordance with the provisions of Article XIIID. Proposition 26 provides that the local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction 28 is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor's burdens on, or benefits received from, the governmental activity. The City does not believe that Proposition 26 will adversely affect its General Fund revenues. Proposition 19 On November 3, 2020, State voters approved Proposition 19, a legislatively referred constitutional amendment (“Proposition 19”), which amends Article XIIIA to: (i) expand special rules that give property tax savings to homeowners that are over the age of 55, severely disabled, or whose property has been impacted by wildfire or natural disaster, when they buy a different home; (ii) narrow existing special rules for inherited properties; and (iii) dedicate most of the potential new State revenue generated from Proposition 19 toward fire protection. The City cannot make any assurance as to what effect Proposition 19 will have on the City’s or the assessed valuation of real property in the City. Future Initiatives Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID, and Propositions 1A 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. TAX MATTERS In the opinion of Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court decisions, interest on the Bonds is exempt from State of California personal income taxes. Bond Counsel observes that interest on the Bonds is not excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the “Code”). Bond Counsel expresses no opinion regarding any other tax consequences relating to the ownership or disposition of, or the amount, accrual, or receipt of interest on, the Bonds. The proposed form of opinion of Bond Counsel is contained in Appendix D hereto. The following discussion summarizes certain U.S. federal tax considerations generally applicable to holders of the Bonds that acquire their Bonds in the initial offering. The discussion below is based upon laws, regulations, rulings, and decisions in effect and available on the date hereof, all of which are subject to change, possibly with retroactive effect. Prospective investors should note that no rulings have been or are expected to be sought from the U.S. Internal Revenue Service (the “IRS”) with respect to any of the U.S. federal tax consequences discussed below, and no assurance can be given that the IRS will not take contrary positions. Further, the following discussion does not deal with U.S. tax consequences applicable to any given investor, nor does it address the U.S. tax considerations applicable to all categories of investors, some of which may be subject to special taxing rules (regardless of whether or not such investors constitute U.S. Holders), such as certain U.S. expatriates, banks, REITs, RICs, insurance companies, tax-exempt organizations, dealers or traders in securities or currencies, partnerships, S corporations, estates and trusts, investors that hold their Bonds as part of a hedge, straddle or an integrated or conversion transaction, or investors whose “functional currency” is not the U.S. dollar. Furthermore, it does not address (i) alternative minimum tax consequences, (ii) the net investment income tax imposed under Section 1411 of the Code, or (iii) the indirect effects on persons who hold equity interests in a holder. This summary also does not consider the taxation of the Bonds under state, local or non-U.S. tax laws. In addition, this summary generally is limited to U.S. tax considerations applicable to investors that acquire their The Bonds pursuant to this offering for the issue price that is applicable to such Bonds (i.e., the price at which a substantial amount of the Bonds are sold to the public) and who will hold their Bonds as “capital assets” within the meaning of Section 1221 of the Code. 29 As used herein, “U.S. Holder” means a beneficial owner of a Bond that for U.S. federal income tax purposes is an individual citizen or resident of the United States, a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), an estate the income of which is subject to U.S. federal income taxation regardless of its source or a trust where a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons (as defined in the Code) have the authority to control all substantial decisions of the trust (or a trust that has made a valid election under U.S. Treasury Regulations to be treated as a domestic trust). As used herein, “Non-U.S. Holder” generally means a beneficial owner of a Bond (other than a partnership) that is not a U.S. Holder. If a partnership holds the Bonds, the tax treatment of such partnership or a partner in such partnership generally will depend upon the status of the partner and upon the activities of the partnership. Partnerships holding the Bonds, and partners in such partnerships, should consult their own tax advisors regarding the tax consequences of an investment in the Bonds (including their status as U.S. Holders or Non-U.S. Holders). Notwithstanding the rules described below, it should be noted that, under enacted law that became effective for tax years beginning after December 31, 2017 (or, in the case of original issue discount, for tax years beginning after December 31, 2018), certain taxpayers that are required to prepare certified financial statements or file financial statements with certain regulatory or governmental agencies may be required to recognize income, gain and loss with respect to the Bonds at the time that such income, gain or loss is recognized on such financial statements instead of under the rules described below. Prospective investors should consult their own tax advisors in determining the U.S. federal, state, local or non-U.S. tax consequences to them from the purchase, ownership and disposition of the Bonds in light of their particular circumstances. U.S. Holders Interest. Interest on the Bonds generally will be taxable to a U.S. Holder as ordinary interest income at the time such amounts are accrued or received, in accordance with the U.S. Holder’s method of accounting for U.S. federal income tax purposes. To the extent that the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds) by more than a de minimis amount, the difference may constitute original issue discount (“OID”). U.S. Holders of the Bonds will be required to include OID in income for U.S. federal income tax purposes as it accrues, in accordance with a constant yield method based on a compounding of interest (which may be before the receipt of cash payments attributable to such income). Under this method, U.S. Holders generally will be required to include in income increasingly greater amounts of OID in successive accrual periods. Bonds purchased for an amount in excess of the principal amount payable at maturity (or, in some cases, at their earlier call date) will be treated as issued at a premium. A U.S. Holder of a Bond issued at a premium may make an election, applicable to all debt securities purchased at a premium by such U.S. Holder, to amortize such premium, using a constant yield method over the term of such Bond. Sale or Other Taxable Disposition of the Bonds. Unless a nonrecognition provision of the Code applies, the sale, exchange, redemption, retirement (including pursuant to an offer by the District) or other disposition of a Bond will be a taxable event for U.S. federal income tax purposes. In such event, in general, a U.S. Holder of a Bond will recognize gain or loss equal to the difference between (i) the amount of cash plus the fair market value of property received (except to the extent attributable to accrued but unpaid interest on the Bond, which will be taxed in the manner described above) and (ii) the U.S. Holder’s adjusted U.S. federal income tax basis in the Bond (generally, the purchase price paid by the U.S. Holder for the Bond, decreased by any amortized premium, and increased by the amount of any OID previously included in income by such U.S. Holder with respect to such Bond). Any such gain or loss generally will be capital gain or loss. In the case of a non-corporate U.S. Holder of 30 the Bonds, the maximum marginal U.S. federal income tax rate applicable to any such gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income if such U.S. holder’s holding period for the Bonds exceeds one year. The deductibility of capital losses is subject to limitations. Defeasance of the Bonds. If the City defeases any Bond, the Bond may be deemed to be retired for U.S. federal income tax purposes as a result of the defeasance. In that event, in general, a holder will recognize taxable gain or loss equal to the difference between (i) the amount realized from the deemed sale, exchange or retirement (less any accrued qualified stated interest which will be taxable as such) and (ii) the holder’s adjusted tax basis in the Bond. Information Reporting and Backup Withholding. Payments on the Bonds generally will be subject to U.S. information reporting and possibly to “backup withholding.” Under Section 3406 of the Code and applicable U.S. Treasury Regulations issued thereunder, a non-corporate U.S. Holder of the Bonds may be subject to backup withholding at the current rate of 24% with respect to “reportable payments,” which include interest paid on the Bonds and the gross proceeds of a sale, exchange, redemption, retirement or other disposition of the Bonds. The payor will be required to deduct and withhold the prescribed amounts if (i) the payee fails to furnish a U.S. taxpayer identification number (“TIN”) to the payor in the manner required, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) there has been a “notified payee underreporting” described in Section 3406(c) of the Code or (iv) the payee fails to certify under penalty of perjury that the payee is not subject to withholding under Section 3406(a)(1)(C) of the Code. Amounts withheld under the backup withholding rules may be refunded or credited against the U.S. Holder’s federal income tax liability, if any, provided that the required information is timely furnished to the IRS. Certain U.S. holders (including among others, corporations and certain tax-exempt organizations) are not subject to backup withholding. A holder’s failure to comply with the backup withholding rules may result in the imposition of penalties by the IRS. Non-U.S. Holders Interest. Subject to the discussions below under the headings “Information Reporting and Backup Withholding” and “Foreign Account Tax Compliance Act,” payments of principal of, and interest on, any Bond to a Non-U.S. Holder, other than (1) a controlled foreign corporation, a such term is defined in the Code, which is related to the City through stock ownership and (2) a bank which acquires such Bond in consideration of an extension of credit made pursuant to a loan agreement entered into in the ordinary course of business, will not be subject to any U.S. federal withholding tax provided that the beneficial owner of the Bond provides a certification completed in compliance with applicable statutory and regulatory requirements, which requirements are discussed below under the heading “Information Reporting and Backup Withholding,” or an exemption is otherwise established. Disposition of the Bonds. Subject to the discussions below under the headings “Information Reporting and Backup Withholding” and “FATCA,” any gain realized by a Non-U.S. Holder upon the sale, exchange, redemption, retirement (including pursuant to an offer by the City or a deemed retirement due to defeasance of the Bond) or other disposition of a Bond generally will not be subject to U.S. federal income tax, unless (i) such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business within the United States; or (ii) in the case of any gain realized by an individual Non-U.S. Holder, such holder is present in the United States for 183 days or more in the taxable year of such sale, exchange, redemption, retirement (including pursuant to an offer by the City) or other disposition and certain other conditions are met. U.S. Federal Estate Tax. A Bond that is held by an individual who at the time of death is not a citizen or resident of the United States will not be subject to U.S. federal estate tax as a result of such individual’s death, provided that, at the time of such individual’s death, payments of interest with respect to such Bond would not have been effectively connected with the conduct by such individual of a trade or business within the United States. 31 Information Reporting and Backup Withholding. Subject to the discussion below under the heading “FATCA,” under current U.S. Treasury Regulations, payments of principal and interest on any Bonds to a holder that is not a United States person will not be subject to any backup withholding tax requirements if the beneficial owner of the Bond or a financial institution holding the Bond on behalf of the beneficial owner in the ordinary course of its trade or business provides an appropriate certification to the payor and the payor does not have actual knowledge that the certification is false. If a beneficial owner provides the certification, the certification must give the name and address of such owner, state that such owner is not a United States person, or, in the case of an individual, that such owner is neither a citizen nor a resident of the United States, and the owner must sign the certificate under penalties of perjury. The current backup withholding tax rate is 24%. Foreign Account Tax Compliance Act (“FATCA”)—U.S. Holders and Non-U.S. Holders Sections 1471 through 1474 of the Code impose a 30% withholding tax on certain types of payments made to foreign financial institutions, unless the foreign financial institution enters into an agreement with the U.S. Treasury to, among other things, undertake to identify accounts held by certain U.S. persons or U.S.-owned entities, annually report certain information about such accounts, and withhold 30% on payments to account holders whose actions prevent it from complying with these and other reporting requirements, or unless the foreign financial institution is otherwise exempt from those requirements. In addition, FATCA imposes a 30% withholding tax on the same types of payments to a non-financial foreign entity unless the entity certifies that it does not have any substantial U.S. owners or the entity furnishes identifying information regarding each substantial U.S. owner. Under current guidance, failure to comply with the additional certification, information reporting and other specified requirements imposed under FATCA could result in the 30% withholding tax being imposed on payments of interest on the Bonds. In general, withholding under FATCA currently applies to payments of U.S. source interest (including OID) and, under current guidance, will apply to certain “passthru” payments no earlier than the date that is two years after publication of final U.S. Treasury Regulations defining the term “foreign passthru payments.” Prospective investors should consult their own tax advisors regarding FATCA and its effect on them. The foregoing summary is included herein for general information only and does not discuss all aspects of U.S. federal taxation that may be relevant to a particular holder of the Bonds in light of the holder’s particular circumstances and income tax situation. Prospective investors are urged to consult their own tax advisors as to any tax consequences to them from the purchase, ownership and disposition of the Bonds, including the application and effect of state, local, non-U.S., and other tax laws. A copy of the proposed form of opinion of Bond Counsel for the Bonds is attached hereto as Appendix D. 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 2020-21 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.” For the past five years, the City has complied with its continuing disclosure obligations. 32 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. MUNICIPAL ADVISOR The Authority has retained Fieldman, Rolapp & Associates, Inc., Irvine, California, as Municipal Advisor (the “Municipal Advisor”) for the sale of the Bonds. The Municipal Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume any responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. The Municipal Advisor is an independent advisory firm and is not engaged in the business of underwriting, trading, or distributing municipal or other public securities. FINANCIAL STATEMENTS The general purpose financial statements of the City for the Fiscal Year ending June 30, 2020, pertinent sections of which are included in APPENDIX B to this Official Statement, have been audited by Davis Farr 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. RATING S&P Global Ratings, a business unit of Standard & Poor’s Financial Services LLC (“S&P”) has assigned a rating of “AA+” (stable outlook) to the Bonds. Such rating reflects only the views of S&P, and any desired explanation of the significance of such rating may be obtained from such rating agency at the following address: S&P Global Ratings, 55 Water Street, New York, New York 10041, (212) 438-2000. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by the rating agency, if in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. Except as otherwise required in the Continuing Disclosure Agreement, the Authority and the City undertake no responsibility either to bring to the attention of the owners of any Bonds any downward revision or withdrawal of any rating obtained or to oppose any such revision or withdrawal. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time. UNDERWRITING The Bonds are being purchased by Hilltop Securities Inc. (the “Underwriter”). The Underwriter has agreed to purchase the Bonds at a purchase price of $9,434,835.00 (representing the principal amount of the Bonds less an underwriting discount of $51,231.95, and less an original issue discount of $18,933.05). The Bond 33 Purchase Agreement with respect to the Bonds provides that the Underwriter will purchase all of the Bonds, if any are purchased. The obligation of the Underwriter to accept delivery of the Bonds is subject to certain conditions contained in such Bond Purchase Agreement. The Bonds are offered for sale at the initial prices stated on the inside cover page of this Official Statement, which may be changed from time to time by the Underwriter. The Bonds may be offered and sold to certain dealers at prices lower than the public offering prices. 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 B . Executive Director CITY OF ENCINITAS By. 1 City Manager 34 A-1 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.encinitasca.gov. 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 Council/Manager form of government is broadly defined as combining the political/policy leadership of elected officials with the managerial leadership of the City Manager. There are five (5) elected positions in the City of Encinitas: one (1) Mayor elected at-large for a two-year term and four (4) City Council Members each elected for a four-year term. Beginning with the General Municipal Election in November 2018, Council Members are elected by districts in four single-member districts. The Mayor and City Council serve as Board Members of the San Dieguito Water District, Encinitas Housing Authority, and the Encinitas Financing Authority. In addition, Council Members represent the City on various regional boards, commissions, and committees. The City Manager is appointed by the City Council and serves as the City Council’s administrative head of the City. The City Attorney is also appointed by the City Council. All other city employees are appointed by and are responsible to the City Manager. 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 June 30, 2022. A-2 Population At incorporation in 1986, there were about 48,558 people in the City limits. As of January 1, 2021, the California Department of Finance estimates that Encinitas has grown to a population of 62,289, and by 2035, SANDAG estimates the population to be 64,178 as identified in the City’s General Plan. Encinitas is a low density community consisting predominately of single family homes. TABLE A-1 CITY OF ENCINITAS ANNUAL POPULATION ESTIMATES (As of January 1) Year City of Encinitas San Diego County State of California 2017 62,347 3,303,366 39,352,398 2018 62,394 3,321,118 39,519,535 2019 62,296 3,333,319 39,605,361 2020 62,243 3,331,279 39,648,938 2021 62,289 3,315,404 39,466,855 _______________________ Source: California State Department of Finance. Employees and Labor Relations The City currently employs 233.8 full-time equivalent employees, including 55 fire safety and marine personnel. The following table presents the number of full-time City employees for the Fiscal Years 2016-17 through 2020-21. TABLE A-2 CITY OF ENCINITAS FULL-TIME CITY EMPLOYEES (Fiscal Years 2016-17 through 2020-21) Fiscal Year Number of Full-Time Employees(1) 2016-17 219 2017-18 216 2018-19 216 2019-20 223 2020-21 234 _______________________ (1) 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-3 Approximately 67% 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 May 1, 2021. TABLE A-3 CITY OF ENCINITAS EMPLOYEE ORGANIZATIONS (As of May 1, 2021) Organization Employees Represented Expiration of Contract Service Employees International Union (Local 2028) 106 June 30, 2023 Encinitas Firefighters Assoc. 51 December 31, 2021 _______________________ Source: City of Encinitas. 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. Davis Farr LLP, Carlsbad, California, is the City’s current auditor. The audited financial statements of the City for Fiscal Year 2019-20 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.encinitasca.gov. With respect to the audited financial statements delivered for Fiscal Year ended June 30, 2019, the auditors identified one material note for the City’s statement. The note was regarding a delay in recording grant receivables for allowable expenditures incurred through June 30, 2019, and that as these expenditures were incurred, the City had earned the revenue and thus should have a receivable recorded. Under the same note, the auditors also noted that the City had certain projects classified as construction in progress that should have been moved to depreciable classifications as they were substantially complete or already in service. The City responded to the notes and has remedied the item in the subsequent fiscal year. The auditor did not identify any items to note for the Fiscal Year 2019-20 financial statements. 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, development services-planning and engineering, public safety, public works 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. A-4 State Budget Information State Budgeting Process. According to the State Constitution, the Governor is required to propose a budget to the State Legislature no later than January 10 of each year, and a final budget must be adopted by a majority vote of each house of the State Legislature no later than June 15, although this deadline is routinely breached. The budget becomes law upon the signature of the Governor, who may veto specific items of expenditure. The following information concerning the State's budget for fiscal year 2021-22 has been obtained from publicly available information that the City believes to be reliable; however, the City takes no responsibility as to the accuracy or completeness thereof and has not independently verified such information about the State budget is regularly available at various State-maintained websites. Text of proposed and adopted budgets may be found at the website of the State Department of Finance (the “DOF”), http://www.dof.ca.gov, under the heading “California Budget.” An impartial analysis of the budget is posted by the Legislative Analyst's Office (the “LAO”) at http://www.lao.ca.gov. In addition, various State official statements, many of which contain a summary of the current and past State budgets and the impact of those budgets on counties in the State, may be found at the website of the State Treasurer, http://www.treasurer.ca.gov. The information referred to is prepared by the respective State agency maintaining each website and not by the City, the Authority or the Underwriter, and the City, the Authority and the Underwriter take no responsibility for the continued accuracy of these Internet addresses or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by these references. State Budget for Fiscal Year 2021-22 On January 8, 2021, the Governor released his proposed budget for State fiscal year 2021-22 (the “Proposed 2021-22 Budget”). The Proposed 2021-22 Budget indicates that, since the adoption of the 2020-21 Budget, the administration’s economic forecast and revenue projections have significantly improved, driven in large part by a rebound in the stock market and an attendant growth in capital gains tax revenues. However, the Proposed 2021-22 Budget acknowledges that the risks to the revenue forecast remain higher than usual and that economic inequality has intensified since the beginning of the COVID-19 pandemic. The Proposed 2021-22 Budget indicated that the State is (as of January 2021) in the midst of a second and more serious wave of COVID- 19 infections, but that federally-approved COVID-19 vaccines are arriving to assist the recovery from the pandemic. The Proposed 2021-22 Budget’s revenue forecast was finalized prior to the passage of the ARP Act. See the caption “THE CITY—COVID-19 Outbreak.” Of the almost $900 billion in federal funding that was approved, the Proposed 2021-22 Budget identifies approximately $106 billion allocable to the State, including $42.4 billion in direct assistance to individuals and families (including $38.3 billion in unemployment benefits and direct payments), $2.2 billion for COVID-19 testing, tracing and vaccine distribution, $700 million for health and mental health services, $50.1 billion in business and transportation support, and $10.1 billion for education. The Governor’s May revision to the Proposed 2021-22 Budget is expected to include a revised revenue forecast that will reflect this federal assistance. The Proposed 2021-22 Budget also acknowledges that further federal relief will be critical to assisting individuals and businesses survive and recover from the pandemic. For State fiscal year 2020-21, the Proposed 2021-22 Budget projects total general fund revenues and transfers of $168.1 billion and expenditures of $156 billion. The State is projected to end State fiscal year 2020- 21 with total available general fund reserves of approximately $22.7 billion, including $9 billion in the traditional State reserve, $12.5 billion in the BSA, $747 million in the Public School System Stabilization Account and $450 million in the Safety Net Reserve Fund. For State fiscal year 2021-22, the Proposed 2021-22 Budget projects total general fund revenues and transfers of $170.6 billion and authorizes expenditures of $164.5 billion. The State is projected to end State fiscal year 2021-22 with total available general fund reserves of approximately $22 billion, including $2.9 billion in traditional general fund reserves, $15.6 billion in the BSA, $3 billion in the Public School System Stabilization Account and $450 million in the Safety Net Reserve Fund. A-5 In recognition of the need to address the various impacts of the COVID-19 pandemic, the Proposed 2021- 22 Budget includes a package of measures that are intended to be implemented through legislative action earlier than the traditional State budget timeline. For immediate action in January, the package includes $3 billion in direct support for small businesses and low income earners (the latter principally through an income tax refund) and $2 billion to support the re-opening of K-12 schools (as further described herein). For early action in the spring, the package includes $4.6 billion in instructional support for K-14 school districts, $973 million in jobs and workforce training, $561 million in environmental sustainability measures and $262 million in housing and homelessness-related measures. As a result of the expected increases in State general fund revenues, the Proposed 2021-22 Budget sets the Proposition 98 minimum school funding guarantee for State fiscal year 2021-22 at $85.8 billion, including $60.8 billion from the State general fund. This represents a year-to-year increase of $14.9 billion (or 21%) over the level included in the 2020-21 Budget. The Proposed 2021-22 Budget also makes retroactive increases to the minimum funding guarantee in State fiscal years 2019-20 and 2020-21 of $1.9 billion and $11.9 billion, respectively, due almost exclusively to increases in allocable general fund revenues in those years. For additional information regarding the 2021-22 Budget, see the DOF website at www.dof.ca.gov and the LAO's website at www.lao.ca.gov. The information presented on such websites is not incorporated herein by reference. Potential Impact of State Financial Condition on the City Since the adoption of the 2020-21 Budget, the administration’s economic forecast and revenue projections have significantly improved, driven in large part by a rebound in the stock market and an attendant growth in capital gains tax revenues. While the State appears to have surplus to allocate in discretionary state funds, there can be no assurance that, if the State were to be under financial stress, as in a year ago and prior years, the State will not significantly shift financial responsibility for programs to local governments as part of its efforts to address the State's financial difficulties. Although the State is not a significant source of City general fund revenues, no prediction can be made by the City as to what measures the State will adopt to respond to the current or potential future financial difficulties. There can be no assurance that State actions to respond to State financial difficulties will not adversely affect the financial condition of the City. Future State Budgets No prediction can be made by the City as to whether the State will continue to 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 A-6 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 2019-20. Set forth in Table A-4 is the General Fund budget for Fiscal Year 2019-20 compared with actual results and the adopted budget for Fiscal Year 2020-21. During the course of each Fiscal Year, the budget is amended and revised as necessary by the City Council. The adopted budget for each fiscal year shown below is the final adopted budget as adjusted by the City Council. TABLE A-4 CITY OF ENCINITAS GENERAL FUND BUDGETS AND RESULTS Adopted 2019-20 Fiscal Year Budget Final 2019-20 Fiscal Year Budget Actuals Fiscal Year 2019-20 Final Budget vs. Actuals Adopted 2020-21 Budget Revenues: Taxes $ 66,926,984 $ 64,861,162 $ 67,987,818 $ 3,126,656 $ 67,965,262 Licenses and permits 280,200 280,200 263,518 (16,682) 235,200 Intergovernmental 616,547 662,897 780,807 117,910 674,947 Charges for services 7,354,684 7,231,654 6,629,818 (601,836) 6,958,742 Fines, forfeitures and penalties 709,753 709,753 655,032 (54,721) 404,153 Use of money and property 847,489 847,489 2,810,704 1,963,215 837,361 Other 559,811 559,811 712,659 152,848 548,811 Total Revenues $ 77,295,468 $ 75,152,966 $ 79,840,356 $ 4,687,390 $ 77,624,476 Expenditures: General government $ 12,882,131 $ 13,723,115 $ 12,634,244 $ 1,088,871 $ 13,467,855 Development Services-Planning 6,572,737 7,097,051 6,410,961 686,090 6,587,183 Development Services-Engineering 3,192,585 3,223,833 2,784,486 439,347 3,120,767 Public safety 33,045,961 33,413,243 32,656,252 756,991 34,063,309 Public Works 6,751,120 6,780,750 6,263,122 517,628 6,739,997 Parks and recreation 7,555,368 7,678,347 6,714,386 $963,961 7,207,633 Total expenditures $ 69,999,902 $ 71,916,339 $ 67,463,451 $ 4,452,888 $ 71,186,744 Excess of revenues over expenditures $ 7,295,566 $ 3,236,627 $ 12,376,905 $ 9,140,278 $ 6,437,732 Other Financing Sources: Transfers in – Operating $ 1,206,321 $ 1,758,678 $ 2,056,498 $ 297,820 $ 2,138,289 Transfers in – Capital 1,059,542 1,489,135 560,963 (928,192) 4,733,514 Transfers out – Operating (3,780,379) (4,107,000) (3,723,934) 383,066 (3,204,052) Transfers out – Debt Service (3,730,858) (3,730,858) (3,718,611) 12,247 (3,722,269) Transfers out – Capital (2,898,639) (4,768,124) (4,768,124) __________- (8,182,832) Total Transfers $ (8,144,013) $ (9,358,169) $ 9,593,228) $ (235,059) $ (8,237,350) Excess Revenues Over Expenditure after Other Financing Sources $ (848,447) $ (6,121,542) $ 2,783,677 $ 8,905,219 $ (1,389,618) _______________________ Source: City of Encinitas 2019-20 Audited Financial Statements. City of Encinitas Adopted Budget for Fiscal Years 2020-21. The City Council adopted a balanced Fiscal Year 2020-21 budget, which reflects an approximately 1.6% increase in annual growth of taxes and assessments and a 1.7% increase in expenditures as compared to Fiscal Year 2019-20 budget. A-7 The following table summarizes the Fiscal Year 2020-21 Final City Budget versus third quarter results, and the 2021-22 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 2020-21 through 2021-22) 2020-21 Budget Adopted FY 2020-21 3rd Qtr Budget 2021-22 Budget Revenues Taxes $ 67,965,262 $ 69,936,575 $74,832,603 Licenses and permits 235,200 262,680 236,000 Intergovernmental 674,947 674,947 703,346 Charges for services 6,958,742 6,606,063 7,198,118 Fines, forfeitures and penalties 404,153 404,153 435,253 Use of money and property 837,361 724,166 984,154 Other 548,811 1,680,565 656,793 Total Revenues $77,624,476 $ 80,289,149 $85,046,267 Expenditures: Current: General government $ 13,467,855 $ 13,744,967 $14,851,143 Development Services-Planning 6,587,183 6,821,918 7,403,474 Development Services-Engineering 3,120,767 3,178,122 3,507,496 Public safety 34,063,309 34,854,160 35,471,326 Public Works 6,739,997 6,772,397 7,283,518 Parks and recreation 7,207,633 6,644,417 7,969,871 Total expenditures $ 71,186,744 $ 72,015,981 $76,486,828 Excess of revenues over $ 6,437,732 $ 8,273,168 $ 8,559,439 (under) expenditures Other Financing Sources: Transfers in – Operating $ 2,138,289 $ 3,145,631 $ 1,154,919 Transfers in – Capital 4,733,514 4,762,361 21,770,198 Transfers out – Operating (3,204,052) (3,459,077) (4,199,469) Transfers out – Debt Service (3,722,269) (3,538,286) (4,571,838) Transfers out – Capital (8,182,832) (12,869,701) (24,214,402) Total Transfers $ (8,237,350) $(11,959,072) $(10,060,592) _______________________ Source: City of Encinitas, Adopted Budget of City of Encinitas for Fiscal Year 2020-21 and Proposed Budget for Fiscal Year 2021-22. 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.” A-8 The following table illustrates the property tax revenues, sales tax revenues and other revenue sources of the City’s General Fund for Fiscal Years 2010-11 through 2019-20. TABLE A-6 CITY OF ENCINITAS HISTORICAL GENERAL FUND REVENUES (As of June 30) Fiscal Year Ending June 30 Property Tax Revenue(1) Sales Tax Revenues Other Taxes Charges for Services Other Revenue Total Revenues 2011 $31,907,978 $10,244,506 $3,527,052 $6,376,261 $3,162,161 $55,217,958 2012 32,303,822 10,613,188 3,760,075 4,406,737 2,891,038 53,974,860(2) 2013 33,699,290 11,585,145 3,855,930 4,450,756 2,828,221 56,419,342 2014 35,133,220 12,067,360 3,966,089 5,479,847 2,571,871 59,218,387 2015 37,065,258 12,569,119 4,415,300 5,315,721 3,164,831 62,530,229 2016 39,700,730 14,166,771 4,611,928 6,585,518 3,676,136 68,741,083 2017 42,043,923 12,549,609 4,445,503 6,688,958 3,693,867 69,421,860 2018 44,665,529 13,252,052 4,909,915 7,280,374 3,740,388 73,848,258 2019 47,389,797 13,694,647 5,179,117 7,383,043 5,540,805 79,187,409 2020 49,504,256 13,744,880 4,738,682 6,629,818 5,222,720 79,840,356 _______________________ (1) Includes delinquent collections from prior year. (2) Drop in revenue represents a reclassification of Self Insurance revenue from General Fund to an internal service fund. Source: City of Encinitas. Property Taxes. Property tax receipts provide the largest tax revenue source of the City in each fiscal year. The City of Encinitas receives approximately 24 cents of each dollar of property tax revenue generated in the City. 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 A-9 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 1A, which amended the State Constitution to significantly reduce the State’s authority over major local government revenue sources. Under Proposition 1A, the State may not: (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes; (ii) shift property taxes from local governments to schools or community colleges; (iii) change how property tax revenues are shared among local governments without two-thirds approval of both houses of the State Legislature; or (iv) decrease Vehicle License Fee revenues without providing local governments with equal replacement funding. See, “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS – Voter Initiatives.” To help alleviate the effects of COVID-19 on property taxpayers, the Governor issued Executive Order (EO) N-61-20 on May 6, 2020. The EO did not eliminate the required payment of property taxes but did eliminate penalties and interest on late payments based on certain conditions. On November 3, 2020 California voters approved Proposition 19, The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act; of which provisions will become effective April 1, 2021. Since this is very recently enacted legislation the impact currently is unknown. 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 7.75%. 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. A-10 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. 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 March 31, 2021 of approximately $119.9 million. The following table presents a breakdown of the City’s investment portfolio by type of security as of that date. Investments Market Value % of Portfolio Local Agency Investment Funds $31,740,290 26.47% Managed Pool Accounts 5,270,234 4.40 Money Market Funds 11,779,482 9.82 Certificates of Deposit – Bank 13,827,394 11.53 U.S. Treasury Coupon Securities 19,369,560 16.15 Federal Agency Callable Securities 37,926,940 31.63 TOTALS $119,913,900 100.00% _______________________ Source: City Finance Department. As of March 31, 2021, the average days to maturity of the City’s investment portfolio was 338 days. Cash on deposit for the City equals $3,099,312. Risk Management The City is self-insured for liability claims and losses up to $250,000 per occurrence, and for workers’ compensation claims and losses up to $350,000 per occurrence. The City is a member of the California State A-11 Association of Counties, Excess Insurance Authority (CSAC EIA now called PRISM), a join risk sharing pool which covers liability claims or losses above the City’s $250,000 self-insured level. CSAC EIA/PRISM is a separate legal entity formed by the participating municipalities and counties to provide pooled excess liability insurance coverage to its members. The City is covered for losses above $250,000 with excess coverage through CSAC EIA/PRISM and excess carriers up to $50 million dollars. 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 $350,000 and $5,000,000. Excess workers’ compensation coverage between $5,000,000 and statutory limits is provided through contract reinsurance. The City has stated that settled claims have not exceeded commercial coverage in any of the past three fiscal years. The claims liability of $3,243,070 (for both workers compensation and liability) as of June 30, 2020 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. 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, 2020, the City Fire Safety Plan and the City Lifeguard Plan 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% at 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% at 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. A-12 The Safety Fire Department Plan provides employees hired before June 23, 2012 with a Tier 1 benefit equal to 3.0% at 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% at 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% at 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% at 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: 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% and 7.25% of their annual covered salary, respectively. Safety lifeguard members are also now required to contribute the full 9% of their annual covered salary as their employee contribution. Fire safety members are now required to contribute the full required 9% to 12.75%. 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 rate for fiscal year 2019-20 was 26.512% for miscellaneous 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 Year Ended Annual Pension Cost Percentage of APC Contributed Annual Pension Cost Percentage of APC Contributed Annual Pension Cost Percentage of APC Contributed June 30, 2017 $2,723,629 100% $1,029,304 100% $ 79,039 100% June 30, 2018 3,755,605 100 2,095,343 100 108,347 100 June 30, 2019 3,637,225 100 2,342,641 100 114,494 100 A-13 The following table summarizes the City’s Miscellaneous Plan’s funding status for the most recent actuarial valuation (latest available data): Actuarial Valuation Date Actuarial Value of Assets Actuarial Accrued Liability (AAL) Unfunded AAL (UAAL) Funded Ratio FY 2018-19 Covered Payroll UAAL as a % of Covered Payroll June 30, 2019 $90,341,562 $117,505,338 $27,163,776 76.9% $13,153,797 206.51% The actuarial assumptions in the June 30, 2017 actuarial valuation for the City's Miscellaneous Plan, which was used to determine the fiscal year 2019-20 annual required contribution, included (1) 7.25% investment rate of return (net of administrative expenses),which was changed to 7.00% as of June 30, 2018, and (b) a 2.875% growth in payroll. Both (a) and (b) included an inflation component of 2.625%. The actuarial assumptions in the June 30, 2018 actuarial valuation for the City's Miscellaneous Plan included (1) 7.00% investment rate of return (net of administrative expenses), which stayed as 7.00% as of June 30, 2019, and (b) a 2.75% growth in payroll. Both (a) and (b) included an inflation component of 2.50%. 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. As of June 30, 2019, the unfunded actuarial accrued liability of the City is approximately $27.1 million. 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, 2019, 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 7.00%, 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 6.5% 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 2019-20 of $1,151,134 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 $1,151,134 to the Trust, and A-14 received reimbursement for actual pay-as-you-expenses incurred during the year. The ARC for fiscal year 2020- 21 is $978,878. 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, 2019 and the preceding two years were as follows: Fiscal Year Ended Annual OPEB Cost Percentage of Annual OPEB Cost Contributed Net OPEB Obligation 6/30/18 $ 958,415 100% - 6/30/19 1,117,605 100 - 6/30/20 1,151,134 100 - Capital Leases and Bonded Debt The City has executed a number of capital lease and other obligations payable from the City General Fund (see APPENDIX B hereto). The following table shows the City’s Current Outstanding Principal Requirements to Maturity for Capital Leases and Governmental Bonded Debt. The table below does not include the expected payments for the Bonds or the refunding of the Prior Bonds. TABLE A-7 CITY OF ENCINITAS CURRENT OUTSTANDING PRINCIPAL REQUIREMENTS TO MATURITY (GENERAL FUND) Balance July 1, 2019 Additions Deletions Balance June 30, 2020 Due Within One Year Due In More Than One Year Capital Leases: 2008 Civic Ctr Roof Replacement $ 676,834 - $ (160,045) $ 516,789 $ 166,004 $ 350,785 2013 Fire Apparatus 83,106 - (83,106) - - - 2017 Fire Apparatus 460,927 - (87,663) 373,264 89,868 283,396 Bonded Debt: 2013 Community Park Bonds 5,910,000 - (350,000) 5,560,000 360,000 5,200,000 Add: original issue premium 78,840 - (8,760) 70,080 - 70,080 2014 Moonlight Beach Tower 2,830,000 - (70,000) 2,760,000 70,000 2,690,000 Less: original issue discount (26,966) - 1,037 (25,929) - (25,929) 2014 Pacific View 9,555,000 - (210,000) 9,345,000 215,000 9,130,000 Less: original issue discount (135,374) - 5,207 (130,167) - (130,167) 2015 Library Refunding Bonds 14,130,000 - (555,000) 13,575,000 580,000 12,995,000 Add: original issue premium 661,897 - (36,772) 625,125 - 625,125 2017 Lease Refunding Bonds 10,730,000 - (680,000) 10,050,000 715,000 9,335,000 Add: original issue premium 1,165,957 - (97,162) 1,068,795 - 1,068,795 Total $46,120,221 - $(2,332,264) $43,787,957 $2,195,872 $41,592,085 _______________________ Source: City of Encinitas 2019-20 Audited Financial Statements. Additional Lease Obligations The City has entered into an equipment lease with U.S. Bank as of January 2021, for a principal amount of $115,200. 93 and which has a five year term with monthly payments of $2,145.04. Additionally, the City has entered into a lease for a fire truck with Pinnacle Public Finance, dated May 25, 2011, and supplemented on August 14, 2020, which has a term to August 14, 2027. The annual payments are approximately $115,000 for a principal amount of $737,623.27 The City also intends to enter into an iBank Loan for street improvements and mobility improvements. The Leucadia Streetscape Project has been in development for over a decade. It will provide enhanced frontage, A-15 pedestrian, bicycle, and vehicular mobility improvements along approximately 2.5 miles of the North Coast Highway 101 from A Street to La Costa Boulevard. The Streetscape Segment C West Side Improvements are from Jupiter Street to Moorgate Road and have a proposed construction cost of $20 million with part of this funding to come from iBank Financing. The project design is scheduled to begin June 2021 to August 2021 with construction to start December 2022 to February 2023. The application process for the iBank Loan will begin December 2021 to February 2022 with financing anticipated in March 2022 to May 2022. 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 2015-16 through 2019-20. 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) 2015-16 2016-17 2017-18 2018-19 2019-20 Assets: Cash and investments $ 25,578,888 $ 27,033,981 $ 33,687,791 $27,280,962 $31,466,287 Receivables 5,866,695 4,305,095 4,174,221 4,737,316 4,929,517 Interest Receivable - - - - 246,671 Due from other funds 2,516,638 223,443 618,216 2,761,121 1,419,861 Inventory and prepaid items 227,781 302,034 238,507 238,428 254,793 Other assets 332,518 - - - - Long-term receivable 520,000 425,060 28,696 28,400 33,039 Restricted cash and investments 3,007,966 1,472,372 251 383 71 Total Assets $40,050,486 $33,761,985 $38,747,682 $35,046,610 $38,350,239 Liabilities and Fund Balances: Liabilities: Accounts payable & accrued liabilities $ 3,159,413 $ 4,226,315 $ 6,021,430 $ 5,348,917 $ 7,201,884 Unearned revenue 596,323 636,577 691,733 736,064 572,573 Deposits and other liabilities 3,410,206 3,247,501 4,741,061 4,539,298 3,369,774 Total Liabilities $ 7,165,942 $ 8,110,393 $ 11,454,224 $ 10,624,279 $11,144,231 Fund Balances: Nonspendable/Reserved $ 1,109,424 $ 727,094 $ 267,203 $ 266,828 $ 287,832 Restricted - 1,472,372 251 383 167,265 Committed - 13,937,399 14,691,792 15,545,889 16,208,039 Unassigned 31,775,120 9,514,727 12,334,212 8,609,231 10,542,872 Total Fund Balances $32,884,544 $25,651,592 $27,293,458 24,422,331 $27,206,008 Total Liabilities and Fund Balances $40,050,486 $33,761,985 $38,747,682 $35,046,610 $38,350,239 _______________________ Source: City Audited Financial Statements. A-16 TABLE A-9 CITY OF ENCINITAS STATEMENT OF GENERAL FUND REVENUES, EXPENDITURES AND BALANCES (Fiscal Year Ending June 30) 2015-16 2016-17 2017-18 2018-19 2019-20 Revenues: Taxes and assessments $ 58,479,429 $ 59,039,035 $ 62,827,496 $66,263,561 $ 67,987,818 Licenses and permits 232,227 250,749 239,799 286,224 263,518 Intergovernmental 801,966 655,906 795,578 663,028 780,807 Charges for service 6,585,518 6,688,958 7,280,374 7,383,043 6,629,818 Fines, forfeitures and penalties 889,388 850,153 704,216 794,237 655,032 Use of money and property 972,663 1,047,909 807,881 2,582,812 2,810,704 Other 779,892 889,150 1,192,914 1,214,504 712,659 Total Revenues $ 68,741,083 $ 69,421,860 $ 73,848,258 $79,187,409 $ 79,840,356 Expenditures: Current: General government $ 9,096,174 $ 9,873,643 $11,267,904 $ 11,863,735 $ 12,634,244 Public safety 26,775,120 27,499,669 29,284,523 31,279,823 32,656,252 Public works 3,970,924 4,256,600 4,516,723 5,338,578 6,263,122 Planning and building 4,896,957 4,662,871 5,839,578 6,268,884 6,410,961 Engineering services 4,078,841 4,147,138 3,069,458 3,305,943 2,784,486 Parks and recreation 6,112,079 6,375,653 6,773,696 6,985,782 6,713,036 Capital Outlay - - 237,264 133,137 1,350 Total Expenditures $ 54,390,095 $ 56,815,574 $ 60,989,146 $65,175,882 $ 67,463,451 Revenues Over (Under) Expenditures $ 13,810,988 $ 12,606,286 $ 12,859,112 $14,011,527 $ 12,376,905 Other Financial Sources (Uses): Transfers In(1) 1,519,174 2,317,535 1,588,997 1,587,071 2,617,441 Transfers Out(2) (23,848,063) (22,156,773) (12,806,243 (18,469,725) (12,210,669) Total Other Financing Sources (Uses) $(22,328,889) $(19,839,238 $(11,217,246) $(16,862,654) $(9,593,228) Net Change in Fund Balances (8,517,901) (7,232,952) 1,641,866 (2,871,,127) 2,783,677 Fund Balances, Beginning $ 41,402,445 $ 32,884,544 $ 25,651,592 $ 27,293,458 $ 24,422,331 Fund Balances, Ending $ 32,884,544 $ 25,651,592 $ 27,293,458 $24,422,331 $ 27,206,008 _______________________ (1) Includes operating, capital and debt services transfers in. (2) Includes operating, capital and debt service transfer out. Source: City Audited Financial Statements. A-17 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 June 1, 2021. TABLE A-10 DIRECT AND OVERLAPPING DEBT CITY OF ENCINITAS 2020-21 Assessed Valuation: $18,084,459,057 OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 6/1/21 Metropolitan Water District 0.554% $ 148,638 Mira Costa Community College District 15.086 46,203,138 Cardiff School District 100.000 23,406,075 Encinitas Union School District 68.435 30,986,646 San Dieguito Union High School District 24.879 84,992,884 San Dieguito Union High School District Community Facilities District 1.840-100.000 11,517,117 City of Encinitas Community Facilities District No. 1 100.000 20,635,000 Olivenhain Municipal Water District, Assessment District No. 96-1 0.311 1,962,449 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $219,851,947 DIRECT AND OVERLAPPING GENERAL FUND DEBT: San Diego County General Fund Obligations 3.088% $ 6,533,745 San Diego County Pension Obligation Bonds 3.088 12,355,860 San Diego County Superintendent of Schools Obligations 3.088 265,105 San Dieguito Union High School District General Fund Obligations 24.879 3,167,097 City of Encinitas General Fund Obligations 100.000 39,350,000(1) TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $ 61,671,807 COMBINED TOTAL DEBT $281,523,754(2) Ratios to 2020-21 Assessed Valuation: Total Overlapping Tax and Assessment Debt: ..................... 1.22% Total Direct Debt ($39,350,000): ....................................... 0.22% Combined Total Debt: .......................................................... 1.56% _______________________ (1) Excludes the Bonds and includes the Prior Bonds. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Source: California Municipal Statistics, Inc. 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 24% of the basic levy. The following table shows the assessed valuation of the City for the last five fiscal years. A-18 TABLE A-11 CITY OF ENCINITAS SCHEDULE OF ASSESSED PROPERTY (As of June 30) Year Secured Utility Unsecured Total 2017-18 $15,217,980,587 $0 $150,680,923 $15,368,661,510 2018-19 16,216,152,399 0 158,545,225 16,374,697,624 2019-20 16,997,224,279 0 164,396,903 17,161,621,182 2020-21 17,908,169,190 0 176,289,867 18,084,459,057 _______________________ Source: California Municipal Statistics, Inc. and San Diego County Auditor-Controller. Set forth in Table A-12 are property tax collections and delinquencies in the City as of June 30 for Fiscal Years 2011 through 2020. 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, 2020) Collected within the Fiscal Year of Levy Collections Total Collections to Date Fiscal Year Ended June 30 Taxes Levied for the Fiscal Year Amount(1) Percent of Levy In Subsequent Years Amount Percentage of Levy 2011 $27,541,487 $26,888,921 97.63% $548,636 $27,437,557 99.62% 2012 28,100,611 27,540,858 98.01 238,418 27,779,276 99.86 2013 29,207,237 28,712,036 98.30 157,287 28,869,323 98.84 2014 30,550,301 30,009,574 98.23 133,208 30,142,782 98.67 2015 32,251,814 31,755,994 98.46 168,077 31,924,071 98.98 2016 34,443,972 33,961,174 98.60 235,730 34,196,904 99.28 2017 48,540,436 47,871,961 98.62 330,704 48,202,665 99.30 2018 50,804,445 50,172,791 98.76 171,827 50,344,618 99.09 2019 53,427,075 52,652,248 98.55 540,612 53,192,860 99.56 2020 55,190,058 54,143,122 98.10 - 54,143,122 98.10 ___________________ (1) City of Encinitas General Fund. Source: County of San Diego Auditor and Controller: Property Tax Apportionment A-19 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(1) (Fiscal Year 2019-20) Property Owner Primary Land Use 2019-20 Assessed Valuation Percent of Total(1) 1. TRC Encinitas Village LLC Shopping Center $ 87,967,299 0.52% 2. Collwood Pines Apartments LP Apartments 81,811,027 0.48 3. Belmont Village Tenant 2 LLC 3535 Convalescent Home 60,651,170 0.36 4. Pacifico Encinitas Apartment Homes LP Apartments 53,937,600 0.32 5. Encinitas Town Center Associates I LLC Shopping Center 37,675,337 0.22 6. NCHC 3 LLC Professional Building 37,437,936 0.22 7. Weingarten Nostat Inc. Shopping Center 36,726,296 0.22 8. Encinitas Marketplace LLC Shopping Center 32,402,500 0.19 9. Home Depot Commercial 31,850,710 0.19 10. SSL Landlord LLC Convalescent Home 26,415,600 0.16 11. Mission Ridge LLC Apartments 25,776,141 0.15 12. Shea Homes LP Residential Development 35,349,134 0.15 13. Vons Companies Inc. Shopping Center 25,021,750 0.15 14. Paul H. Meardon, Trust Residential/Medical Buildings 24,778,879 0.15 15. RPG Pacifica Station LLC Commercial 24,480,000 0.14 16. Keith B and Sara S. Harrison Hotel 22,579,138 0.13 17. RAF Pacifica Encinitas LLC Auto Sales 21,450,000 0.13 18. Quail Pointe Apartment Homes LP Apartments 21,420,297 0.13 19. Sterling Family Trust Apartments 19,859,936 0.12 20. Plenc El Camino LLC Shopping Center 19,565,707 0.12 $717,156,457 4.22% _______________________ (1) 2019-20 Local Secured Assessed Valuation: $16,997,224,279. Source: California Municipal Statistics, Inc. A-20 Retail and Total Taxable Sales The following table presents the retail taxable transactions of the City of Encinitas for the calendar years 2016 through 2020. TABLE A-14 CITY OF ENCINITAS TAXABLE RETAIL SALES ($ in thousands) 2016 2017 2018 2019 2020 Autos and Transportation $ 1.684,618 $ 1,627,531 $ 1,744,199 $ 1,806,753 $ 1,703,500 Building and Construction 980,140 1,021,600 924,933 1,133,022 959,367 Business and Industry 738,490 623,641 567,665 629,112 730,647 Food and Drugs 1,005,870 931,650 1,010,551 1,110,862 1,109,984 Fuel and Service Stations 1,382,946 1,191,164 1,025,386 1,630,124 1,099,387 General Consumer Goods 3,535,734 3,492,330 3,400,696 3,812,472 3,181,523 Restaurants and Hotels 2,113,116 2,264,487 2,274,664 2,560,108 2,140,574 Total $11,440,914 $11,152,403 $10,948,094 $12,682,453 $10,924,982 _______________________ Source: City Audited Financial Statements. Building Activity The following table summarizes the number of residential building permits issued in the City from Fiscal Year 2015-16 through 2019-20. TABLE A-15 CITY OF ENCINITAS NEW BUILDING PERMITS (As of June 30) Fiscal Year (June 30) Single Family Residential Permits 2016 117 2017 94 2018 160 2019 139 2020 184 _______________________ 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 $113,175, which is 183% higher than the national average of $61,937 and 150% higher than the State of California average of $75,277. APPENDIX B CITY’S AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2019-20 [THIS PAGE INTENTIONALLY LEFT BLANK] CITY OF ENCINITAS AW F ' r1A AnnrI I r K ICIX I lJ ivirr\ crlc IN 3 IV AN N UAL W N.AN A REPO R , ' l I. . Ak : FISCAL*Y-EAR ENDED JW� E 3 . 0 - low 2020 - z-! . J.' r 4 � j. •1 � r �14 ja ?{i 'ENCIN,lT -ASCA .'GD�I , ,l; r - h l� City of Encinitas Encinitas, California Comprehensive Annual Financial Report and Independent Auditor’s Reports For the Year Ended June 30, 2020 Supported by the Finance Department Teresa S. McBroome Director of Finance/City Treasurer Tom Gallup Assistant Director of Finance Tanya Allsup Finance Manager - Operating Stella Huang Finance Manager - Reporting Alexis Angelini Finance Analyst Monica Attili Finance Analyst Glenna McShane Finance Analyst Jessica Huynh Accountant Katie Schroeder Accountant Alyce Gonzalez Finance Technician Annamae Lagdaan Finance Technician Julie Pickard Finance Technician Jules Ramos Finance Technician Chase Belanio Contractor Delaney Burke Contractor INTRODUCTORY SECTION This page intentionally left blank. City of Encinitas Comprehensive Annual Financial Report For the Year Ended June 30, 2020 Table of Contents Page INTRODUCTORY SECTION (Unaudited) Table of Contents Transmittal Letter .......................................................................................................................................... i List of City Officials ..................................................................................................................................... xii Organization Chart ..................................................................................................................................... xiii Certificate of Achievement for Excellence in Financial Reporting – GFOA ................................................ xiv FINANCIAL SECTION Independent Auditor’s Report on Financial Statements ......................................................................... 1 Management’s Discussion and Analysis (Required Supplementary Information – Unaudited) ........... 5 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Position .............................................................................................................. 25 Statement of Activities and Changes in Net Position ...................................................................... 26 Fund Financial Statements: Governmental Fund Financial Statements: Balance Sheet ......................................................................................................................... 33 Reconciliation of the Governmental Funds Balance Sheet to the Government-wide Statement of Net Position ............................................................... 34 Statement of Revenues, Expenditures, and Changes in Fund Balances .................................. 35 Reconciliation of the Governmental Statement of Revenues, Expenditures, and Changes in Fund Balances to the Government-wide Statement of Activities and Changes in Net Position ............................................................. 36 Proprietary Fund Financial Statements: Statement of Net Position ........................................................................................................ 38 Statement of Revenues, Expenses, and Changes in Net Position ........................................... 40 Statement of Cash Flows ......................................................................................................... 42 Fiduciary Fund Financial Statements: Statement of Fiduciary Net Position ......................................................................................... 49 Notes to the Basic Financial Statements ......................................................................................... 53 City of Encinitas Comprehensive Annual Financial Report For the Year Ended June 30, 2020 Table of Contents (Continued) Page FINANCIAL SECTION (Continued): Required Supplementary Information (Unaudited): Budgetary Information ........................................................................................................................ 113 Budgetary Comparison Schedule: General Fund ................................................................................................................................ 114 Infrastructure Improvements Special Revenue Fund .................................................................... 116 Schedule of Changes in the Net Pension Liability and Related Ratios ................................................ 118 Schedule of the City’s Proportionate Share of the Net Pension Liability .............................................. 120 Schedule of Contributions - Pension ................................................................................................... 124 Schedule of Changes in the Net OPEB Liability and Related Ratios ................................................... 130 Schedule of Contributions - OPEB ...................................................................................................... 132 Supplementary Information: Non-Major Governmental Funds: Combining Balance Sheet ............................................................................................................ 138 Combining Statement of Revenues, Expenditures and Changes in Fund Balances ...................... 140 Schedule of Revenues, Expenditures and Changes in Fund Balances – Budget and Actual: Grants and Housing Special Revenue Fund ........................................................................... 142 Development Impact Special Revenue Fund .......................................................................... 143 Lighting and Landscaping Special Revenue Fund ................................................................... 144 Internal Service Funds: Combining Statement of Net Position ........................................................................................... 146 Combining Statement of Revenues, Expenses, and Changes in Net Position .............................. 147 Combining Statement of Cash Flows ............................................................................................ 148 Fiduciary Funds: Statement of Changes in Assets and Liabilities – Agency Funds. ................................................. 151 STATISTICAL SECTION (Unaudited) Index ........................................................................................................................................................ 153 Financial Trends: Net Position by Components – Last Ten Fiscal Years ........................................................................ 154 Changes in Net Position – Last Ten Fiscal Years ............................................................................... 156 Fund Balances of Governmental Funds – Last Ten Fiscal Years ........................................................ 160 Changes in Fund Balances of Governmental Fund – Last Ten Fiscal Years ....................................... 162 Revenue Capacity: Assessed Value of Taxable Property – Last Ten Fiscal Years ............................................................ 164 Principal Property Taxpayers – Current year and Nine Years Ago ...................................................... 165 Property Tax Levies and Collections – Last Ten Fiscal Years............................................................. 166 Direct and Overlapping Property Tax Ratios – Last Ten Fiscal Years ................................................. 168 City of Encinitas Comprehensive Annual Financial Report For the Year Ended June 30, 2020 Table of Contents (Continued) Page STATISTICAL SECTION (Continued): Debt Capacity: Ratios of Outstanding Debt by Type – Last Ten Fiscal Years ............................................................. 172 Ratios of General Bonded Debt Outstanding – Last Ten Fiscal Years ................................................ 174 Schedule of Direct and Overlapping Bonded Debt .............................................................................. 175 Legal Debt Margin Information – Last Ten Fiscal Years ...................................................................... 176 Historical Debt Service Coverage – Last Ten Fiscal Years ................................................................. 178 Demographic and Economic Information: Demographic and Economic Statistics – Last Ten Fiscal Years .......................................................... 180 General Governmental Tax Revenue by Source................................................................................. 181 Taxable Sales by Business Type – Last Ten Fiscal Years .................................................................. 182 Principal Employers – Current Fiscal Year and Nine Years Ago ......................................................... 183 Operating Information: Full-Time and Part-Time Employees by Function – Last Ten Fiscal Years ......................................... 184 Operating Indicators by Function – Last Ten Fiscal Years .................................................................. 186 Capital Asset Statistics by Function – Last Ten Fiscal Years .............................................................. 188 Cardiff Sanitary Division: Rate Schedule for Annual Sewer Charges.......................................................................................... 192 Historical Service Charges Billed ........................................................................................................ 193 Ten Largest Customers ...................................................................................................................... 194 Historical Service Connections ........................................................................................................... 194 San Dieguito Water District: Schedule of Water Rates .................................................................................................................... 196 Bi-Monthly Meter Service Availability Charges .................................................................................... 196 Historic Potable Water System Revenues – Last Ten Fiscal Years .................................................... 197 Historic Recycled Water System Revenues – Last Ten Fiscal Years .................................................. 197 Summary of Water Production by Source – Last Ten Fiscal Years ..................................................... 198 Summary of Water Deliveries by Source – Last Ten Fiscal Years ...................................................... 198 Sales by Customer Class ................................................................................................................... 199 Total Service Connections by Category – Last Ten Fiscal Years ........................................................ 199 This page intentionally left blank. TRANSMITTAL LETTER• INTRODUCTORY SECTION November 23, 2020 Honorable Mayor, City Council and Citizens of the City of Encinitas,California: It is a pleasure to present the Fiscal Year 2019-20 Comprehensive Annual Financial Report(CAFR) for the City of Encinitas and its related entities. This report was prepared to assist those interested in understanding the financial condition and results of City operations for the fiscal year ended June 30, 2020 and includes financial information for the City of Encinitas, the San Dieguito Water District, the Encinitas Housing Authority, and the Encinitas Public Financing Authority. These financial statements have been prepared in accordance with generally accepted accounting principles(GAAP) and audited in accordance with generally accepted auditing standards.Responsibility for the accuracy of the data, the completeness and reliability of the presentation, including all disclosures, rests with City management. To provide a reasonable basis for making the presentations shown in this report and to compile sufficient reliable information for the preparation of the City's financial statements,the management of the City has established a comprehensive internal control framework designed to protect the City's assets from loss, theft, or misuse. Because the cost of internal controls should not exceed their benefits, the City's internal controls have been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatements. The City's financial statements have been audited by Davis Farr LLP, certified public accountants. The independent auditor concluded based on the audit,that there was reasonable basis for rendering an unmodified opinion(or a"clean audit")on the City's financial statements for the fiscal year ended June 30, 2020 which means that in the auditor's opinion, the financial statements accurately present the City's financial position. Management's Discussion & Analysis (MD&A) immediately follows the independent auditor's report and provides a narrative introduction,overview,and analysis of the basic financial statements. The 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, Leucadia, and Olivenhain. Encinitas is located in northern San Diego County approximately 25 miles north of downtown San Diego on the Southern California coast. The City with an estimated population of 62,000 covers approximately 21 square miles and is predominately residential with two major commercial corridors. i TRANSMITTAL LETTER INTRODUCTORY SECTION ii GOVERNANCE The City is governed by a City Council consisting of a Mayor and four Council members under the Council-Manager form of government. The Mayor is elected at-large for a two-year term of office. The City of Encinitas has transitioned to a system where City Council members are elected by district instead of serving "at large" with the sequence of elections for district elections in Council Districts 3 and 4 in 2018, and district elections in Council Districts 1 and 2 in 2020. The transition to district- based elections will be complete in 2020. In the general municipal election held on November 3, 2020, the Mayor was elected for a full two-year term of office and Council Members were elected by district for a full four-year term of office for Districts 1 and 2. The City Council appoints the City Manager and City Attorney. All other staff positions are appointed by the City Manager or her 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. MUNICIPAL SERVICES The City provides a full range of municipal services such as: Fire and paramedic services Law enforcement (contract) Marine safety Parks, beaches and trails Development services Recreation services Street maintenance and construction Traffic control Wastewater services Water services 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 an active Community and Senior Center located at Encinitas Boulevard and Balour Drive; the 44-acre Encinitas Community Park located at 425 Santa Fe Drive along with 20 other park sites. The City’s Moonlight Beach located at 400 B Street attracts an estimated three million visitors annually. 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. The corporate yard for both the City of Encinitas and San Dieguito Water District is located on Calle Magdalena near Encinitas Boulevard. The Wastewater Collections division is located at the San Elijo Water Reclamation Facility located in Cardiff. BUDGETING OVERVIEW The City develops and adopts both an operating and a capital budget on a two-year budget cycle. Amounts are appropriated for the first year only, with the amounts for the second year subject to revision before appropriation. Any changes to the operating or capital budgets must be approved by the City Council. The City also publishes a six-year capital improvement program and financial plan which is updated as part of the two-year budget cycle. This document provides management and the City Council with long-term financial planning information and tools. Online access to detailed City financial information is available on the City’s website. This web-based tool allows the user to sort and filter City financial information to obtain the specific financial information desired. This tool may be found on the City’s website at https://encinitasca.opengov.com/transparency. TRANSMITTAL LETTER INTRODUCTORY SECTION iii FACTORS AFFECTING FINANCIAL CONDITION OF THE CITY Global Pandemic and Local Economy – In response to the outbreak and spread of the novel virus, coronavirus (COVID-19), in March 2020, the California Governor issued stay at home orders and shut down non-essential businesses. Encinitas enjoys a strong and well diversified tax base and over the years, the property values and personal income levels within the City have generated tax revenues sufficient to support the level of municipal services and facilities for the community to enjoy. In the past, the tax base has performed well in good economic times and has also been able to weather the financial impacts during slower economic times. The net taxable assessed value of property in the City has grown 51.3 percent since Fiscal Year 2009-10 (ten years ago). Throughout past recessions the City maintained slight increases each year in net taxable assessed value. For Fiscal Years 2018- 19 and 2019-20 taxable values increased 6.5 percent and 4.8 percent, respectively. General Fund Revenue - Property tax, and sales and use tax revenue represent approximately 79 percent of the City’s total General Fund revenue. Property tax revenue in FY 2019-20 totaled $49.5 million which was an increase of $2.1 million, or 4.5 percent, compared to FY 2018-19. Sales and use tax revenue in FY 2019-20 was flat at $13.7 million compared to FY 2018-19. The State lockdown affected other revenues in the General Fund such as charges for services related to the cancellation of recreation program and the transient occupancy tax (TOT) revenue as travel came to a halt. Total General Fund revenues for FY 2019-20 of $79.8 million increased slightly compared to revenues in FY 2018-19 of $79.1 million. Financial Strength and Sustainability – Despite the loss in revenue related to COVID-19, due to the City’s conservative budgeting, strong reserves, and re-evaluation of its CIP program, the City of Encinitas continues to be well positioned to weather economic fluctuations. The City has been evaluated and rated by internationally recognized third party reviewers and on January 26, 2017, Standard & Poor’s Rating Services (S&P) affirmed its ‘AAA’ issuer credit rating (ICR) for the City of Encinitas. The City had approximately $43.8 million of general fund bonded debt and capital leases outstanding at June 30, 2020, with scheduled payments of principal and interest of $3.9 million in FY 2019-20. This debt service as a percentage of the General Fund budget is 5.4 percent, which is well below the City’s debt service policy which states that debt service paid each year shall not exceed 15 percent of the General Fund budget. Development and Maintenance of Financial Reserves - The City has an established financial policy regarding maintenance of adequate financial reserves. The City sets aside 20 percent of General Fund operating expenditures 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 General Fund budget stabilization reserve, established in 2007 in anticipation of the ensuing recession. This reserve is funded at a minimum of two percent of operating revenues. The City has not had any need to draw on this reserve, despite the decline in operating revenues experienced during the last quarter of the fiscal year from the effects of the global pandemic and shutdown orders. 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. General Fund reserves for contingencies and budget stabilization total $16.2 million and funding available for capital improvements was $18.4 million as of June 30, 2020. TRANSMITTAL LETTER INTRODUCTORY SECTION iv ACCOMPLISHMENTS Based on direction by the City Council, highlighted below are the City’s accomplishments this fiscal year. Response to COVID-19 - As a result of the global pandemic, a pivot from basic operations was necessary. Budget cuts were made across the board in all departments. Encinitas was one of the first cities to provide financial support to small businesses and through the CARES act the City assisted 200 small businesses by distributing $500,000 in direct financial assistance. No cost permits were provided with accelerated processing to allow businesses to operate outside and in the public right- of-way. Window clings were delivered to businesses stating “Facial Coverings Required” to help present a unified message to the patrons of Encinitas businesses. We made great effort to provide extensive and up to date communication to the public, providing important information as new information became available on almost a daily basis. We strengthened our connection with the Chamber of Commerce and the 101 associations to assist in the delivery of information to the business community, and to receive feedback regarding the best and most effective levels of assistance that the City could provide. The Senior Nutrition Program participation more than doubled with the City providing more than 80 meals a day. Meals were available for pick-up or delivery. The City of Encinitas received $209,521 in Community Development Block Grant/CARES Act funding (CDBG-CV) which was allocated to a COVID-19 Emergency Rental Assistance program. Approximately 40 households have been assisted with rental assistance. The City of Encinitas will receive an additional CDBG-CV allocation of $453,824 which is expected to be allocated to eligible assistance programs in early 2021. In March 2020, the City also began providing Temporary Emergency Motel Vouchers to individuals experiencing homelessness during the pandemic. The program eligibility was limited to those that meet the definition of “high-risk” as defined by FEMA. On May 6, 2020, the City Council approved an MOA with the County of San Diego Health and Human Services Agency to provide up to 22 hotel rooms and the existing agreement with Community Resource Center was extended to provide case management services. Additionally, we worked hard to promote the best methods of slowing the spread of COVID-19 by educating the public on the importance of wearing facial coverings and maintaining social distance from others. This was achieved through banners, yard signs, the free distribution of 22,000 masks, and through personal contact by Sheriff Deputies. The positive outcome of this messaging has been measurable as Encinitas has consistently been one of the communities within the County of San Diego with the lowest number of COVID-19 cases. Housing Element – Following approval of the Fifth Cycle Housing Element (2013-2021) by the California Coastal Commission, the State Housing and Community Development certified the document in October 2019. EnerGov (EG) and Customer Self Service (CSS) - EG is a fully integrated enterprise system that incorporates processes and data from the various city departments. This tool reduces the need for redundant data processing and provides staff access to information within a single environment. CSS works with EG and is an outward facing web portal. CSS provides various services to the public, such as the ability to submit permit applications, access information, and pay invoices. EG and CSS incorporate electronic application and plan submittals, which greatly reduce paper usage, the need to TRANSMITTAL LETTER INTRODUCTORY SECTION v scan documents, and customer trips to City Hall. The system also routes applications and information electronically to City reviewers. The City has over 37,100 contacts within EG, since the City implemented this system in June 2015. Additionally, there are currently over 8,200 registered CSS users accessing online services since CSS was rolled out in January 2018. Fire Prevention now conducts all building permit, plan reviews, and construction inspections electronically through EG. All Planning, Building, and Land Development Engineering permits are now submitted entirely online within EG and most can now be paid through the CSS system. Cyber Security and Telecommuting Upgrades – Infrastructure was implemented to support staff working remotely during the pandemic. This included implementation of cybersecurity tools to protect the public, conducting business online with the City, and a remote workforce from a potential breach. Leucadia Fast Response Vehicle Pilot Program – The City approved a Fast Response Vehicle (FRV) Pilot Program with the goal of reducing fire department response times in the North Leucadia/Saxony Canyon area from January 02, 2019 to July 02, 2020. The FRV program was in service for twelve hours a day, staffed with an overtime Captain and Firefighter/Paramedic, and utilized a County- owned Type 6 fire engine at a temporary site. Staff, along with an outside consultant, Fitch & Associates, evaluated the performance of the FRV program and the pilot program ended after the results were presented to the City Council. Community Choice Energy (CCE) - Since 2016, the City has been actively investigating the feasibility of commencing CCE service for electric customers within the City, with the objective of allowing electricity customers the choice of selecting a greater percentage of renewable energy, providing greater local involvement over the provision of electric commodity services, and promoting competitive commodity rates. The City completed a Technical Feasibility Study which determined that a CCE program could result in local benefits including the use of renewable energy. On September 18, 2019, Council officially formed and joined a new CCE agency, the San Diego Community Power, along with the Cities of San Diego, Chula Vista, Imperial Beach and La Mesa. Climate Action Plan (CAP) Award – The City continues to receive awards for its Climate Action Plan and associated implementation efforts. In March 2020, the Climate Action Campaign, a local non-profit climate advocacy organization, recognized the City of Encinitas with a top-ranking score of “Silver” in its published regional CAP Report Card for the second year in a row. This recognition was received for the completion of a robust Climate Action Plan, early-stage implementation efforts and annual reporting. Successful Sand Replenishment Project – In winter/spring of 2019, the City of Encinitas procured and deposited 40,000 cubic yards of compatible beach sand on the north end of the City at Batiquitos Beach. Benefits to the area were immediately realized; deposited sand improved public safety and recreation with increased beach widths, and enhanced wildlife habitat for resident and migrating shorebirds. In February 2020, the City was able to procure over 500 cubic yards of clean beach sand directly dredged from Batiquitos Lagoon to supplement Moonlight Beach back beach areas. San Diego County Coastal Storm Damage Reduction Project – In February 2020, the City received word that this project would be added to the Army Corps Work Program and that the Army Corps of Engineers would allocate over $400,000 in federal funding to begin the pre-construction, engineering TRANSMITTAL LETTER INTRODUCTORY SECTION vi and design (PED) phase of this project. The $400,000 allocated by the Army Corps represents the full amount of federal funding needed for the year. The PED phase will require an additional $1.5 million in federal funding. Council previously authorized the acceptance of a total of $450,000 in grant funding from the Department of Boating and Waterways (DBW) to support the PED phase. Acceptance of the grant funds reduces the Cities’ non-federal share for the PED phase. The DBW has been and continues to be a committed partner in the Project. Cardiff Beach Living Shoreline Project Receives National Award – On May 18, 2020, the American Shore and Beach Preservation Association (ASBPA) announced that the Cardiff State Beach Living Shoreline project in Encinitas won the top honor for the 2020 Best Restored Beach Award. By utilizing recovered and imported rock materials, dredged sand from the San Elijo Lagoon inlet and locally sourced coastal plants, this dune creation project provides an ecological facelift that increases biodiversity with the added benefit of protecting Coast Highway 101 from ocean surges. In August 2020, the City entered into an agreement with WILDCOAST, a nonprofit, community- based organization committed to conserving coastal and marine ecosystems, to install a Marine Monitoring radar (M2) atop of the Marine Safety Center at Moonlight Beach. The intention of installing the M2 is to gather boat activity data for research purposes to determine if illegal fishing is taking place in the Swami’s State Marine Conservation Area (SMCA) and to what extent. This data will be shared with the M2 working group, which includes the City, WILDCOAST, the Anthropocene Institute, California Marine Sanctuaries Foundation, National Oceanic and Atmospheric Administration, Cal Poly San Luis Obispo, and the University of California, Santa Barbara The M2 radar was successfully installed in November 2020, and has been tracking data since the completion of the install. Helen Putnam Award for Accessory Dwelling Units (ADU)s – On October 16, 2019, the City received the 2019 Helen Putnam Award from the League of California Cities for its Housing for Generations program, under the “Housing Programs and Innovations” category. The Housing for Generations program was recognized for its innovative, multistep approach to encourage the permitting and construction of Accessory Dwelling Units (ADU). This program included the adoption of two new ordinances for ADU and Junior ADU regulations, the sponsoring of state legislation (SB 1226), and the creation of the Permit Ready Accessory Dwelling Unit (PRADU) program, which offers property owners a selection of pre-approved ADU building plans, free of charge. In 2019, the Development Services Department issued 201 ADU applications, with 103 ADU building permits, and 108 ADUs permitted in 2020 through October 30. In the first year of the PRADU program, 29 applications were submitted, 12 permits were issued, and three received certificates of occupancy. The City updated the ordinances regarding ADUs and JADUs. Transition to a Zero/Low Emissions Vehicle Fleet - The Public Works Department is progressively moving toward a zero/low emissions municipal fleet. The Fleet Division receives regular delivery of renewable diesel instead of conventional diesel. Renewable diesel is a non-petroleum-based diesel that works in unmodified diesel engines, and burns 80 percent cleaner than conventional diesel fuel. All three of the City’s fuel tanks, which are located at the Public Works Facility, as well as Fire Stations 3 and 4, supply renewable diesel. The renewable diesel is used for all diesel-fueled City vehicles, including Public Works heavy duty trucks and equipment and all fire engines. The Public Works fleet is also steadily transitioning to electric light duty vehicles in compliance with the goals of the CAP. The City owns thirty-four (34) heavy- and medium-duty diesel vehicles and forty-six TRANSMITTAL LETTER INTRODUCTORY SECTION vii (46) light duty vehicles. This fleet includes thirty-two (32) vehicles currently fueled with renewable diesel, fourteen (14) hybrid vehicles, one (1) plug-in hybrid vehicle, and five (5) all-electric vehicles. Leaf Blower Ordinance – An ordinance regulating the use of gas-powered leaf blowers was adopted by Council on July 10, 2019. The ordinance prohibits gas-powered leaf blowers and allows the use of battery and electric leaf blowers as an alternative. The ordinance took full effect on January 20, 2020. Public Safety Improvements and Upgrades – The Fire Department replaced cardiac monitors on every unit and purchased new mechanical CPR devices which will help improve our already great CPR survival rate. The Department also replaced all the thermal imaging units for all fire stations, which is a vital piece of equipment that helps locate downed civilians or firefighters. The Department also purchased a new fire engine for Encinitas Fire Station #3 to replace the previous engine that was used for the community for the last 17 years. The following CIP and Work Program projects were completed during FY 2019-20: Assessment of Fair Housing - Program participants including Housing Authorities and recipients of Community Development Block Grant program funds are required to take actions to affirmatively further fair housing choice. The City (along with all San Diego County jurisdictions) updated the (San Diego Regional) Analysis of Impediments to Fair Housing Choice. The work commenced in August 2019 and was completed June 2020. The Analysis of Impediments was adopted by the City Council in June 2020. ADA Curb Ramp Project – Cardiff Accessibility – This project added ADA improvements at the intersection of Newcastle Ave. and Chesterfield Drive, and the west side of Newcastle Avenue from Chesterfield Drive to Aberdeen Drive in Cardiff. Bonita Drive Sidewalk – In September 2019, a sidewalk was installed on Bonita Drive from Melba Road to 600 feet to the north. Safe Routes to School – New crosswalks were installed for Capri Elementary School. Other improvements included the addition of white edge lines on Caudor Street, the extension of the double yellow on Plato Place, “Slow School Xing” legends on Capri Road, and the installation of additional speed limit signs in the area. Pedestrian Scramble Crosswalks – this project added pedestrian scramble crosswalks on the Coast Highway 101 at D and E Streets and was completed in May 2020. Pedestrian Improvements – Rectangular rapid flashing beacons (RRFB), advanced warning signage and crossing striping improvements were completed at Montgomery Drive and Westminster, Paseo De las Verdes at the Pedestrian Trail Crossing, Gardendale Road and Clear Valley Road. A crosswalk and RRFB was added on Vulcan Avenue at F Street. Crosswalk improvements were made at several locations during the year, including: Lake Drive by the Cardiff Sport Park parking lot, Wandering Road at Rambling Road, Willowspring Drive from Hickoryhill Drive to Melba Road, and along Encinitas Boulevard at Calle Magdalena, Westlake St./ Quail Gardens Drive, via Cantebria, El Camino Real, Village Square Drive and Rancho Santa Fe Road. Traffic Calming – Vulcan Avenue from E Street to Santa Fe Drive was restriped to narrow travel lanes, add bike lanes and parking lanes. Vulcan Avenue from Santa Fe Drive to Montgomery Avenue TRANSMITTAL LETTER INTRODUCTORY SECTION viii was restriped to narrow travel lanes and add parking northbound. Bike lane buffers have also been added on Garden View Road from El Camino Real to Glen Arbor Drive, Mountain Vista from El Camino Real to Glen Arbor Drive, Piraeus from Leucadia Blvd to la Costa Avenue, and Via Cantebria from Encinitas Boulevard to Garden View Road. Citywide Stormdrain Repair Project - This project targeted corroded corrugated metal pipe storm drain throughout the city. The work included rehabilitation such as local repairs, lining and replacements as need. Senior Center ADA Improvements - This project provided ADA improvements to the Encinitas Senior Center parking lot including new sidewalks, ramps and paving and parking lot striping. Highway 101 San Elijo Lagoon Bridge Emergency Repairs - This project removed spalling concrete, placed new reinforcing steel and placed new concrete under the South Coast Highway 101 bridge over the San Elijo Lagoon. Consolidated Plan - The US Department of Housing and Urban Development requires jurisdictions that receive Community Development Block Grant funds to prepare a Consolidated Plan. The five- year plan covers the period of July 1, 2020 to June 30, 2025. The work was coordinated through the County of San Diego and was adopted on April 22, 2020, and submitted to HUD. Park Improvements – Three shade structures were placed over the playgrounds at Encinitas Community Park, Leo Mullen Sports Park and Sun Vista Park. Shade at public parks was listed as a priority by the community during the parks master planning process. MAJOR INITIATIVES AND PROJECTS The City Council has four Strategic Priority Focus areas which are – 1.Attain a legally compliant Housing Element 2.Better incorporate the rail corridor into our neighborhoods 3.Improve connectivity and mobility for all users 4.Promote green initiatives and protect natural resources. Highlighted below are the projects that the City is working on as they relate to the City Council’s focus areas: 1.Attain a legally compliant Housing Element Housing Element - Development of the Housing Element Update 2021-2029 began in May 2019 with the issuance of a Request for Proposal (RFP). On September 18, 2019, the City Council approved the agreement with Kimley-Horn & Associates, Inc. (Consultant). The Consultant completed a review of demographics, population and housing to reflect current conditions, and an adequate site analysis for the 2021-2029 Regional Housing Needs Assessment (RHNA). Public workshops were held in November 2019 and February 2020, with a joint Planning Commission/City Council public meeting held in December 2019. City staff submitted the draft Housing Element to HCD in June 2020 for its 60-day review period. TRANSMITTAL LETTER INTRODUCTORY SECTION ix 2.Better incorporate the rail corridor into our neighborhoods Rail Corridor Cross-Connect Implementation Plan – This plan builds on the recommendations presented in the Rail Corridor Vision Study and Active Transportation Plan, approved by City Council in February 2018. The Rail Corridor Vision Study is the centerpiece of the Coastal Mobility and Livability Study (CMLS), a broad effort to examine mobility issues and opportunities in the Encinitas coastal rail corridor. Using a Caltrans Sustainable Communities Transportation, the first workshop was held on May 20, 2019. The survey was completed and the draft concept plans were prepared for the second workshop held on January 30, 2020. An on-line open house was also available through February 29, 2020. El Portal Pedestrian Rail Crossing - This project is fully designed, and construction of a grade- separated pedestrian and bicycle rail crossing near El Portal Street in Leucadia is starting in November 2020. The City retained the services of the San Diego Association of Governments to manage construction of this complicated project. Verdi Undercrossing – This project consists of a rail undercrossing at Verdi Avenue in Cardiff – the project is finishing design and grant funding is being sought for construction. 3.Improve connectivity and mobility for all users Leucadia 101 Streetscape - This project provides streetscape improvements along North Coast Highway 101 from A Street to La Costa Avenue. The project includes pedestrian and bicycle improvements, roundabouts, road lane narrowing and tree plantings throughout the entire corridor. The City Council approved the construction contract for Phase 1 (Marcheta Street to Basil Street) which is expected to start construction in January 2021. B Street Sidewalk Improvements - This project constructs new sidewalk, pedestrian ramps, curbs and gutters and landscaping on the north side of B Street from Highway 101 to Moonlight Beach. The Notice of Completion was approved on October 28, 2020. Santa Fe Drive South Sidewalk and San Dieguito Academy Frontage Improvements - This project involves construction of curb, gutter, and sidewalk on the south side of Santa Fe Drive from Gardena Road to Mackinnon Avenue. In addition, accessible curb ramps will be provided on both sides of the Santa Fe Drive/Mackinnon Avenue intersection, and landscaping improvements will be provided on the north side of the street, fronting San Dieguito Academy School. Public outreach is underway. Americans with Disabilities Act (ADA) Transition Plan - Under Title II of the ADA, public agencies are required to conduct a self-evaluation of their programs and services in order to identify any obstacles or barriers to accessibility. In 2013, the City and San Dieguito Water District conducted a self-evaluation of its programs, services, administrative employment policies, and facilities on public property and developed a Self-Evaluation and Transition Plan. The City/District recognizes that ADA compliance is an ongoing responsibility and has updated the Self-Evaluation and Transition Plans, Grievance Procedures, Public Notice and Administrative policies PO20, PO21, PO22, and PO23 which was presented to City Council in December 2019 for adoption. Rancho Santa Fe (Trail 82) and Camino Del Norte (Trail 95) Design and Construction - Design is 95 percent complete for Trail 95. Utility conflicts are being worked out for Trail 82. Adams Run Trail will require environmental review and permits from Federal Fish and Wildlife regarding habitat impacts to California Gnatcatcher. TRANSMITTAL LETTER INTRODUCTORY SECTION x 4. Promote green initiatives and protect natural resources. Climate Action Plan - The updated Climate Action Plan (CAP) was adopted by Council on January 17, 2018. City staff continues to implement projects, programs, and initiatives that support the goals of the CAP and reduce greenhouse gas (GHG) emissions. The CAP was updated on November 18, 2020. Some of the major CAP actions that have been completed or will be advanced in the coming year include: •Launch a Community Choice Energy (CCE) Program –The new CCE has commenced start-up activities including developing a business plan, hiring staff, and acquiring the financing needed to purchase and serve renewable electricity to the community. •Development of building ordinances to require and encourage reduction of fossil fuel energy use – In November 2019, Council adopted an ordinance that will require additional electrical improvements and electric vehicle charging stations (EVCS) to be installed at a percentage of parking spaces at commercial and multi-family properties, as well as require new single family homes to come equipped with electrical infrastructure necessary for the home to be “EVCS ready.” The ordinance went into effect on January 1, 2020. State-required cost effectiveness studies and proposed ordinances are currently being drafted to address solar photovoltaic energy production, energy efficient water heating, building electrification, and other efficiency measures for commercial and residential properties. •Support initiatives to divert food waste and recycling out of the landfill - Support EDCO, the City’s franchise waste hauler, in developing an anaerobic digestion facility and coordinating curbside pickup of all organic waste, including food waste. Continue to fund and support community education and outreach programs that encourage the diversion of food waste through composting and other means and encourage proper recycling and waste disposal. •Plastics initiative – Implementation of the City of Encinitas Plastics Initiative regulating the sale and distribution of single-use plastic products in Encinitas including plastic straws, plastic utensils, and plastic beverage bottles. The Plastics Initiative is a multi-phased approach, starting in December 2019 through the Introduction of an Ordinance to require the distribution of plastic straws upon request only, including takeout and drive-thru, and a prohibition on the distribution of plastic straws. Phase 2 was initiated in February 2020 and included the development of a policy to limit the sale or distribution of Plastic Beverage Containers at City Facilities and Events. Phase 3 was initiated in April 2020, leading to the adoption of an ordinance prohibiting the retail sale of expanded polystyrene (EPS) food service ware, ice chests, and packing materials. Net Zero Municipal Electricity - In response to a major goal outlined in the Climate Action Plan, the Public Works Department commissioned a study to evaluate all city facilities, propose energy savings measures, and design a solar system to offset the remaining demand with the goal of bringing the City to a net zero energy footprint. The evaluation of city facilities is complete and outlines options to finance and install energy efficiency measures and multiple solar photovoltaic systems. The proposal is planned to go to City Council for consideration in 2021. Olympus Park (formerly Standard Pacific Park) - In 2001, as part of the Maravu Development, the Standard Pacific parcel was conveyed to the City for parkland mitigation. On October 26, 2016, the Parks, Beaches, Trails and Open Space Master Plan was approved by City Council. The plan "# -+"),(--"’1’%--%+01&)-+*$.#-*+/1,%#-&*)1 š{~¾Ú›†¤~{óڗ~ó¼~œ–—xÁŗÁÁ{ósÅÁæ½{óڗ~ólÚs½|sÆ|ójsy‚¬yóÃsȯóٞÚ~ówós¼ósÆ~sóۗsÜóÁ…‡~Æ~{ó°ÁíóÙ~Æì¤y~ó ‘Æó È~yÆ~sݝÁ¼s±ó ÁÃÃÁÆÛ伤ۤ~Ù8ó Ró ÃsÆ¯ó ¼ó ژÙósÇ~só íÁå²{ó sˆ‡ÁÆ|ó ۗ~óÈ~ٞ{~¾ÞÙó ¹ÁÆ~ó ÁÃÃÁÇÚ潤ßðó ÚÁó ÃsÌܜyÃsÛ~ó¤½óÃsƯós¼|óÅ~yÐsڟÁ¾ósyڜìšÚ¤~Ù9ó i ¼ódæ¾~óMP'ó MGIO(ó WœÚðóWÁå¼y±ósísÌ}~{ósóyÁ¾ÛÆsyÚóÚÁó {~ٝ–¾ó mÚs¾{sÆ{ó jsy¤Šyó jsǯ:ó n—~ó ÙyÁÃ~ó Áóí ÁÈ¯ó œ¾ó Ú —~óyÁ¼ÚÆtyÜó Ÿ¼y±æ{~Ùó {~ê~²Áù~¼Úó Á‚ó ñs½Ù)ó ÙÃ~yž‹ysڝÁ¾Ù*óÃ~ƹ¤ÚÙ+ós¼|ó~¾ì¤ÆÁ½¹~¼Ús³ó{Áyæ¹~¾Ús۝Á¾óÈóۗ~ómÞs½{sÉ|ójuzŸŠyóÃsƯóٚÚ~8óo—~óŒ¾s°ó {~ٝ–¼ó {Áyæ¹~¼ÚÙó tÌó yÁ¹Ã±~Ú~ó s¼{ó sÆ~óƒæ±²ðó ~½ÚžÜ´~{ó ÚÁóx宵{ó ڗ~ó ÃsƯ;ó i¾ó SÃͪ±ó MM+ó MGMG,ó X WÁå¼yž´ó sív{~|ó sóyÁ¼ÚÆsyÚóÚÁó yÁ½ÙàËæyÚói´ðºÃæÙó js˯<ó WÁ¼ÙÚØy۟Á½ó Áƒó ڗ~ó Ãs̯ó x~–sÀó ¤¼óÙÃʜ½–ó MGMG=ó n˜~óÃsƯóÙóÙy—~{æ ~|óÛÁóx~óyÁ¹Ã±~Ú~|óœ¼ó~s˲ðóMGMJ>ó \¾~Æ`Áëó "]_%ó s¼{ó WçÙÚÁ¹~Æó m~´ƒó l~Æëy~ó #Wll%ó 6 o™~ó Y~ì~°Áù~¿Üó m~Èêy~Ùó Y~ÃsÆݹ~¼Úó —sÙó yÁ¹Ã²~Û~{ó yÁ¾„¬–æƤ¼–ó ۗ~óÆ~¹s¡½¤¼–óU梲|›¼–-ój´s¾½¤¾–.ós¾{ó \¼–›¾€~Ɵ½–ó Ã~ƹÚÙóí£Û—œ½ó \`ó s¼{ó Wlmó{æƜ¾–óMGMG/ó헤y—ós±´ÁíÙó“Æós¼óÁ¼²¤½~óÃ~źœÛósÃñ›ysۚÁ¾óÙæx¹¤ÚÜs´ós¼{óÌ~ì¤~íóÃËÁy~ÙÙ?ó "01"-$.1"+$1"#(+,0)&%’&*&+/.1 ò o—~ó`Áê~Ó¹~¼Úó^Ÿ¾s½y~ói„y~ÊÙóRÙÙÁyžsÚ¤Á¼ó$`^iR&ó sísÆ{~{óÚÙóW~Ô¤ŽysÚ~óÁ…óTy—~ê~¹~¼ÛóƒÂÅ \îy~±´~¼y~ó¤¼ó^¥½s¿ys±ók~ÃÁ՜¼–óÞÁóڗ~óWœÝðóÁ…ó\¼yœ½¦ÚsÙó’Æó §ÚÙóWÁ¹ÃÈ~˜~¼ÙŸì~óS¾¼ès±ó^š¿s¾ys´ k~ÃÁÆÞó“Æóۗ~óŒÙys²óð~sÎó~½|~|óbæ¾~óNG0MGKQ@óp—~óX¤Ýðóx~²¤~ì~ÙóۗsÚóۗ~ó^róMHLQ7MGóWÁºÃÆ~—~¼Ùœê~ S½½és±ó^œ¿s¾yœsµók~ÃÁÖóyÁ½ÚŸ¼æ~ÙóÚÁó¹~~Ûóۗ~ó_^iRóyÈ®á~̤só”Æóڗ~ósísÆ{A fsÙÚ¶ð1óí~ó{~~öðósÃÃÆ~y¤sÚ~óڗ~ó|~{¤ysڝÁ¾ós½|ó´~s{~ÈٗœÃóÁƒóܗ~ógsðÁÆós¾{óXÁæ¼yœ²ó h~¹x~ÆÙóí—Á —sê~ó yÁ¼Ù¨ÙÞ~¼Ú±ðó ÙæÃÃÁÆÛ~{ó ÁæÆó –Ás±ó Á‚ó ~îy~±²~¼y~ó ½ó s¸¸ó sÙÃ~yÝÙó Á…ó ½s¼yŸs²ó ¹s½s–~¹~¼ÚEó o—~ yÁ¹Ã°~۞Á½óÁƒóڗœÙóÑÃÁÆÞóyÁæ²|ó¼ÁÚó—sì~óx~~¾ósyyÁ¹Ã°¤Ù—~{óí¤Ú—ÁæÚóڗ~ó{~{ŸysÚ©Á¼ós¼{ó—sË|óíÁůóÁ† ڗ~ó~¼Ú¤Æ~óÙÛs‰óž½ó ۗ~ó^œ¼s½y~óZ~ÃsÅݹ~¼ÛCólÄ~yœs´óÏ~yÁ–½ÜœÁ½ó–Á~ÙóÚÁóܗ~ó^œ¼s¾y~ók~ÃÁם¼–ó Û~s¹2 mÞ~´±sóaæs¾–4óR²~ïžÙóR¾–~·ž¾œ3ó esÚª~ómy—ÆÁ~{~Æ4ós¼{óc~ÙÙ¤ysóaæð¾—ó “Èó ڗ~«ÆóíÁůóí¬Ú—óڗ~óså{¤âÁÆÙ s¾{óڗ~óyÁÁÍ{¤¿sڟÁ¿óÁƒóژ~óÃÈ~ÃsËsÛ­Á¼óÁ‚óڗŸÙóÆ~ÃÁËãB k~ÙÃ~yڕ±²ðóÙæx¹žÚÚ~{5 js»~–sqCR⁄† XœÛðóhs¼s–~Æó o~smDhyV¯``„~ [›È~yÚÁÈóÁƒó^œ¾s¾y~FWÚñóoÈ~sÙæÆ~Æó #"$ LIST OF CITY OFFICIALS As of June 30, 2020 CITY COUNCIL Mayor Catherine S. Blakespear Deputy Mayor Kellie Hinze District 2 Council Member Tony Kranz District 1 Council Member Jody Hubbard District 3 Council Member Joe Mosca District 4 EXECUTIVE TEAM MEMBERS City Manager Pamela Antil* Assistant City Manager Mark Delin City Clerk/Legislative Services Director Kathy Hollywood Public Works Director Carl Quiram Director of Finance/City Treasurer Teresa S. McBroome Fire Chief Michael Stein Human Resources Director Tom Bokosky IT Manager Wendy Flynn Development Services Director Lillian Doherty Risk Manager Jace Schwarm Parks, Recreation & Cultural Arts Director Jennifer Campbell *Effective October 12, 2020 xii %s\]KŠ‹Kth¢F‚ƒ¢šI?¢$‰™¢,i¡L„uj^@k›5Z¢&v_`MŒNwl¢-6…YŽ¢"¢0A<†B7œOxm¢’yabPQzn¢.[8opRhH¢({cdS‘’T|o¢"-46/*6#.)-.-3’6$1+%.-5(-0.6",&26#&$")’(*%+1CqU}‡¢)se]K“”K~h¢3ˆ9GL>¢#¢/Ÿ;ZX=¢2:EDž¢*ffV•–W€r¢4J¢+sgdM—˜Mso¢"#$ 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, 2019 Executive Director/CEO xiv FINANCIAL SECTION This page intentionally left blank. Independent Auditor’s Report City Council City of Encinitas Encinitas, California 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, 2020, and the related notes to the basic financial statements, which collectively comprise the City’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the Investment in Joint Ventures of the R.E. Badger Joint Powers Authority, R.E. Badger Financing Authority, San Elijo Joint Powers Authority, and Encina Wastewater Authority, which collectively represent the following percentages of assets, net position and expenses of the following opinion units: Those statements were audited by other auditors whose reports have been furnished to us, and our opinions, as they relate to the amounts included for investment in joint ventures, are based solely on the reports of the other auditors. 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 City’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we express no such opinion.An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion,based on our audit and the report of other auditors,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, 2020, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management’s Discussion and Analysis,Budgetary Comparison Schedule for the General Fund and the Infrastructure Improvements Special Revenue Fund, Schedule of Changes in the Net Pension Liability and Related Ratios, Schedule of the City’s Proportionate Share of the Net Pension Liability, Schedules of Contributions –Pensions, Schedule of Changes in the Net OPEB Liability and Related Ratios, and the Schedule of Contributions –OPEB be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City of Encinitas' basic financial statements. The introductory section, supplementary information and the statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplementary information is 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 supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory section and the statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 23, 2020 on our consideration of the City of Encinitas' internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering City of Encinitas' internal control over financial reporting and compliance. Irvine, California November 23, 2020 3 This page intentionally left blank. _ City of Encinitas Management's Discussion and Analysis For the Year Ended June 30, 2020 The Management's Discussion and Analysis ("MD&A") provides a narrative overview and analysis of the financial activities of the City of Encinitas ("City") for the fiscal year ended June 30, 2020. 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 (SDWD). Please read the MD&A in conjunction with the transmittal letter, the basic financial statements and the accompanying notes to those financial statements. FINANCIAL HIGHLIGHTS • The City's total assets increased overall by$11.4 million. This is due to a $8.1 million increase in governmental activities and a $3.3 million increase in business-type activities. • The City's total net position increased overall by $9.4 million compared to the previous year. The governmental activities increased $3.9 million and business-type activities increased $5.5 million. Total assets increased $11.4 million, total liabilities increased $1.8 million, deferred outflows increased $1.0 million, and deferred inflows also increased $1.2 million. • The City's total revenues increased $1.6 million from 2019. ■ Governmental activities revenues increased $1.5 million ■ Business-type activities revenues increased $0.1 million • The City's total expenses increased $8.0 million from 2019. ■ Governmental activities expenses increased $7.2 million ■ Business-type activities expenses increased $0.8 million • The City's total net pension liability increased $3.9 million from 2019. ■ Governmental liability increased $3.3 million ■ Business-type liability increased $0.6 million • The City's total OPEB liability decreased $2.1 million from 2019. ■ Governmental liability decreased $2.0 million ■ Business-type liability slightly decreased at $0.1 million OVERVIEW OF THE FINANCIAL STATEMENTS The MD&A is intended to serve as an introduction to the City's basic financial statements. The basic financial statements are composed of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. This report also contains other required supplementary information in addition to the basic financial statements themselves. The financial statements presented herein include all the activities of the City and the component unit of San Dieguito Water District (SDWD) using the integrated approach as prescribed by GASB Statement 5 City of Encinitas %P Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 No. 34. The City includes accounts for the Encinitas Public Financing Authority (EPFA)and the Encinitas Housing Authority (EHA). The government-wide financial statements present the financial picture of the City from the economic resources measurement focus using the accrual basis of accounting. They present governmental activities and business-type activities separately.These statements include all assets of the City including infrastructure as well as all liabilities including long-term debt. Certain eliminations have occurred as prescribed by the statement in regard to interfund activity, payables and receivables. Reporting the City as a Whole The Statement of Net Position and the Statement of Activities The government-wide financial statements provide a long-term view of the City's activities as a whole, and are composed of the statement of net position and the statement of activities and changes in net position. These statements are prepared on the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. Revenues and expenses for the current fiscal year are recorded, regardless of when cash is received or paid. The Statement of Net Position presents information on all the City's assets, deferred outflows-inflows and liabilities, with the difference between the four reported as net position, which is one way to measure the City's financial health. Over time, increases or decreases in the net position is one indicator of whether the financial condition of the City is improving or declining. The statement of activities and changes in net position presents information showing how the City's net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows.Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods. Examples include revenues pertaining to uncollected taxes and expenses pertaining to earned but unused vacation and sick leave. In both the statement of net position and the statement of activities and changes in net position, the City activities are separated as follows: Governmental Activities — Property, sales and use taxes, user fees, franchise fees, investment earnings, and state and federal grants revenues finance the governmental activities. Most of the City's basic services are reported in this category, including: ■ General Government ■ Public Safety ■ Public Works ■ Planning ■ Engineering ■ Parks, Recreation and Cultural Arts 6 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 Business-type Activities—The City charges a fee to customers to cover all or most of the cost of certain services it provides. These activities include the water and wastewater operations and a portion of the City's affordable housing program. Reporting the City's Most Significant Funds The fund financial statements include statements for each of the three categories of activities: governmental, business-type (proprietary) and fiduciary. The governmental activities, other than internal service activities, are prepared using the current financial resources measurement focus and modified accrual basis of accounting. The business-type activities are prepared using the economic resources management focus and the accrual basis of accounting. The fiduciary activities include agency funds that only report a balance sheet and do not have a measurement focus. Reconciliations of the fund financial statements to the government-wide financial statements are included to explain the differences created by the integrated approach. Fund Financial Statements — The City's fund financial statements provide a greater level of detail regarding the City's governmental activities and include the General Fund, Capital Improvements Capital Projects Fund, Infrastructure Improvements Special Revenue Fund and other non-major governmental funds. The City reports the General Fund, the Capital Improvements Capital Projects Fund, and the Infrastructure Improvements Special Revenues Fund as major funds, under the guidance provided by GASB No. 34. All other governmental funds are considered non-major funds and are reported as one group. The 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 Capital Improvements Capital Projects Fund accounts for all governmental fund capital improvements, as well as work projects such as long-term consultant studies.The Infrastructure Improvements Special Revenue Fund accounts for financial resources from local, state and federal grants which are used primarily to fund capital improvements. All these expenditures are categorized as capital outlay. The City's Major Funds include: Type of Activity: • General Fund Governmental Activities • Capital Improvements Capital Projects Fund Governmental Activities • Infrastructure Improvements Special Revenue Fund Governmental Activities • City's Water and Wastewater Enterprises Business-type Activities ■ San Dieguito Water District ■ Cardiff Sanitary Division • Encinitas Sanitary Division Governmental Funds—Most of the City's basic services are reported in governmental funds. Unlike the government-wide financial statements, governmental funds financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the City's capacity to finance its programs in the near future. These funds are reported by using an accounting method called modified 7 City of Encinitas %P Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental funds balance sheet and the governmental funds statement of revenues, expenditures, and changes in fund balance present information separately for the General Fund, the Capital Improvements Capital Projects Fund, and the Infrastructure Improvements Special Revenue Fund, which are all classified as major funds. These statements also report several individual governmental funds classified as non-major funds, such as Special Revenue and Debt Service Funds, which are combined into a single, aggregated presentation. Individual fund data for each of the non-major governmental funds is provided in the supplementary information section. 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, like government-wide financial statements, are presented on an accrual basis of accounting. There are two types of proprietary funds — enterprise funds and internal service funds. Enterprise funds are used to report activities for which external users are charged a fee for goods or services. Internal service funds are used to report activities that provide supplies and services to other City programs and activities. The internal service funds are reported with governmental activities in the government-wide financial statements. Fiduciary Funds—The City is the trustee, or fiduciary,for certain funds held on behalf of the Community Facilities District No. 1- the Encinitas Ranch Development. The City's fiduciary activities are reported in a separate statement of fiduciary net position.These activities are excluded from the City's other financial statements because the City cannot use these assets to finance its operations. The City is responsible for ensuring that the assets reported in these funds are used for their intended purposes. Financial Analysis of the City Overall Net Position —The City of Encinitas' combined net position (i.e. inclusive of all City funds)for the fiscal year ended June 30, 2020 is compared to the results for 2019 in Table 1. 8 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 Table 1 Statement of Net Position (in millions of dollars) Governmental Business-type Total Primary Total Activities Activities Government Changes Cy Py Cy Py Cy Py 2020 2019 2020 2019 2020 2019 Current assets $ 93.1 $ 91.4 $ 53.1 $ 49.2 $ 146.2 $ 140.6 4.0% Capital assets (net) 224.8 218.4 56.9 58.7 281.7 277.1 1.7% Other non-current assets 0.5 0.5 61.1 59.9 61.6 60.4 2.0% Total assets 318.4 310.3 171.1 167.8 489.5 478.1 2.4% Deferred outflows 13.6 13.7 2.6 1.5 16.2 15.2 6.6% Current liabilities 22.4 18.8 4.0 4.1 26.4 22.9 15.3% Long-term liabilities 100.5 101.0 25.2 26.4 125.7 127.4 (1.3%) Total liabilities 122.9 119.8 29.2 30.5 152.1 150.3 1.2% Deferred inflows 4.3 3.3 0.7 0.5 5.0 3.8 31.6% Net position: Net investment in capital assets 181.3 172.6 38.1 38.1 219.4 210.7 4.1% Restricted 23.0 21.0 0.4 0.4 23.4 21.4 9.3% Unrestricted 0.5 7.3 105.3 99.8 105.8 107.1 (1.2%) Total net position $ 204.8 $ 200.9 $ 143.8 $ 138.3 $ 348.6 $ 339.2 2.8% Net position represents the simplest test of financial health for the City, indicating the excess or deficit of assets, and deferred outflows of resources, over liabilities and deferred inflows of resources. Net position for the City as a whole increased 2.8 percent from $339.2 million on June 30, 2019, to $348.6 million at June 30, 2020. • The overall increase in total assets is $11.4 million when compared to the previous year. The governmental activities total assets increased $8.1 million compared to the previous year with an increase in cash and investments, inventory and prepaid items, and capital assets offset by a decrease in receivables. The business-type activities total assets increased $3.3 million compared to the previous year with primary increases also in cash and investments, receivables, and inventory and prepaid items. In addition, the investment in joint ventures increased slightly compared to the previous year. The only decrease was in capital assets due to a write-off in construction in progress and an increase in accumulated depreciation in structures and improvements. • The overall increase in total liabilities is $1.8 million when compared to the previous year. This is primarily attributable to an increase in net pension liabilities and current liabilities offset by a decrease in other postemployment benefits (OPEB) liabilities and long-term liabilities. 9 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 • The increase in total assets of$11.4 million, increase in total liabilities of$1.8 million, deferred inflows of$1.2 million and deferred outflows of$1.0 million results in an increase in the City's total net position of$9.4 million, or approximately 2.8 percent, compared to 2019. See Table 1. Table 2 Statement of Activities and Changes in Net Position (in millions of dollars) Governmental Business-type Total Primary Activities Activities Government CY PT CY PY CY PY 2020 2019 2020 2019 2020 2019 Program revenues: Charges for services $ 8.7 $ 9.4 $ 24.9 $ 23.6 $ 33.6 $ 33.0 Operating grants 4.4 4.4 1.2 1.2 5.6 5.6 Capital grants 6.8 6.6 0.6 0.7 7.4 7.3 General revenues: Property taxes 51.2 49.2 1.2 1.1 52.4 50.3 Sales and use taxes 13.7 13.7 - - 13.7 13.7 Other taxes 5.0 5.3 - - 5.0 5.3 Intergovernmental 0.2 0.2 - - 0.2 0.2 Other general revenue 3.8 3.5 2.1 3.3 5.9 6.8 Total revenues 93.8 92.3 30.0 29.9 123.8 122.2 Program expenses: General government 17.3 15.3 - - 17.3 15.3 Public safety 35.8 33.1 - - 35.8 33.1 Public works 11.9 9.2 - - 11.9 9.2 Planning and building 7.0 6.8 - - 7.0 6.8 Engineering services 6.3 6.8 - - 6.3 6.8 Parks and recreation 10.0 9.8 - - 10.0 9.8 Interest on long-term debt 1.6 1.7 - - 1.6 1.7 Cardiff Sanitary Division - - 3.1 3.5 3.1 3.5 San Dieguito Water District - - 16.5 16.6 16.5 16.6 Encinitas Sanitary Division - - 3.2 2.0 3.2 2.0 Affordable housing - - 1.7 1.6 1.7 1.6 Total expenses 89.9 82.7 24.5 23.7 114.4 106.4 Change in net position 3.9 9.6 5.5 6.2 9.4 15.8 Transfers in (out) - - - - - - Increase in net position 3.9 9.6 5.5 6.2 9.4 15.8 Net position - beginning 200.9 191.3 138.3 132.1 339.2 323.4 Net position - ending $ 204.8 $ 200.9 $ 143.8 $ 138.3 $ 348.6 $ 339.2 10 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 Governmental Activities Chart 1 reflects the financial impact of the various City programs or the extent to which these programs generate revenue from fees and grants. The City's programs include General Government, Public Safety (Fire and Law Enforcement), Public Works, Development Services (Planning and Engineering) and Parks, Recreation and Cultural Arts. Each program's net cost (total cost less revenues generated by the activities) is presented in the Statement of Activities and Changes in Net Position. Chart I Expenditures vs. Program Revenues (Governmental Activities) $40,000,00❑ $3 5,000,000 $30,000,000 $2 5,000,000 $20,000,000 $15,000,000 $20,000,000 55,000,000 S - _im - General Pubic Safety Public Works Planning Engineering Parks& Interest on Government Services Services Recreation Long-term M Program Revenues R Expenditures Debt Note:Program revenues only include charges for services,operating grants and contributions,capital grants and contributions and do not include general revenues. 11 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 Chart 2 reflects that property taxes, sales and use taxes, charges for services, capital grants and contributions, and other taxes are the top five categories of total revenue and comprise 91 percent of funding for governmental activities. The remaining categories include operating grants and contributions, investment income and other. Chart 2 Governmental Revenues Other Investment Income 1% Charges for Services Intergovernmental 3% 9% a% Operating Grants& Other Taxes Contributions 5% 5% Capital Grants& Contributions 7% Sales and Use Taxes 15% Property Taxes 55% Business-type Activities Business-type activities for the City of Encinitas include water and wastewater operations and the City's affordable housing program. These activities increased net position by $5.5 million from the last fiscal year. The program revenues and general revenues totaled $30.0 million, exceeding total expenses of $24.5 million. Refer to Table 2, Statement of Activities and Changes in Net Position. The Statement of Activities and Changes in Net Position for business-type activities reflects an increase of$1.2 million in program revenues and a decrease of$1.1 million in general revenues from the previous year. The primary reason for the increase in operating revenue during Fiscal Year 2019-20 was attributable to SDWD's increase in water sales of $1.1 million due to two increases in the water rates. The Board approved the first rate increase effective May 1, 2019. The second rate increase went into effect on June 1, 2020. The operating revenues in Cardiff Sanitary Division (CSD) increased slightly by two percent and the Encinitas Sanitary Division (ESD) increased one percent compared to the previous year. Supplies expense for SDWD increased $0.3 million compared to the previous year. The changes in water rates contributed to a$0.8 million increase in net income for SDWD.The CSD and ESD operating income remained stable. 12 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 Overall, program revenues and general revenues exceeded program expenses during Fiscal Year 2019- 20 resulting in a total net change of$5.5 million. Chart 3 below compares program revenue from business-type activities to program expenses. Water and wastewater operations operated at a surplus, as shown in the Statement of Activities and Changes in Net Position. Chart 3 Expenses vs. Program Revenues (Business-type Activities) $18,000,000 T $16,000,000 $14,000,000 $12,000,000 $10,000,000 58,000,000 $6,000,000 s4,000,000 52,000,000 5 INK - Cardiff Sanitary Division San Dieguito Water Encinitas Sanitary Affordable Housing District Division ■program Revenues 2Eapense5 Note:Program revenues only include charges for services,operating grants and contributions,capital grants and contributions and do not include general revenues. GENERAL FUND BUDGETARY HIGHLIGHTS General Fund Revenues $4.7 million above projections General Fund actual revenues of$79.8 million were $2.5 million, or 3.3 percent, higher than the original budget and $4.7 million, or 6.2 percent, higher than the final budget.Actual revenues were higher by$0.6 million, or 0.8 percent, when compared to FY 2018-19. Property taxes are the City's largest revenue source and make up 62 percent of the General Fund revenue budget. The City of Encinitas receives approximately 24 cents of each dollar of property taxes revenue generated in the City. Current secured property taxes, along with other property tax categories, exceeded projections by $1.2 million, or 2.4 percent, compared to the final budget. Total property tax revenue collected in FY 2019-20 increased by $2.1 million or 4.5 percent more compared with the prior year. The continued growth in assessed values from transfers of ownership and the full two percent inflation adjustment applied under Proposition 13 contributed to the increase in property tax revenue. The 13 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 median sale price of a detached single-family residential home in Encinitas was $1,342,500 up from $1,144,250 compared with the same period January through July in FY 2018-19. The City experienced a net taxable value increase of 4.8 percent for the FY 2019-20 tax roll, which was slightly less than countywide at 5.7 percent. With the postponement of property tax payments of affected property owners due to the virus, COVID-19, the City still collected 86.9 percent of property tax revenue. Documentary transfer tax exceeded projections by $112,882, which was related to the values of homes sold and the number of homes sold. The revenue from this category exceeded the budget due to higher than anticipated transfers of ownership occurring during the fourth quarter, which accounted for 50 percent of the actual amount received. Sales and use taxes are the City's second largest revenue source, providing 17 percent of General Fund revenue. Actual revenue received was over projections by $1,962,478, which was a 16.7 percent increase compared to the final budget. The increase was from sales through the internet and sales in the Auto and Transportation, Food and Drugs and in the Building and Construction categories. Due to the COVID-19 pandemic, the City forecasted a decline of approximately $1.9 million in sales and use taxes revenues in the third and fourth quarters. The State lockdown orders temporarily shuttered many non- essential retailers and had a profound impact on most categories within the general consumer goods group. However, the allocations from the countywide use tax pool surged 36 percent for the taxation of additional internet purchases. Essential retailers in the Consumer Goods category that remained open in Encinitas offset some of the expected overall decline in sales receipts. In addition, fewer businesses took advantage of the State's sales tax payment deferral program than expected. The year end results were better than expected with actual revenue received for sales tax exceeding projects by approximately $2 million. However, compared to the previous year, collections were flat and only $50,233 higher, an increase of 0.4 percent compared with the prior year. Transient occupancy tax (TOT) is apportioned 80 percent to the General Fund and 20 percent to the Coastal Zone Management Fund for sand replenishment and shore stabilization. TOT revenue was under projections by$54,924, a decrease of 2.8 percent from the final budget. Staff forecasted a decline in TOT revenue of $170,515 due to the stay-at-home orders in place and potential travelers postponing or cancelling travel plans due to the COVID-19 pandemic. Overall, franchise taxes were under projections by $46,843, which was a result of a reduction in taxes collected due to a declining number of paid services not meeting projections and a decrease in total electricity consumption. The franchise fee revenue is generated from public utility sources, trash collection franchises, and telecommunication franchises conducting business within the city limits. The revenue collected from AT&T was $12,106 lower than anticipated and $39,905 below projection for collections from SDG&E and SoCal Edison. Licenses and permits were under projections by$16,682.This fell below budget projection by 6.0 percent, mostly due to lower than anticipated revenue collected from the SB1186 State Mandate Fee for Disability Access CASp (Certified Access Specialist) Revenue collected in this category was $22,706 less than the previous fiscal year. 14 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 Intergovernmental revenue was higher than projected by $117,910. This was primarily due to revenue received from agencies participating in the Joint Technical Community Choice Aggregate (CCA) Feasibility Study cost sharing agreement, reimbursements of state mandated costs, a payment made by the California Office of Emergency Services for 2019 storms and payments for excess vehicle license fees. Overall charges for services revenue were under projections by $601,836, primarily from engineering fees,which were$124,191 lower than projected due to lower activity levels in the fourth quarter restricted by the pandemic shutdown. The building fees were $278,397 lower than projected also due to a lower activity level. The number of Accessory Dwelling Unit (ADU) and energy efficiency permit fee waiver credits were higher than expected. During the year, the fee waiver credits totaled $293,551. The revenue collected from recreation fees were$160,243 higher than expected since staff forecasted the cancellation of a number of recreation programs. Fines, forfeitures and penalties, which include vehicle code and red-light violations, were also under projections by $54,721. Use of money and property, which include investment earnings, exceeded projections by $2.0 million, due to a higher portfolio amount and the change in fair market value of investments. The other revenues exceeded projections by $152,848 due to the recording of unclaimed Flexible Spending Accounts as revenues. General Fund Expenditures $4.5 million under budget All General Fund functional areas, including general government/administration, experienced savings in the current fiscal year, with total savings (budget vs. actual) of over$4.5 million, or 6.2 percent compared to the final budget. The savings were primarily from personnel costs resulting from vacancies throughout City departments, and savings in the contracts and services category. In FY 2019-20 the savings in major functions were from development services, parks and recreation, public safety and general government. Departments also saved in contracts and services, and materials and supplies expenditures. Overall, all departments were 2.3 percent to 12.5 percent below budget. Actual General Fund expenditures were $67.5 million compared to prior year's actual amount of$65.2 million. Excess of Revenues over Expenditures $9.1 million above projections Actual revenues over expenditures were approximately $12.4 million, compared to a budget of $3.2 million. This does not take into account other financing sources and uses which are discussed below. This result is a combination of revenues being above projections and expenditures being under budget, as discussed above. Other Financing Sources and Uses— General Fund Other financing sources and uses consisted of transfers in and transfers out during the fiscal year. Scheduled transfers in included: (a) monies from the Gasoline Taxes Special Revenue Fund, which fund a portion of the City's street maintenance program, and (b) monies for impact fees collected for community facilities and fire mitigation. The impact fees are transferred at year end to reimburse the General Fund for amounts expended in prior years for the Public Library and Fire Station Rehabilitation 15 City of Encinitas %P Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 projects. Transfers in for operating were over projections by $297,820, due to the CARES Act funding which subsidized the personnel costs for expenditures related to COVID-19. Transfers out of the General Fund operating category were $383,066 less than projected. The anticipated matching shares or subsidies from the General Fund for the Community Development Block Grant (CDBG) Fund, Section 8 Administration Fund and Pacific Pines Administration Fund were also lower than projected. The Section 8 Administration Fund also received additional CARES Act funding to subsidize administrative costs. Transfers out to internal service funds include the General Fund's contribution to the Self-Insurance fund. Appropriations for capital projects from the General Fund totaled $4.8 million compared to $11.0 million in 2019. Transfers out for debt service totaled $3.7 million which were flat compared to the previous year. Analysis of Fund Balance and Changes in Fund Balance Fund balance was projected to be$18.3 million as of June 30, 2020, a scheduled decrease of about$6.1 million. Actual fund balance was$27.2 million, or$8.9 million higher than projected; as mentioned above, revenues were $4.7 million above projected and expenditures were $4.5 million under projected. There was an excess of revenues over expenditures of $12.4 million. Factoring in transfers for debt service payments of $3.7 million, capital expenditures of $4.8 million and other net transfer activity of $1.1 million, the net result is an increase in total fund balance of$2.8 million at year end. Besides the General Fund, the Capital Improvements Capital Projects Fund and Infrastructure Improvements Special Revenue Fund are also major funds in the governmental funds. The City executes capital projects through the Capital Improvements Capital Projects Fund. When a project is designated and the budget is appropriated, the fund balance of the funding source is transferred to the Capital Improvements Capital Projects Fund to complete the capital project. Because of the transfers, the Infrastructure Improvements Special Revenue Fund at June 30, 2020 had a deficit fund balance of$13.2 million due to expected grant funding and commitments.The Capital Improvements Capital Projects Fund had a total fund balance of$44.7 million at the end of Fiscal Year 2019-20. CAPITAL ASSETS AND THE CAPITAL IMPROVEMENT PROGRAM As of June 30, 2020,the City had approximately$281.7 million 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, $224.8 million is classified as capital assets under the category of governmental activities, and $56.9 million is classified as capital assets of business-type activities. For more detailed information on capital assets activity refer to Note 7. In addition, there are $61.1 million of assets under business-type activities classified as investments in joint ventures. These investments consist mainly of capital assets belonging to related governmental agencies where the City holds an equity interest in the joint venture. The assets are primarily water and wastewater treatment facilities. 16 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 Governmental Activities Capital Assets: $224.8 million The City has three Capital Improvements Capital Projects Funds to monitor capital improvements projects for governmental activities. These projects include 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 for budgeting purposes. The City uses a dollar threshold of $100,000 and a useful life of five years or more in its evaluation for capitalizing a capital expenditure. Eligible project costs are additions to construction in progress (CIP) at fiscal yearend. Costs for completed projects are recorded as additions to the appropriate capital asset category at year end. The City spent approximately $18.7 million this fiscal year on capital improvement projects consisting of a variety of different projects that were either in development or under construction. The primary emphasis this fiscal year was the Cardiff Beach Living Shoreline Project also known as the Dune Restoration project, the Leucadia Streetscape project, the El Portal Pedestrian/Bike Underpass project, the Morning Sun Drive Sidewalk project, the El Camino Real Z Crossing project, the Leo Mullen Park Turf Replacement project, General Mobility Improvement projects, the Technology Infrastructure Replacement project, parkland and drainage improvements, and ongoing pavement overlay projects. Business-type Activities Capital Assets: $56.9 million The City accounts for the acquisition and construction of capital assets for its water and wastewater operations under its proprietary-type funds as enterprise activities. Capital spending is recorded as expenses in the appropriate capital fund under each separate activity during the fiscal year. At the end of the fiscal year, the expenses are analyzed to determine if they meet the criteria to be capitalized as long-term capital assets. The criteria are the same as the City's criteria ($100,000 threshold and a minimum five-year life). Eligible capital expenses are then capitalized to the construction-in-progress account, while non-eligible expenses are reclassified as operating expenses. Total amounts expensed on completed projects are then transferred to the appropriate capital asset class. Capital assets at$56.9 million decreased slightly compared to the prior year's amount of$58.7 million. During the year, the ESD deleted CIP projects under the $100,000 threshold and capitalized CIP projects, which increased accumulated depreciation. SDWD also deleted older CIP projects. The City's Affordable Housing Fund carries an investment of about $2.4 million in affordable housing stock under the classification of utility, plant, vehicles and equipment. The City purchased 16 housing units in 2004. There has not been any capital spending activity in this fund since then. Investment in Joint Ventures: $61.1 million The City's water and wastewater enterprises each hold equity interests in joint ventures with other local agencies. 17 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 SDWD holds an equity interest, along with Santa Fe Irrigation District, in the R.E. Badger Joint Facilities. SDWD makes capital contributions each year for the replacement and improvement of the Joint Facilities, which then is added to the investment account at the end of the fiscal year. SDWD also makes monthly payments to cover its proportional share of annual operating costs. SDWD also holds an equity interest in the R.E. Badger Water Facilities Financing Authority. The primary reason for this investment is to provide financing for the acquisition and construction of capital improvements related to the R.E. Badger Joint Facilities. SDWD has a proportional share of assets in the debt service reserve only. Therefore, these resources are not available to SDWD for the funding of its operations. Cardiff Sanitary Division (CSD) holds an equity interest, along with the City of Solana Beach, in the San Elijo Joint Powers Authority (SEJPA) Joint Facilities. CSD makes capital contributions each year for the replacement and improvement of the SEJPA Joint Facilities, which is added to its investment account at the end of the fiscal year. CSD also makes quarterly payments to cover its proportional share of annual operating costs. The treatment facilities, also serving other local agencies, bill quarterly for their proportional share of operations costs and capital improvements. Encinitas Sanitary Division (ESD) holds an equity interest, along with five other local agencies, in the Encina Wastewater Authority (EWA) Joint Facilities. ESD makes capital contributions each year for the replacement and improvement of the EWA Joint Facilities. These capital contributions are additions to the investment account at the end of the fiscal year. ESD also makes quarterly payments to cover its proportional share of annual operating costs. The City's joint ventures in the Cardiff Sanitary Division and Encinitas Sanitary Division increased $1.8 million, which was offset by a decrease of$0.7 million in the City's joint venture in the San Dieguito Water District. DEBT ISSUANCE AND ADMINISTRATION The City has a total of $68.6 million of long-term obligations for both governmental and business-type activities as shown in Note 8 of the basic financial statements. The governmental activities debt totaling $43.8 million include$0.9 million in capital leases, and$42.9 million in bonded debt. Besides$43.8 million in debt, the long-term obligations in governmental activities also includes $5.7 million in claims payable and compensated absences. The capital leases consist of borrowings for the Civic Center Roof Replacement project and fire apparatus vehicles. The business-type activities long-term obligation totals $19.1 million and includes $18.9 million in bonded debt and $0.2 million in compensated absences. Of the $62.7 million total debt that is due, $3.7 million is due within one year. Governmental Activities $43.8 million The majority of the City's long-term debt is bonded debt issued in order to acquire and/or construct public facilities including City Hall, the Public Library, the Encinitas Community Park and the Pacific View property. Debt payments for all of these bonds are due semi-annually at fixed amounts, and the debt 18 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 matures at various times through 2045. The City's total annual debt service of approximately$3.9 million represents approximately five percent of annual General Fund operating revenues. The City has a policy of utilizing lease/purchase financing for the acquisition of equipment costing more than $100,000. The City is obligated under a lease/purchase agreement (a private placement with a financial institution) for improvements made to City Hall in 2008 for the repair of the roof. The annual payment on that lease is $183,556. Additionally, the City currently leases one fire engine vehicle and paid one off during FY 2019-20. The annual lease payments in FY 2019-20 were $183,334. Business-type Activities $18.9 million SDWD and CSD carry long-term debt issued to construct capital improvements to both their distribution and collection systems and their Joint Facilities. On July 6, 2017, SEJPA on behalf of its members (the CSD division and the City of Solana Beach) issued 2017 Revenue Bonds for the purpose of funding facilities and improvements as part of SEJPA's capital improvements. CSD's share of the loan is $11,057,500.The Encinitas Housing Authority has a mortgage loan with a financial institution that partially funded the acquisition of the City's affordable housing units (Pacific Pines). The City is not obligated in any way for repayment of these debt issues. General Information on City Debt The City of Encinitas obtained and affirmed in 2017 an upgrade to its issuer credit rating to AAA by Standard & Poor's (S&P). The City's credit rating affirmed by S&P issued a credit rating of AA+ on the City's 2017 Lease Revenue bonds. Ratings for lease revenue bond issues are typically one notch lower than the issuers' rating due to the payment structure of the bond issue. 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 presented by the City Manager to the City Council for consideration. The City adopts its operating budget over a two-year cycle, with legal appropriations set for the first year only. The operating and capital budgets for Fiscal Year 2020-21 were appropriated by the City Council in June 2020. The FY 2019-20 actual results, when compared to the adopted projections and appropriations, showed revenues above forecasts and expenditures under budget. FY 2020-21 revenues are expected to decrease $3.0 million under FY 2019-20 actual levels. Expenditures are budgeted to decrease slightly under FY 2019-20 levels and the capital expenditures budgeted to decrease $13.0 million than originally expected due to continued economic uncertainty from the COVID-19 pandemic. Next year's budget includes a two percent adjustment to employee compensation, which is the largest expenditure category of the General Fund budget. 19 City of Encinitas Management's Discussion and Analysis (Continued) For the Year Ended June 30, 2020 CONTACTING THE CITY'S FINANCIAL MANAGEMENT This financial report is intended to provide our residents, 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, California 92024, telephone (760) 633-2600, or visit our website at www.encinitasca.gov and review the Finance Department webpage. 20 BASIC FINANCIAL STATEMENTS This page intentionally left blank. GOVERNMENT-WIDE FINANCIAL STATEMENTS This page intentionally left blank. City of Encinitas Statement of Net Position June 30, 2020 ASSETS Current assets: Noncurrent assets: Total assets DEFERRED OUTFLOWS OF RESOURCES Total deferred outflows of resources LIABILITIES Current liabilities: Noncurrent liabilities: Total liabilities DEFERRED INFLOWS OF RESOURCES Total deferred inflows of resources NET POSITION Total net position City of Encinitas Statement of Activities and Changes in Net Position For the Year Ended June 30, 2020 Program Revenues Operating Capital Total Charges for Grants and Grants and Program Functions/Programs Expenses Services Contributions Contributions Revenues Primary government: Governmental activities: General government $ 17,335,001 $ 1,804,550 $ 3,000 $ - $ 1,807,550 Public safety 35,791,015 1,521,745 177,126 - 1,698,871 Public works 11,859,286 1,776 3,640,346 6,096,090 9,738,212 Planning services 7,027,696 3,417,094 377,282 - 3,794,376 Engineering services 6,309,896 970,837 - - 970,837 Parks and recreation 10,079,123 1,029,655 203,845 688,731 1,922,231 Interest on long-term debt 1,569,705 - - - - Total governmental activities 89,971,722 8,745,657 4,401,599 6,784,821 19,932,077 Business-type activities: Cardiff Sanitary Division 3,093,405 5,046,841 - 288,736 5,335,577 San Dieguito Water District 16,503,660 16,835,266 - 251,344 17,086,610 Encinitas Sanitary Division 3,271,260 2,744,193 - 53,099 2,797,292 Affordable Housing 1,676,260 270,931 1,246,133 - 1,517,064 Total business-type activities 24,544,585 24,897,231 1,246,133 593,179 26,736,543 Total primary government $ 114,516,307 $ 33,642,888 $ 5,647,732 $ 7,378,000 $46,668,620 See accompanying Notes to the Basic Financial Statements. 26 City of Encinitas Statement of Activities and Changes in Net Position (Continued) For the Year Ended June 30, 2020 Net(Expense)Revenue and Changes in Net Position Primary Government Governmental Business-type Functions/Programs Activities Activities Total Primary government: Governmental activities: General government $ (15,527,451) $ - $ (15,527,451) Public safety (34,092,144) - (34,092,144) Public works (2,121,074) - (2,121,074) Planning services (3,233,320) - (3,233,320) Engineering services (5,339,059) - (5,339,059) Parks and recreation (8,156,892) - (8,156,892) Interest on long-term debt (1,569,705) - (1,569,705) Total governmental activities (70,039,645) - (70,039,645) Business-type activities: Cardiff Sanitary Division - 2,242,172 2,242,172 San Dieguito Water District - 582,950 582,950 Encinitas Sanitary Division - (473,968) (473,968) Affordable Housing - (159,196) (159,196) Total business-type activities - 2,191,958 2,191,958 (70,039,645) 2,191,958 (67,847,687) General revenues: Taxes: Property taxes and documentary transfer taxes 51,251,719 1,159,681 52,411,400 Sales and use taxes 13,744,880 - 13,744,880 Transient occupancy taxes 2,383,060 - 2,383,060 Franchise taxes 2,539,090 - 2,539,090 Total taxes 69,918,749 1,159,681 71,078,430 Intergovernmental-unrestricted 182,449 - 182,449 Investment income 3,030,295 1,716,759 4,747,054 Rental income - 215,140 215,140 Gain on disposal of capital assets 36,013 - 36,013 Other 804,984 185,088 990,072 Transfers (18,666) 18,666 - Total general revenues and transfers 73,953,824 3,295,334 77,249,158 Changes in net position 3,914,179 5,487,292 9,401,471 Net position: Beginning of year 200,935,344 138,295,230 339,230,574 End of year $ 204,849,523 $143,782,522 $ 348,632,045 See accompanying Notes to the Basic Financial Statements. 27 This page intentionally left blank. 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City of Encinitas Balance Sheet Governmental Funds June 30, 2020 ASSETS Total assets LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND FUND BALANCES Liabilities: Total liabilities DEFERRED INFLOWS OF RESOURCES Total deferred inflows of resources Fund Balances: Total fund balances Total liabilities, deferred inflows of resources, and fund balances City of Encinitas Reconciliation of the Governmental Funds Balance Sheet to the Government-wide Statement of Net Position June 30, 2020 Total Fund Balances - Total Governmental Funds Net position of governmental activities City of Encinitas Statement of Revenues, Expenditures, and Changes in Fund Balance Governmental Funds For the Year Ended June 30, 2020 REVENUES: Total revenues EXPENDITURES: Total expenditures REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES): Total other financing sources (uses) NET CHANGE IN FUND BALANCES FUND BALANCES: City of Encinitas Reconciliation of the Governmental Statement of Revenues, Expenditures, and Changes in Fund Balances to the Government-wide Statement of Activities and Changes in Net Position For the Year Ended June 30, 2020 Net Change in Fund Balances - Total Governmental Funds Change in net position of governmental activities PROPRIETARY FUND FINANCIAL STATEMENTS City of Encinitas Statement of Net Position Proprietary Funds June 30, 2020 Major Enterprise Funds Cardiff San Dieguito Encinitas Sanitary Water Sanitary Division District Division ASSETS Current assets: Cash and investments $14,146,534 $21,143,272 $13,978,968 Restricted cash and investments with fiscal agent - 2,435 - Accounts and taxes receivable 91,744 2,794,349 35,805 Interest receivable 54,592 82,667 54,282 Inventory and prepaid items 5,052 233,226 4,295 Total current assets 14,297,922 24,255,949 14,073,350 Noncurrent assets: Investment in joint ventures 34,943,710 19,892,372 6,238,828 Capital assets: Land - 3,450,544 - Public works facility right-of-use - 3,378,700 - Construction in progress 3,152,158 31,104 209,891 Capacity rights,net - 165,365 - Utility,plant,vehicles,and equipment,net 14,777,222 15,566,998 13,837,600 Total capital assets,net 17,929,380 22,592,711 14,047,491 Total noncurrent assets 52,873,090 42,485,083 20,286,319 Total assets 67,171,012 66,741,032 34,359,669 DEFERRED OUTFLOWS OF RESOURCES Pension related deferred outflows of resources 2,502,847 - OPEB related deferred outflows of resources 69,930 Total deferred outflows of resources 2,572,777 - LIABILITIES Current liabilities: Accounts payable and accrued liabilities 41,256 959,923 630,500 Due to other funds(Note 9) - - - Accrued interest payable 148,858 64,069 Deposits - 504,665 Compensated absences-due in one year - 76,868 Current portion of long-term debt 284,999 1,190,000 - Total current liabilities 475,113 2,795,525 630,500 Noncurrent liabilities: Capital leases payable - - - Revenue bonds payable-due in more than one year - 2,472,486 Notes and mortgages payable-due in more than one year 11,597,425 2,330,000 Compensated absences-due in more than one year - 80,332 Net pension liability 7,577,802 Net OPEB liability 225,019 Total noncurrent liabilities 11,597,425 12,685,639 - Totalliabilities 12,072,538 15,481,164 630,500 DEFERRED INFLOWS OF RESOURCES Deferred amount on refunding 29,367 - - Pension related deferred inflows of resources - 589,305 OPEB related deferred inflows of resources - 43,199 Total deferred inflows of resources 29,367 632,504 - NET POSITION Net investment in capital assets 6,017,590 16,600,225 14,047,491 Restricted: Debt service - 2,435 - Housing - - Unrestricted 49,051,517 36,597,481 19,681,678 Total net position $55,069,107 $53,200,141 $33,729,169 See accompanying Notes to the Basic Financial Statements 38 City of Encinitas Statement of Net Position (Continued) Proprietary Funds June 30, 2020 Non-major Governmental Enterprise Fund Activities Affordable Internal Housing Total Service Funds ASSETS Current assets: Cash and investments $ 345,613 $ 49,614,387 $ 7,250,572 Restricted cash and investments with fiscal agent 59,219 61,654 - Accounts and taxes receivable 960 2,922,858 Interest receivable 1,475 193,016 - Inventory and prepaid items 105,721 348,294 798,197 Total current assets 512,988 53,140,209 8,048,769 Noncurrent assets: Investment in joint ventures - 61,074,910 - Capital assets: Land 3,450,544 Public works facility right-of-use 3,378,700 Construction in progress 3,393,153 Capacity rights,net 165,365 - Utility,plant,vehicles,and equipment,net 2,404,529 46,586,349 3,573,508 Total capital assets,net 2,404,529 56,974,111 3,573,508 Total noncurrent assets 2,404,529 118,049,021 3,573,508 Total assets 2,917,517 171,189,230 11,622,277 DEFERRED OUTFLOWS OF RESOURCES Pension related deferred outflows of resources - 2,502,847 160,108 OPEB related deferred outflows of resources 69,930 24,994 Total deferred outflows - 2,572,777 185,102 LIABILITIES Current liabilities: Accounts payable and accrued liabilities 1,699 1,633,378 376,734 Due to other funds(Note 9) 89,545 89,545 284,847 Accrued interest payable - 212,927 - Deposits 18,459 523,124 Compensated absences-due in one year 6,167 83,035 - Current portion of long-term debt 84,115 1,559,114 89,868 Total current liabilities 199,985 4,101,123 751,449 Noncurrent liabilities: Capital leases payable - - 283,396 Revenue bonds payable-due in more than one year - 2,472,486 - Notes and mortgages payable-due in more than one year 924,799 14,852,224 Compensated absences-due in more than one year 8,628 88,960 - Net pension liability - 7,577,802 720,714 Net OPEB liability - 225,019 128,848 Total noncurrent liabilities 933,427 25,216,491 1,132,958 Total liabilities 1,133,412 29,317,614 1,884,407 DEFERRED INFLOWS OF RESOURCES Deferred amount on refunding - 29,367 - Pension related deferred inflows of resources 589,305 32,803 OPEB related deferred inflows of resources 43,199 27,206 Total deferred inflows 661,871 60,009 NET POSITION Net investment in capital assets 1,395,615 38,060,921 3,200,244 Restricted: Debt service - 2,435 - Housing 388,490 388,490 - Unrestricted - 105,330,676 6,662,719 Total net position $ 1,784,105 $ 143,782,522 $ 9,862,963 See accompanying Notes to the Basic Financial Statements. 39 City of Encinitas Statement of Revenues, Expenses, and Changes in Net Position Proprietary Funds For the Year Ended June 30, 2020 Major Enterprise Funds Cardiff San Dieguito Encinitas Sanitary Water Sanitary Division District Division OPERATING REVENUES: Charges for services $ 5,046,841 $ 16,783,363 $ 2,744,193 Rental income - 110,176 - Interfund revenues - 51,903 - Intergovernmental - - - Other revenues - 7,907 3,660 Total operating revenues 5,046,841 16,953,349 2,747,853 OPERATING EXPENSES: Housing assistance payments - - - Source of supply - 5,495,963 - General operations and maintenance 1,038,339 6,494,446 636,643 Facility operations and maintenance 1,645,980 2,406,285 780,694 General and administrative 185,128 - 103,976 Depreciation 443,689 805,350 766,955 Insurance and claims 32,100 29,411 29,397 Total operating expenses 3,345,236 15,231,455 2,317,665 OPERATING INCOME (LOSS) 1,701,605 1,721,894 430,188 NONOPERATING REVENUES(EXPENSES): Investment income 482,406 742,550 485,103 Property taxes - 1,159,681 - Operating grants - -Net change from joint ventures 749,640 (1,025,142) (594,909) Gain (loss)on disposal of capital assets (45,870) - (358,686) Amortization of bond premium 98,880 74,372 - Interest expense (451,939) (247,063) - Total nonoperating revenues(expenses) 833,117 704,398 (468,492) INCOME(LOSS) BEFORE CAPITAL CONTRIBUTIONS AND TRANSFERS 2,534,722 2,426,292 (38,304) Capital contributions 288,736 251,344 53,099 Transfers in(Note 9) - 12,433 - Transfers out(Note 9) - - - Total capital contributions and transfers 288,736 263,777 53,099 CHANGES IN NET POSITION 2,823,458 2,690,069 14,795 NET POSITION: Beginning of year 52,245,649 50,510,072 33,714,374 End of year $55,069,107 $53,200,141 $33,729,169 See accompanying Notes to the Basic Financial Statements. 40 City of Encinitas Statement of Revenues, Expenses, and Changes in Net Position (Continued) Proprietary Funds For the Year Ended June 30, 2020 Non-major Enterprise Fund Governmental Activities Affordable Internal Housing Total Service Funds OPERATING REVENUES: Charges for services $ - $ 24,574,397 $ - Rental income 104,964 215,140 - Interfund revenues 111,666 163,569 2,622,721 Intergovernmental 159,265 159,265 - Other revenues 269 11,836 390,487 Total operating revenues 376,164 25,124,207 3,013,208 OPERATING EXPENSES: Housing assistance payments 1,283,217 1,283,217 - Source of supply - 5,495,963 - General operations and maintenance 129,058 8,298,486 1,063,042 Facility operations and maintenance - 4,832,959 - General and administrative 146,283 435,387 2,202,552 Depreciation 100,538 2,116,532 546,864 Insurance and claims - 90,908 1,449,287 Total operating expenses 1,659,096 22,553,452 5,261,745 OPERATING INCOME(LOSS) (1,282,932) 2,570,755 (2,248,537) NONOPERATING REVENUES(EXPENSES): Investment income 6,700 1,716,759 - Property taxes - 1,159,681 - Operating grants 1,246,133 1,246,133 - Net change from joint ventures - (870,411) - Gain (loss)on disposal of capital assets - (404,556) 39,667 Amortization of bond premium - 173,252 - Interest expense (17,164) (716,166) (12,562) Total nonoperating revenues(expenses) 1,235,669 2,304,692 27,105 INCOME(LOSS)BEFORE CAPITAL CONTRIBUTIONS AND TRANSFERS (47,263) 4,875,447 (2,221,432) Capital contributions - 593,179 - Transfers in (Note 9) 23,633 36,066 2,506,898 Transfers out(Note 9) (17,400) (17,400) (132,000) Total capital contributions and transfers 6,233 611,845 2,374,898 CHANGES IN NET POSITION (41,030) 5,487,292 153,466 NET POSITION: Beginning of year 1,825,135 138,295,230 9,709,497 End of year $ 1,784,105 $143,782,522 $ 9,862,963 See accompanying Notes to the Basic Financial Statements. 41 City of Encinitas Statement of Cash Flows Proprietary Funds For the Year Ended June 30, 2020 Major Enterprise Funds Cardiff San Dieguito Encinitas Sanitary Water Sanitary Division District Division CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from users $ 4,972,303 $ 16,229,770 $ 2,690,408 Cash received from other funds - 51,903 - Payments to employees (3,235) (3,034,505) - Payments to suppliers for goods and services (2,910,581) (11,892,360) (1,587,658) Other operating revenues - 7,907 3,660 Net cash provided by(used in)operating activities 2,058,487 1,362,715 1,106,410 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Acquisition of capital assets (487,047) (50,215) (220,946) Capital contributions received-connection/capacity fees 288,736 168,300 53,099 Principal payments on long-term debt (275,000) (1,135,000) - Interest payments on long-term debt (454,621) (260,119) - Capital related payments to other agencies (668,791) (282,309) (976,757) Proceeds received from disposal of capital assets - -Net cash(used in)capital and related financing activities (1,596,723) (1,559,343) (1,144,604) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Operating grants - - - Proceeds from property taxes - 1,159,682 - Cash received from other funds - 12,433 - Cash paid to other funds - -Net cash provided by(used in)noncapital financing activities - 1,172,115 - CASH FLOWS FROM INVESTING ACTIVITIES: Interest income 482,406 742,550 485,103 Net cash provided by investing activities 482,406 742,550 485,103 Net increase(decrease)in cash and cash equivalents 944,170 1,718,037 446,909 CASH AND CASH EQUIVALENTS: Beginning of year 13,202,364 19,427,670 13,532,059 End of year $ 14,146,534 $ 21,145,707 $ 13,978,968 RECONCILIATION OF CASH AND CASH EQUIVALENTS TO STATEMENT OF NET POSITION: Cash and investments $ 14,146,534 $ 21,143,272 $ 13,978,968 Restricted cash and investments with fiscal agent - 2,435 - Total cash and cash equivalents $ 14,146,534 $ 21,145,707 $ 13,978,968 See accompanying Notes to the Basic Financial Statements. 42 City of Encinitas Statement of Cash Flows (Continued) Proprietary Funds For the Year Ended June 30, 2020 Major Enterprise Funds Cardiff San Dieguito Encinitas Sanitary Water Sanitary Division District Division RECONCILIATION OF OPERATING INCOME(LOSS)TO NET CASH PROVIDED BY(USED IN)OPERATING ACTIVITIES: Operating income(loss) $ 1,701,605 $ 1,721,894 $ 430,188 Adjustments to reconcile operating income to net cash provided(used)by operating activities: Depreciation 443,689 805,350 766,955 Changes in operating assets,deferred outflows of resources, liabilities,and deferred inflows of resources: Changes in assets—(increase)decrease: Accounts and taxes receivable (74,538) (663,769) (53,785) Inventory and prepaid items (1,427) 3,730 (1,214) Change in deferred outflows of resources —(increase)decrease: OPEB-related deferred outflows - (2,947) - Pension-related deferred outflows - (1,049,669) - Changes in liabilities—increase(decrease): Accounts payable and accrued liabilities 26,540 (88,935) (35,734) Due to other funds - - - Deposits (37,382) (15,318) - Compensated absences - 9,663 - Net OPEB liability - (62,087) - Net pension liability - 504,751 - Change in deferred inflows of resources —increase(decrease): OPEB-related deferred inflows - 33,904 - Pension-related deferred inflows - 166,148 - Total adjustments 356,882 (359,179) 676,222 Net cash provided by(used in)operating activities $ 2,058,487 $ 1,362,715 $ 1,106,410 NON-CASH FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Amortization of original issue premium $ 98,880 $ 74,372 $ - Donation of capital assets - 83,044 - Total non-cash capital and related financing activities $ 98,880 $ 157,416 $ - See accompanying Notes to the Basic Financial Statements. 43 City of Encinitas Statement of Cash Flows (Continued) Proprietary Funds For the Year Ended June 30, 2020 Non-major Enterprise Fund Governmental Activities Affordable Internal Housing Total Service Funds CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from users $ 292,937 $24,185,418 $ 3,013,561 Cash received from other funds 111,666 163,569 - Payments to employees (135,186) (3,172,926) (1,469,812) Payments to suppliers for goods and services (1,433,382) (17,823,981) (2,891,142) Other operating revenues 269 11,836 Net cash provided by(used in)operating activities (1,163,696) 3,363,916 (1,347,393) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Acquisition of capital assets - (758,208) (808,160) Capital contributions received-connection/capacity fees - 510,135 - Principal payments on long-term debt (82,715) (1,492,715) (170,771) Interest payments on long-term debt (17,164) (731,904) (12,562) Capital related payments to other agencies - (1,927,857) - Proceeds received from disposal of capital assets - - 39,667 Net cash(used in)capital and related financing activities (99,879) (4,400,549) (951,826) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Operating grants 1,246,133 1,246,133 - Proceedsfrompropertytaxes - 1,159,682 - Cash received from other funds 43,763 56,196 2,506,898 Cash paid to other funds (17,400) (17,400) (132,000) Net cash provided by(used in) noncapital financing activities 1,272,496 2,444,611 2,374,898 CASH FLOWS FROM INVESTING ACTIVITIES: Interest income 6,700 1,716,759 Net cash provided by investing activities 6,700 1,716,759 - Net increase(decrease)in cash and cash equivalents 15,621 3,124,737 75,679 CASH AND CASH EQUIVALENTS: Beginning of year 389,211 46,551,304 7,174,893 End of year $ 404,832 $49,676,041 $ 7,250,572 RECONCILIATION OF CASH AND CASH EQUIVALENTS TO STATEMENT OF NET POSITION: Cash and investments $ 345,613 $49,614,387 $ 7,250,572 Restricted cash and investments with fiscal agent 59,219 61,654 - Total cash and cash equivalents $ 404,832 $49,676,041 $ 7,250,572 See accompanying Notes to the Basic Financial Statements. 44 City of Encinitas Statement of Cash Flows (Continued) Proprietary Funds For the Year Ended June 30, 2020 Non-major Enterprise Fund Governmental Activities Affordable Internal Housing Total Service Funds RECONCILIATION OF OPERATING INCOME(LOSS)TO NET CASH PROVIDED BY(USED IN)OPERATING ACTIVITIES: Operating income(loss) $ (1,282,932) $ 2,570,755 $ (2,248,537) Adjustments to reconcile operating income to net cash provided(used)by operating activities: Depreciation 100,538 2,116,532 546,864 Changes in operating assets,deferred outflows of resources, liabilities,and deferred inflows of resources: Changes in assets—(increase)decrease: Accounts and taxes receivable 28,707 (763,385) 353 Inventory and prepaid items (12,998) (11,909) (753,991) Change in deferred outflows of resources —(increase)decrease: OPEB-related deferred outflows - (2,947) (24,994) Pension-related deferred outflows - (1,049,669) (160,108) Changes in liabilities—increase(decrease): Accounts payable and accrued liabilities 329 (97,800) 98,602 Due to other funds - - 284,847 Deposits 248 (52,452) - Compensated absences 2,412 12,075 - Net OPEB liability - (62,087) 720,714 Net pension liability - 504,751 128,848 Change in deferred inflows of resources —increase(decrease): OPEB-related deferred inflows - 33,904 27,206 Pension-related deferred inflows - 166,148 32,803 Total adjustments 119,236 793,161 901,144 Net cash provided by(used in)operating activities $ (1,163,696) $ 3,363,916 $ (1,347,393) NON-CASH FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Amortization of original issue premium $ - $ 173,252 $ - Donation of capital assets - 83,044 - $ - $ 256,296 $ - See accompanying Notes to the Basic Financial Statements. 45 This page intentionally left blank. FIDUCIARY FUND FINANCIAL STATEMENTS Agency Fund This page intentionally left blank. City of Encinitas Statement of Fiduciary Net Position Fiduciary Funds June 30, 2020 ASSETS Total assets LIABILITIES Total liabilities This page intentionally left blank. NOTES TO THE BASIC FINANCIAL STATEMENTS This page intentionally left blank. City of Encinitas Notes to the Basic Financial Statements For the Year Ended June 30, 2020 Note 1 — 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 City is governed by a City Council consisting of a mayor and four council members under the Council-Manager form of government. In evaluating how to define the City for financial reporting purposes, management has considered all potential component units. The primary criteria for including a potential component unit within the reporting entity are the governing body's financial accountability and a financial benefit or burden relationship and whether it is misleading to exclude. A primary government is financially accountable and shares a financial benefit or burden relationship if it appoints a voting majority of an organization's governing body and it is able to impose its will on the organization, or if there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on the primary government. A primary government may also be financially accountable if an organization is fiscally dependent on the primary government regardless of whether the organization has a separately elected governing board, a governing board appointed by a higher level of government, or a jointly appointed board, and there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on the primary government. Blended Component Units Although the following are legally separate from the City, they have been "blended" as though they are part of the City because the component unit's governing body is substantially the same as the City's and there is a financial benefit or burden relationship between the City and the component unit; management of the City has operational responsibilities for the component units; and/or the component units provide services entirely, or almost entirely, to the City or otherwise exclusively, or almost exclusively, benefits the City, even though it does not provide services directly to it. The San Dieguito Water District ("SDWD") was formed 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 Encinitas Housing Authority (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 Encinitas Public Financing Authority (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. The following specific criteria were used in determining 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. 53 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 1 — Reporting Entity (Continued) Blended Component Units (Continued) • The EHA, the EPFA and SDWD are managed, at least in part, by employees of the City, who provide various support functions including financial reporting and investment decisions. 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. Note 2 —Summary of Significant Accounting Policies A. Basis of Presentation Financial statement presentation follows the recommendations promulgated by the Governmental Accounting Standards Board ("GASB") commonly referred to as accounting principles generally accepted in the United States of America ("U.S. GAAP"). GASB is the accepted standard-setting body for establishing governmental accounting and financial reporting standards. B. Measurement Focus, Basis of Accounting and Financial Statements Presentation The accounts of the City are organized on the basis of funds, each of which is considered a separate accounting entity. The operations of each fund are accounted for by providing a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures or expenses, as appropriate. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual provisions. The minimum number of funds is maintained in accordance with legal and managerial requirements. The Statement of Net Position/Balance Sheet reports separate sections for Deferred Outflows of Resources, and Deferred Inflows of Resources, when applicable. Deferred Outflows of Resources represent outflows of resources (consumption of net position) that apply to future periods and, therefore, will not be recognized as an expense until that time. The City reports deferred loss on refunding, deferred outflows related to pensions, and Other Post- Employment Benefits (OPEB) in this category. Deferred Inflows of Resources represent inflows of resources (acquisition of net position) that apply to future periods and, therefore, are not recognized as revenue until that time. The City has two types of items that qualify for reporting in this category. The first item is deferred gain on refunding, deferred inflows related to pensions and OPEB. The second item, unavailable revenue, is reported only in the governmental funds balance sheet. The governmental funds report unavailable revenues from grants. This amount is deferred and recognized as an inflow of resources in the period the amount becomes available. 54 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) B. Measurement Focus, Basis of Accounting and Financial Statements Presentation (Continued) Government-wide Financial Statements The City's Government-wide Financial Statements include a Statement of Net Position, and a Statement of Activities and Changes in Net Position. These statements present summaries of governmental and business-type activities for the City accompanied by a total column. Fiduciary activities of the City are not included in these statements. These financial statements are presented on an "economic resources"measurement focus and the accrual basis of accounting. Accordingly, all of the City's assets and liabilities, including capital assets, as well as infrastructure assets, and long-term liabilities, are included in the accompanying Statement of Net Position. The Statement of Activities presents changes in Net Position. Under the accrual basis of accounting, revenues are recognized in the period in which they are earned while expenses are recognized in the period in which the liability is incurred. Certain types of transactions are reported as program revenues for the City in three categories: • Charges for services • Operating grants and contributions • Capital grants and contributions Certain eliminations have been made in regard to interfund activities, payables and receivables. All internal balances in the Statement of Net Position have been eliminated except those representing balances between the governmental activities and the business-type activities, which are presented as internal balances and eliminated in the total primary government column. In the Statement of Activities and Changes in Net Position, internal service fund transactions have been eliminated; however, those transactions between governmental and business-type activities have not been eliminated. The following interfund activities have been eliminated: • Due to/from other funds • Transfers in/out Government Fund Financial Statements Governmental Fund Financial Statements include a Balance Sheet and a Statement of Revenues, Expenditures, and Changes in Fund Balances for all major governmental funds and non-major funds aggregated. An accompanying schedule is presented to reconcile and explain the differences in Net Position as presented in these statements to the Net Position presented in the Government- wide Financial Statements. The City has presented all major funds that met the applicable criteria. All governmental funds are accounted for on a spending or "current financial resources" measurement focus and the modified accrual basis of accounting. Accordingly, only current assets and current liabilities are included on the Balance Sheet. The Statement of Revenues, Expenditures, and Changes in Fund Balances presents increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in fund balances. 55 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) B. Measurement Focus, Basis of Accounting and Financial Statements Presentation (Continued) Government Fund Financial Statements (Continued) Under the modified accrual basis of accounting, revenues are recognized in the accounting period in which they become both measurable and available to finance expenditures of the current period. Revenues are recorded when received in cash, except for that revenues subject to accrual (generally 60 days after year end) are recognized when earned. The primary revenue sources, which have been treated as susceptible to accrual by the City, are property taxes, transient occupancy taxes, franchise taxes, sales tax, licenses, intergovernmental revenues and other taxes. Expenditures are recorded in the accounting period in which the related fund liability is incurred. The Reconciliation of the Fund Financial Statements to the Government-wide Financial Statements is provided to explain the differences. The City reports the following major Governmental Funds: The General Fund is used to account for resources which are not required to be accounted for in another fund. The fund includes the general activities of the City and other administrative functions. The Capital Improvements Capital Projects Fund is used to account for financial resources to be used for the acquisition or construction of major property, equipment, or facilities which are generally financed by governmental funds. 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. Proprietary Fund Financial Statements Proprietary Fund Financial Statements include a Statement of Net Position, a Statement of Revenues, Expenses, and Changes in Net Position, and a Statement of Cash Flows for each major Proprietary Fund. A separate column representing Internal Service Funds is also presented in these statements. However, internal service balances and activities have been combined with the governmental activities in the Government-wide Financial Statements. The City's Internal Service Funds include four individual funds which provide services directly to other City funds. These areas of service include Risk Management, Wastewater Support, Vehicle Maintenance, and Vehicle Replacement. Proprietary funds are accounted for using the "economic resources" measurement focus and the accrual basis of accounting. Accordingly, all assets and liabilities (whether current or noncurrent) are included on the Statement of Net Position. 56 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) B. Measurement Focus, Basis of Accounting and Financial Statements Presentation (Continued) Proprietary Fund Financial Statements (Continued) The Statement of Revenues, Expenses, and Changes in Net Position presents increases (revenues) and decreases (expenses) in total Net Position. Under the accrual basis of accounting, revenues are recognized in the period in which they are earned while expenses are recognized in the period in which the liability is incurred. In these funds, receivables have been recorded as revenue and provisions have been made for uncollectible amounts. Operating revenues in the proprietary funds are those revenues that are generated from the primary operations of the fund. All other revenues are reported as non-operating revenues. Operating expenses are those expenses that are essential to the primary operations of the fund. All other expenses are reported as non-operating expenses. The City reports the following major proprietary funds: The Cardiff Sanitary Division ("CSD") Enterprise Fund provides wastewater collection and treatment services to approximately 6,400 customers in the southern portion of the City. The San Dieguito Water District ("SDWD") Enterprise Fund provides potable and reclaimed water services to approximately 11,000 customers in Encinitas. The Encinitas Sanitary Division ("ESD") Enterprise Fund provides wastewater collection and treatment services to approximately 4,000 customers in the northern portion of the City. Fiduciary Fund Financial Statements 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 Agency Fund accounts for one Community Facilities (Mello-Roos) District for which the City acts as an agent for debt service activities. C. Cash, Cash Equivalents, and Investments The City pools its available cash for investment purposes. The City considers pooled cash and investment amounts, with original maturities of three months or less, to be cash equivalents. Highly liquid market investments with maturities of one year or less at time of purchase are stated at amortized cost. All other investments are stated at fair value. Market value is used as fair value for those securities for which market quotations are readily available. 57 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) C. Cash, Cash Equivalents, and Investments (Continued) The Statement of Cash Flows requires presentation of "cash and cash equivalents". For the purposes of the statement of cash flows, the City considers all proprietary fund pooled cash and investments as "cash and cash equivalents," as such funds are available to the various funds as needed. Certain disclosure requirements, if applicable, for deposits and investment risks in the following areas: • Interest rate risk • Credit risk o Overall o Custodial credit risk o Concentration of credit risk • Foreign currency risk In addition, other disclosures are specified including use of certain methods to present deposits and investments, highly sensitive investments, credit quality at year end and other disclosures. D. Restricted Cash and Investments with Fiscal Agents Cash and investments with fiscal agents are restricted due to limitations on their use by bond covenants. Fiscal agents acting on behalf of the City hold investment funds arising from the proceeds of long-term debt issuances. The funds may be used for specific capital outlays or for the payment of certain bonds and have been invested only as permitted by specific State statutes or applicable City ordinance, resolution or bond indenture. E. Fair Value Measurement Certain assets and liabilities are required to be reported at fair value. The fair value framework provides a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy are described as follows: Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly and fair value is determined through the use of models or other valuation methodologies including: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in markets that are inactive; • Inputs other than quoted prices that are observable for the asset or liability; • Inputs that are derived principally from or corroborated by observable market data by correlation or other means. 58 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) E. Fair Value Measurement (Continued) Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement. These unobservable inputs reflect the City's own assumptions about the inputs market participants would use in pricing the asset or liability (including assumptions about risk). These unobservable inputs are developed based on the best information available in the circumstances and may include the City's own data. F. 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. G. Investments in Joint Ventures The City's Cardiff Sanitary Division, San Dieguito Water District, and Encinitas Sanitary Division (the "City agencies") participate in joint ventures with other local agencies, generally to provide water and wastewater treatment more efficiently. Each entity has an ownership interest in the respective joint facilities, which are 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. Refer to Note 5, Investment in Joint Ventures. H. Inventory and Prepaid Items Inventory applies only to SDWD and consists of water meters and other material used in the repair of capital facilities. Inventory is valued at average-cost using the first-in first-out basis. Prepaid items are payments made to vendors for services that will benefit periods beyond the fiscal year ended. The cost of inventory and prepaids are recorded as expenditures/expenses when consumed rather than purchased. I. Capital Assets Capital assets are valued at historical cost or estimated historical cost if the actual historical cost was not available. Donated capital assets are valued at their acquisition value on the date donated. City policy has set the capitalization threshold for reporting capital assets at $5,000 for non- infrastructure assets and $100,000 for infrastructure assets. Depreciation is recorded on a straight- line basis over estimated useful lives of the assets as follows: 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 defines infrastructure as the basic physical assets that allow the City to function. 59 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) I. Capital Assets (Continued) Governmental fund capital assets include land, land 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). 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 acquisition value on the date of donation. J. 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 from 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, 2020 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. K. Unearned Revenue 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 non-exchange transactions, for which advance payments have been received from the provider for which eligibility requirements, other than timing requirements, have not been satisfied. 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. L. Long-Term Debt For the government-wide financial statements and proprietary fund financial statements, long-term debt and other financial obligations are reported as liabilities, net of bond premiums or discounts. 60 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) L. Long-Term Debt (Continued) Bond premiums and discounts are amortized over the life of the bonds using the straight-line method. Issuance costs are reported as expense when incurred. Governmental fund financial statements do not present long-term debt but are shown in the Reconciliation of the Governmental Funds Balance Sheet to the Government-wide Statement of Net Position. M. Arbitrage Rebate Requirement The City is subject to the Internal Revenue Code ("IRC") Section 148(f), related to its tax-exempt revenue bonds. The IRC requires that investment earnings on gross proceeds of any revenue bonds that are in excess of the amount prescribed be surrendered to the Internal Revenue Service. The City had no rebate liability for arbitrage as of June 30, 2020. N. Claims Liabilities 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. O. Compensated Absences The City's policy permits its non-fire employees to accumulate not more than two times their current annual vacation allotment. Fire employees can accrue up to a maximum of 720 hours of vacation, depending on the length of employment with the City. Non-fire employees are compensated five days of sick leave per year with no balances accruing upon separation of employment. Fire employees may accrue up to 240 hours of sick leave. The combined unused vacation and sick pay will be paid to the employee or his/her beneficiary upon leaving the City's employment. The amount due will be determined using the salary/wage rate in effect at the time of separation. Government-wide Financial Statements — For governmental and business-type activities, compensated absences are recorded as expenses and liabilities as incurred. Fund Financial Statements — In governmental funds, compensated absences are recorded as expenditures in the years paid, as it is the City's policy to liquidate any unpaid compensated absences at June 30 from future resources, rather than currently available financial resources. The General Fund is typically used to liquidate compensated absences. In proprietary funds, compensated absences are expensed to the various funds in the period they are earned, and such fund's share of the unpaid liability is recorded as a long-term liability of the fund. 61 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) P. Pensions For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the plans and additions to/deductions from the plans' fiduciary net position have been determined on the same basis as they are reported by the plans (Note 13). For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with benefit terms. Investments are reported at fair value. The following timeframes are used for pension reporting: Valuation date June 30, 2018 Measurement Date June 30, 2019 Measurement Period July 1, 2018 to June 30, 2019 Gains and losses related to changes in total pension liability and fiduciary net position are recognized in pension expense systematically over time. The first amortized amounts are recognized in pension expense for the year the gain or loss occurs. The remaining amounts are categorized as deferred outflows and deferred inflows of resources related to pensions and are to be recognized in future pension expense. The amortization period differs depending on the source of the gain or loss. The difference between projected and actual earnings is amortized straight-line over 5 years. All other amounts are amortized straight-line over the average expected remaining service lives of all members that are provided with benefits (active, inactive, and retired) as of the beginning of the measurement period. The obligations for net pension liability and OPEB are primarily liquidated from the General Fund. There is no fixed payment schedule for these liabilities Q. Other Post-Employment Benefits For purposes of measuring the net OPEB liability, deferred outflows of resources and deferred inflows of resources related to OPEB, and OPEB expense, information about the fiduciary net position of the plans and additions to/deductions from the plans' fiduciary net position have been determined on the same basis as they are reported by the plans (Note 14). The following timeframes are used for OPEB reporting: Valuation Date June 30, 2019 Measurement Date June 30, 2019 Measurement Period July 1, 2018 -June 30, 2019 R. Net Position For government-wide and proprietary fund financial statements, net position represents the difference between all other elements in the statement of net position and should be displayed in the following three components. 62 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) R. Net Position (Continued) Net Investment in Capital Assets — This component of net position consists of capital assets, net of accumulated depreciation, plus deferred outflows of resources attributed to their acquisition, reduced by the outstanding balances of debt that are attributable to the acquisition, construction, or improvement of those assets and deferred inflows of resources attributable to their acquisition. Restricted — This component of net position consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets. Unrestricted — This component of net position is the amount of the assets, deferred outflows of resources, liabilities, and deferred inflows of resources that are not included in the determination of net investment in capital assets or the restricted component of net position. When an expense is incurred for purposes for which both restricted and unrestricted net position are available, the City's policy is to apply restricted net position first. S. Fund Balances In governmental fund financial statements, fund balances are categorized as follows: Non-spendable— Items that cannot be spent because they are not in spendable form, such as prepaid items and inventories, and items that are legally or contractually required to be maintained intact, such as principal of an endowment or revolving loan funds. Restricted — Restricted fund balances encompass the portion of net fund resources subject to externally enforceable legal restrictions. This includes externally imposed restrictions by creditors, such as through debt covenants, grantors, contributors, laws or regulations of other governments, as well as restrictions imposed by law through constitutional provisions or enabling legislation. Committed — Committed fund balances encompass the portion of net fund resources, the use of which is constrained by limitations that the government imposes upon itself at its highest level of decision making, normally the governing body, and that remain binding unless removed in the same manner. Adoption of a resolution by the City Council is required to commit resources or rescind the commitment. Assigned —Assigned fund balances encompass the portion of net fund resources reflecting the government's intended use of resources. Assignment of resources can be done by the highest level of decision making or by a committee or official designated for that purpose. The City Council adopted a resolution contained within the annual budget that delegates the authority to the Director of Finance to assign fund balance amounts in the annual financial statements. 63 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) S. Fund Balances (Continued) Unassigned —This amount is for any portion of the fund balances that do not fall into one of the above categories. The General Fund is the only fund that reports a positive unassigned fund balance amount. In other governmental funds, it is not appropriate to report a positive unassigned fund balance amount. However, in governmental funds other than the General Fund, if expenditures incurred for specific purposes exceed the amounts that are restricted, committed or assigned to those purposes, it may be necessary to report a negative unassigned fund balance in that particular fund. When expenditures are incurred for purposes where only unrestricted fund balances are available, the City uses the unrestricted resources in the following order: committed, assigned, and unassigned. T. Property Taxes Property taxes are levied on July 1 and are payable in two installments: November 1 and February 1 of each year. Property taxes become delinquent on December 10 and April 10, for the first and second installments, respectively. The lien date is January 1. The County of San Diego, California (County) bills and collects property taxes and remits them to the City according to a payment schedule established by the County. The County is permitted by State law to levy taxes at one percent of full market value (at time of purchase). The City receives a share of this basic tax levy. Property tax revenue is recognized in the fiscal year for which the taxes have been levied, provided the taxes are received within 60 days after the end of the fiscal year. Property taxes received after this date are not considered available as a resource that can be used to finance the current year operations of the City and therefore, are not recorded as revenue until collected. No allowance for doubtful accounts on property taxes receivable was considered necessary. U. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 64 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 2 —Summary of Significant Accounting Policies (Continued) V. Accounting Changes Upcoming Governmental Accounting Standards Implementation The City is currently analyzing its accounting practices to determine the potential impact on the financial statements for the following GASB statements: • GASB Statement No. 87 — "Leases," effective for reporting periods beginning after June 15, 2021. • GASB Statement No. 89 — "Accounting for Interest Cost Incurred before the End of a Construction Period,"effective for reporting periods beginning after December 15, 2020. • GASB Statement No. 91 — "Conduit Debt Obligations," effective for reporting period beginning after December 15, 2021. • GASB Statement No. 92 — "Omnibus 202," effective for reporting period beginning after June 15, 2021. • GASB Statement No. 93 — "Replacement of Interbank Offered Rates," effective for reporting period beginning after June 15, 2021. • GASB Statement No. 94 — "Public-Private and Public-Public partnerships and Availability Payment Arrangements," effective for reporting period beginning after June 15, 2022. • GASB Statement No. 96 — "Subscription-Based Information Technology Arrangements," effective for reporting period beginning after June 15, 2022. • GASB Statement No. 97 — "Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans—an amendment of GASB Statements No. 14 and No. 84, and a supersession of GASB Statement No. 32,"effective for reporting period beginning after June 15, 2021. Note 3 — Cash and Investments Cash and investments are classified in the accompanying financial statements as follows: Government-wide Statement of Position Fiduciary Funds Governmental Business-type Statement of Activities Activities Net Position Total Current assets: Cash and investments $ 85,284,831 $ 49,614,387 $ 2,443,480 $ 137,342,698 Restricted cash and investments with fiscal agent 156 61,654 1,981,550 2,043,360 Total cash and investments $ 85,284,987 $ 49,676,041 $ 4,425,030 $ 139,386,058 65 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 3 — Cash and Investments (Continued) Cash and investments at June 30, 2020, consisted of the following: Cash on hand $ 3,655 Deposits with financial institutions 3,191,713 Restricted cash 2,043,360 Investments 134,147,330 Total cash and investments $ 139,386,058 At June 30, 2020, cash and investments, excluding restricted cash and investments held by fiscal agent, are reported at fair value based on quoted market prices. The following table represents the fair value measurements of investments recognized in the accompanying Statement of Net Position measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2020: Percentage Fair of Measurement Investment Type Value Investments Input Investments: Local Agency Investment Fund (LAIF) $ 36,201,161 26.99% Uncategorized California Asset Management Program 1,057,884 0.79% Uncategorized Money Market Mutual Funds 3,162,527 2.36% Uncategorized Negotiable Certificates of Deposit 12,335,593 9.19% Uncategorized U.S. Treasury Securities 37,257,413 27.77% Level 2 U.S. Government Sponsored Enterprise Securities 39,962,876 29.79% Level 2 San Diego County Investment Pool 4,169,876 3.11% Uncategorized Total Investments $134,147,330 The City's level two investments are valued based on either quoted prices for identical securities in markets that are not active or quoted prices for similar securities in active markets. A. Demand Deposits The carrying amounts of the City's demand deposits were $3,191,713 at June 30, 2020. Bank balances were $3,753,480 at that date, the total amount of which was collateralized or insured with securities held by the pledging financial institutions in the City's name as discussed below. The California Government Code requires California banks and savings and loan associations to secure the City's cash deposits by pledging securities as collateral. This Code states that collateral pledged in this manner shall have the effect of perfecting a security interest in such collateral superior to those of a general creditor. Thus, collateral for cash deposits is considered to be held in the City's name. 66 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 3 — Cash and Investments (Continued) A. Demand Deposits (Continued) The market value of pledged securities must equal at least 110 percent of the City's cash deposits. California law also allows institutions to secure City's deposits by pledging first trust deed mortgage notes having a value of 150 percent of the City's total cash deposits. The City may waive collateral requirements for cash deposits, which are fully insured up to $250,000 by the Federal Deposit Insurance Corporation ("FDIC"). The City has not waived the collateral ization requirements. B. Investments Authorized by the California Government Code and the City's Adopted Investment Policy The table below identifies the investment types that are authorized for the City by the California Government Code (or the City's investment policy, where more restrictive). The table also identifies certain provisions of the California Government Code (or the City's investment policy, where more restrictive)that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustees that are governed by the provisions of debt agreements of the City, rather than the general provisions of the California Government Code or the City's investment policy. Authorized Maximum Maximum Authorized by Investment Maximum Percentage of Investment in Investment Type Policy Maturity Portfolio One Issuer Repurchased Agreements-Overnight"Sweep" Yes 1 year 20% No Limit Local Agency Investment Fund (LAIF) Yes N/A 30% State Law Maximum Other Governmental Managed Investment Pools Yes N/A 30% 10% per pool Money Market Mutual Funds Yes N/A 20% 10% Certificates of Deposit Yes 5 years 10% 5% Negotiable Certificates of Deposit Yes 5 years 10% 5% Bankers'Acceptances Yes 180 days 10% 5% U.S. Treasury Bills, Notes and Bonds Yes 5 years 50% No Limit U.S. Government Sponsored Enterprises Yes 5 years 60% 25% Commercial Paper Yes 270 days 25% 5% Commercial Medium-Term Notes Yes 5 years 15% 5% C. 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 Government 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. 67 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 3 — Cash and Investments (Continued) D. Risk Disclosures 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 that shows the distribution by maturity is as follows: Remaining Maturity(in Months) Less than 12 to 36 36-60 Investment Type Total 12 Months Months Months Investments: Local Agency Investment Fund (LAIF) $ 36,201,161 $ 36,201,161 $ - $ - California Asset Management Program 1,057,884 1,057,884 - - Money Market Mutual Funds 3,162,527 3,162,527 - - Negotiable Certificates of Deposit 12,335,593 493,142 5,156,883 6,685,568 U.S.Treasury Securities 37,257,413 17,884,867 14,250,585 5,121,961 U.S. Government Sponsored Enterprise Securities 39,962,876 2,007,529 32,666,300 5,289,047 San Diego County Investment Pool 4,169,876 4,169,876 - - Total Investments $134,147,330 $ 64,976,986 $ 52,073,768 $ 17,096,576 Disclosures Related 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 (LAIF) 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. The next table presents the minimum rating required by (where applicable) the Government Code, the Investment Policy, or the debt agreements, and the actual rating as of year-end for each investment type. 68 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 3 — Cash and Investments (Continued) Minimum Rating as of Year End Fair Legal AAA/ Investment Type Value Rating AA+ Not Rated Investments: Local Agency Investment Fund (LAIF) $ 36,201,161 N/A $ - $ 36,201,161 California Asset Management Program 1,057,884 N/A 1,057,884 - Money Market Mutual Funds 3,162,527 AAA 3,162,527 - Negotiable Certificates of Deposit 12,335,593 N/A - 12,335,593 U.S.Treasury Securities* 37,257,413 N/A - - U.S. Government Sponsored Enterprise Securities 39,962,876 N/A 39,962,876 - San Diego County Investment Pool 4,169,876 N/A 4,169,876 - Total Investments $134,147,330 $ 48,353,163 $ 48,536,754 *Exempt from rating disclosure Disclosures Relating to Concentration of Credit Risk GASB Statement No. 40 requires disclosure by amount and issuer of investments in any one issuer that represent five percent or more of total investments. Investments in any one issuer (other than U.S. Treasury securities, mutual funds, and external investment pools) that represents five percent or more of the City's total investments are as follows: Issuer Investment Type Fair Value Federal Farm Credit Bank U.S Government Sponsored Enterprise Securities $ 18,750,910 Federal Home Loan Bank U.S Government Sponsored Enterprise Securities 10,283,420 Disclosures Relating to Custodial Credit Risk 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 Government Code and the City's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for investments. 69 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 3 — Cash and Investments (Continued) E. Investment in State Investment Pool — Local Agency Investment Fund The City is a participant in the Local Agency Investment Fund (LAIF) which is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The fair value of the City's investment in this pool is reported in the accompanying financial statements at amounts based upon the City's pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. F. Investment in California 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 Pool is required to maintain an average maturity of less than 60 days and is rated AAA by Standard & Poor's national rating agency. G. Investment in San Diego County Pooled Investment Fund The San Diego County Pooled Investment Fund (SDCPIF) is a pooled investment fund program governed by the County of San Diego Board of Supervisors and administered by the County of San Diego Treasurer and Tax Collector. Investments in SDCPIF are highly liquid as deposits and withdrawals can be made at any time without penalty. SDCPIF does not impose a maximum investment limit. The County of San Diego's bank deposits are either Federally insured or collateralized in accordance with the California Government Code. Pool detail is included in the County of San Diego Comprehensive Annual Financial Report (CAFR). Copies of the CAFR may be obtained from the County of San Diego Auditor-Controller's Office — 1600 Pacific Coast Highway — San Diego, CA 92101. Note 4— Receivables At June 30, 2020, receivables consist of the following: Governmental Business-Type Activities Activities Total Accounts receivable $ 2,698,279 $ 2,757,587 $ 5,455,866 Taxes and assessments receivable 460,829 165,271 626,100 Accrued revenues 3,219,779 - 3,219,779 Total $ 6,378,887 $ 2,922,858 $ 9,301,745 70 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 5— Investment in Joint Ventures Investment in joint ventures consists of the following as of June 30, 2020: Proprietary Fund Investment in Joint Ventures Cardiff Sanitary Division San Elijo Joint Facilities $ 34,943,710 San Dieguito Water District R.E. Badger Joint Facilities 19,245,731 San Dieguito Water District R.E. Badger Financing Authority 646,641 19,892,372 Encinitas Sanitary Division Encina Joint Facilities 6,238,828 Total Investment in Joint Ventures $ 61,074,910 A. Cardiff Sanitary Division Investment in San Elijo 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 "Joint Facilities"). In 1987, CSD and Solana Beach agreed to establish the San Elijo Joint Powers Authority ("SEJPA"), a separate legal entity whose function is to manage and operate the Joint 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 Joint Facilities in exchange for a 50 percent interest in SEJPA. The Ocean Outfall is jointly owned by SEJPA (21 percent interest) and the City of Escondido (79 percent interest). SEJPA 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 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, 2020, CSD's share of those costs was $1,645,980, 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 in the next table. 71 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 5— Investment in Joint Ventures (Continued) B. San Dieguito Water District (Continued) SDWD Santa Fe Facilities 45% 55% Filtration Plant 31% 69% Filtered Water Reservoir 39% 61% Joint Pipeline 42% 58% San Dieguito Water 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, 2020, SDWD's share of those was $2,406,285, which is shown as "facility operations and maintenance" in the accompanying financial statements. 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 percent of the Joint Facilities, after adjusting for the construction and upgrades to the Joint Facilities, referred to as "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, 2020, ESD's share of those costs was $780,694, which is shown as "facility operations and maintenance" in the accompanying financial statements. Note 6— Long-Term Receivables Long-term receivables consist of loans to developers and loans to employees for the purchase of computer equipment, a program approved by the City Council to promote more efficient use of technology. At June 30, 2020, loans receivable is shown in the next table. 72 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 6— Long-Term Receivables (Continued) Iris Apartments $ 450,786 Employee computer loans 33,039 Total $ 483,825 Iris Apartments On April 20, 2012, the City entered into a promissory note agreement with Iris Apartments in the amount of $350,000, secured by a Deed of Trust on the project. The outstanding principal balance due to the City bears simple interest at a rate of six percent per annum, commencing on the date of fund disbursement which was May 2012. Under the terms of the agreement, Iris Apartments is obligated to make annual payments of principal and interest in the amount equal to 50 percent of residual receipts, as defined in the promissory note agreement. All principal and unpaid interest will be due and payable on April 20, 2067. The outstanding principal and interest receivable at June 30, 2020 was $450,786. Note 7— Capital Assets A. Governmental Activities The summary of changes in governmental activities capital assets for the year ended June 30, 2020 is as follows: Balance Balance July 1,2019 Additions Deletions Transfers June 30,2020 Capital assets,not being depreciated: Land $ 61,862,474 $ - $ $ $ 61,862,474 Land easements 2,381,057 62,276 2,443,333 Construction in progress 19,015,179 13,684,941 (291,065) (15,161,502) 17,247,553 Total capital assets,not being depreciated 83,258,710 13,747,217 (291,065) (15,161,502) 81,553,360 Capital assets,being depreciated: Public facilities 106,466,354 - - 7,359,607 113,825,961 Vehicles,equipment and machinery 10,878,602 1,167,870 (275,871) - 11,770,601 Infrastructure 117,435,353 5,775 - 7,801,895 125,243,023 Total capital assets,being depreciated 234,780,309 1,173,645 (275,871) 15,161,502 250,839,585 Less accumulated depreciation Public facilities (38,620,122) (4,435,714) - - (43,055,836) Vehicles,equipment and machinery (7,038,945) (705,030) 275,871 (7,468,104) Infrastructure (54,004,711) (3,094,186) - (57,098,897) Total accumulated depreciation (99,663,778) (8,234,930) 275,871 (107,622,837) Total capital assets being depreciated,net 135,116,531 (7,061,285) - 15,161,502 143,216,748 Governmental activities capital assets,net $ 218,375,241 $ 6,685,932 $ (291,065) $ - $ 224,770,108 Depreciation expense was charged to the functions/programs of the governmental activities as shown in the next table. 73 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 7 — Capital Assets (Continued) General government $ 1,561,128 Public safety 519,179 Public works 3,306,740 Parks and recreation 2,301,019 Internal service funds 546,864 Total depreciation expense $ 8,234,930 B. Business-type Activities The summary of changes in business-type activities capital assets for the year ended June 30, 2020 is as follows: Balance Balance July 1,2019 Additions Deletions Transfers June 30,2020 Capital assets, not being depreciated: Land easements $ 3,413,320 $ 37,224 $ - $ - $ 3,450,544 Public works facility right of use 3,378,700 - - - 3,378,700 Construction in progress 6,792,649 858,576 (558,741) (3,699,331) 3,393,153 Total capital assets, not being depreciated 13,584,669 895,800 (558,741) (3,699,331) 10,222,397 Capital assets, being depreciated: Structures and improvements 21,170,222 - - 2,168,503 23,338,725 Collection and distribution 64,485,308 45,820 - 1,530,828 66,061,956 Machinery and equipment 2,693,762 53,818 - - 2,747,580 Capacity rights 323,190 - - - 323,190 Total capital assets, being depreciated 88,672,482 99,638 - 3,699,331 92,471,451 Less accumulated depreciation Structures and improvements (6,661,906) (845,132) - - (7,507,038) Collection and distribution (34,668,933) (1,077,773) - - (35,746,706) Machinery and equipment (2,121,005) (187,163) - - (2,308,168) Capacity rights (151,361) (6,464) - (157,825) Total accumulated depreciation (43,603,205) (2,116,532) - (45,719,737) Total capital assets being depreciated, net 45,069,277 (2,016,894) - 3,699,331 46,751,714 Business-type activities capital assets, net $58,653,946 $(1,121,094) $ (558,741) $ - $ 56,974,111 Depreciation expense was charged to the functions/programs of the business-type activities as follows: Cardiff Sanitary Division $ 443,689 San Dieguito Water District 805,350 Encinitas Sanitary Division 766,955 Non-major Affordable Housing 100,538 Total $ 2,116,532 74 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 8- Long-Term Obligations A summary of changes in long-term liabilities for the year ended June 30, 2020 is as follows: Balance Balance Due Within Due in More July 1,2019 Additions Deletions June 30,2020 One Year Than One Year Governmental Activities: Capital Leases: 2008 Civic Center Roof Replacement $ 676,834 $ $ (160,045) $ 516,789 $ 166,004 $ 350,785 2013 Fire Apparatus 83,106 (83,106) - - - 2017 Fire Apparatus 460,927 (87,663) 373,264 89,868 283,396 Bonded Debt: 2013 Community Park Bonds 5,910,000 (350,000) 5,560,000 360,000 5,200,000 add:original issue premium 78,840 (8,760) 70,080 - 70,080 2014 Moonlight Beach Tower(Series A) 2,830,000 (70,000) 2,760,000 70,000 2,690,000 less:original issue discount (26,966) 1,037 (25,929) - (25,929) 2014 Pacific View(Series B) 9,555,000 (210,000) 9,345,000 215,000 9,130,000 less:original issue discount (135,374) 5,207 (130,167) - (130,167) 2015 Library Refunding Bonds 14,130,000 (555,000) 13,575,000 580,000 12,995,000 add:original issue premium 661,897 (36,772) 625,125 - 625,125 2017 Park Refunding Bonds 10,730,000 (680,000) 10,050,000 715,000 9,335,000 add:original issue premium 1,165,957 (97,162) 1,068,795 - 1,068,795 Claims payable 2,652,742 1,812,951 (1,222,623) 3,243,070 2,270,149 972,921 Compensated absences 2,185,740 1,931,775 (1,607,804) 2,509,711 1,163,586 1,346,125 Total governmental activities 50,958,703 3,744,726 (5,162,691) 49,540,738 5,629,607 43,911,131 Business-type Activities: 2011 CSD Note Payable to SEJPA 117,500 - (57,500) 60,000 60,000 - add:original issue premium 68,802 (34,401) 34,401 - 34,401 2017 CSD Note Payable to SEJPA 11,057,500 (217,500) 10,840,000 225,000 10,615,000 add:original issue premium 983,136 (35,112) 948,024 - 948,024 2007 SDWD Note Payable Badger 3,345,000 (490,000) 2,855,000 525,000 2,330,000 2004 EHA Housing Note Payable 1,091,629 (82,715) 1,008,914 84,115 924,799 2014 SDWD Water Revenue Bonds 3,485,000 (645,000) 2,840,000 665,000 2,175,000 add:original issue premium 371,858 (74,371) 297,487 - 297,487 Compensated absences(SDWD) 147,536 147,294 (137,631) 157,199 76,868 80,331 Compensated absences(Affordable Housing) 12,383 9,302 (6,891) 14,794 6,166 8,628 Total business-type activities 20,680,344 156,596 (1,781,121) 19,055,819 1,642,149 17,413,670 Total long-term obligations $71,639,047 $ 3,901,322 $(6,943,812) $ 68,596,557 $ 7,271,756 $ 61,324,801 A. Governmental Activities 2008 Civic Center Roof Replacement and Energy 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 years, an interest rate of 3.69 percent, and semi-annual payments of$91,778. The project was completed during Fiscal Year 2008-09, and the final payment is due in Fiscal Year 2022-23. The total cost of the project was $3,543,258. 75 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 8 — Long-Term Obligations (Continued) A. Governmental Activities (Continued) The annual debt service requirements for the lease outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 166,004 $ 17,552 $ 183,556 2022 172,186 11,370 183,556 2023 178,599 4,957 183,556 Total $ 516,789 $ 33,879 $ 550,668 2017 Fire Apparatus Lease The City entered into a long-term lease arrangement in Fiscal Year 2016-17 to finance the purchase of a 2017 Pierce Arrow XT Pumper Truck for $629,851. The lease has a term of seven years, an interest rate of 2.50 percent, and annual payments of$98,641. The lease is accounted for as a capital lease, as the City will be purchasing the unit at the maturity of the lease in Fiscal Year 2023-24. The annual debt service requirements for the lease outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 89,868 $ 8,773 $ 98,641 2022 92,129 6,512 98,641 2023 94,446 4,195 98,641 2024 96,821 1,819 98,640 Total $ 373,264 $ 21,299 $ 394,563 Capital assets and accumulated depreciation for assets held under capital leases are as follows: Accumulated Net Capital Cost Depreciation Assets Public facilities $ 3,543,258 $ (1,570,844) $ 1,972,414 Fire apparatus and equipment 629,851 (136,486) 493,365 76 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 8— Long-Term Obligations (Continued) A. Governmental Activities (Continued) 2013 Lease Revenue Refunding Bonds (Public Park Construction Project) On March 20, 2013, the Encinitas Public Financing Authority, a blended component unit of the City, 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 percent to 3.00 percent. 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 payable from lease payments to be made by the City of Encinitas for the right to use certain real property and related improvements pursuant to a lease agreement dated March 1, 2013 between the City as lessee and the Authority as lessor. The bonds are secured by pledged revenue consisting of all lease revenue paid by the City of Encinitas in addition to any assets held in trust for the purpose of paying the lease payments. The Authority has a leasehold on the property until all the terms of the lease agreement are fulfilled. The refunding bonds are payable from any source of legally available funds of the City. The bonds are subject to federal arbitrage requirements. The annual debt service requirements for the 2013 Lease Revenue Refunding Bonds outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 360,000 $ 156,818 $ 516,818 2022 365,000 148,206 513,206 2023 375,000 138,722 513,722 2024 390,000 127,950 517,950 2025 400,000 116,100 516,100 2026-2030 2,185,000 390,675 2,575,675 2031-2033 1,485,000 67,725 1,552,725 Total $ 5,560,000 $ 1,146,196 $ 6,706,196 The bonds maturing on or after October 1, 2023 are subject to optional redemption on any date on or after October 1, 2022, without a premium. 77 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 8— Long-Term Obligations (Continued) A. Governmental Activities (Continued) 2014 Lease Revenue Bonds (Pacific View Property and Moonlight Beach Lifeguard Tower) On November 26, 2014, the Encinitas Public Financing Authority (on behalf of the City of Encinitas) issued its 2014 Lease Revenue Bonds, Series A tax-exempt (Moonlight Beach Lifeguard Tower) and Series B taxable (Pacific View Property) in the amounts of $3,095,000 and $10,365,000, respectively, to provide funds for the purpose of improving the Moonlight Beach Lifeguard Tower and financing the acquisition of a property known as the Pacific View Property. The bonds consist of $3,350,000 of serial bonds and $10,110,000 of term bonds. The serial bonds mature annually through 2030 in installments ranging from $65,000 to $245,000. The term bonds mature through 2045 and are subject to mandatory sinking requirements. Interest is due and payable semi-annually at rates ranging from 2.00 percent to 3.50 percent. 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 payable from lease payments to be made by the City of Encinitas for the right to use certain real property and related improvements pursuant to a lease agreement dated November 1, 2014 between the City as lessee and the Authority as lessor. The bonds are secured by pledged revenue consisting of all lease revenue paid by the City of Encinitas in addition to any assets held in trust for the purpose of paying the lease payments. The Authority has a leasehold on the property until all the terms of the lease agreement are fulfilled. The refunding bonds are payable from any source of legally available funds of the City. The bonds are subject to federal arbitrage requirements. The annual debt service requirements for the 2014 Lease Revenue Bonds, Series A Moonlight Beach Lifeguard Tower bonds outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 70,000 $ 95,381 $ 165,381 2022 75,000 92,831 167,831 2023 75,000 89,831 164,831 2024 80,000 86,731 166,731 2025 85,000 84,069 169,069 2026-2030 455,000 384,297 839,297 2031-2035 530,000 304,463 834,463 2036-2040 630,000 201,044 831,044 2041-2045 760,000 73,688 833,688 Total $ 2,760,000 $ 1,412,335 $ 4,172,335 78 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 8— Long-Term Obligations (Continued) A. Governmental Activities (Continued) 2014 Lease Revenue Bonds (Pacific View Property and Moonlight Beach Lifeguard Tower) (Continued) The annual debt service requirements for the 2014 Lease Revenue Bonds, Series B Pacific View Property bonds outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 215,000 $ 426,556 $ 641,556 2022 225,000 420,225 645,225 2023 230,000 413,113 643,113 2024 240,000 405,475 645,475 2025 245,000 397,288 642,288 2026-2030 1,390,000 1,826,400 3,216,400 2031-2035 1,735,000 1,480,119 3,215,119 2036-2040 2,215,000 1,000,625 3,215,625 2041-2045 2,850,000 370,500 3,220,500 Total $ 9,345,000 $ 6,740,301 $ 16,085,301 2015 Library Refunding Bonds On September 1, 2015, the Encinitas Public Financing Authority issued $15,645,000 of 2015 Lease Revenue Refunding Bonds to defease and refund on a current basis, all of the outstanding 2006 Library Bonds which were originally used to finance capital projects that included the construction of the Encinitas Library and the Encinitas Community Park, in addition to rehabilitating three fire stations and the public works facility. The bonds consist of serial bonds maturing from 2016 through 2036 in annual installments of $480,000 to $1,025,000. Interest is due and payable semi-annually at rates ranging from 2.5 percent to 5.0 percent. Annual debt service is approximately $1,065,000 through 2036. The bonds are subject to federal arbitrage requirements. The annual debt service requirements for the 2015 Library Refunding Bonds outstanding at June 30, 2020 are presented in the next table. 79 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 8— Long-Term Obligations (Continued) A. Governmental Activities (Continued) 2015 Library Refunding Bonds (Continued) Year Ending June 30 Principal Interest Total 2021 $ 580,000 $ 476,331 $ 1,056,331 2022 610,000 446,581 1,056,581 2023 640,000 415,331 1,055,331 2024 675,000 382,456 1,057,456 2025 700,000 351,581 1,051,581 2026-2030 3,865,000 1,385,056 5,250,056 2031-2035 4,490,000 745,056 5,235,056 2036-2037 2,015,000 73,059 2,088,059 Total $ 13,575,000 $ 4,275,451 $ 17,850,451 2017 Park Refunding Bonds On February 7, 2017, the Encinitas Public Financing Authority issued $11,955,000 of 2017 Lease Revenue Refunding Bonds to defease and refund on a current basis, all of the outstanding 2010 Park Bonds which were issued for the purpose of refinancing its 2001 Lease Revenue Bonds, Series A. The refunded 2001 Lease Revenue Bonds, Series A were used to finance the acquisition of real property (Hall Property) now known as the Encinitas Community Park. The bonds consist of serial bonds maturing from 2018 through 2031 in annual installments of $580,000 to $1,110,000 and term bonds maturing April 1, 2030 in the amount of $2,125,000. Interest is due and payable semi-annually at rates ranging from 3.0 percent to 5.0 percent. Annual debt service is approximately $1,140,000 through 2031. The bonds are subject to federal arbitrage requirements. The annual debt service requirements for the 2017 Park Refunding Bonds outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 715,000 $ 427,750 $ 1,142,750 2022 750,000 392,000 1,142,000 2023 785,000 354,500 1,139,500 2024 825,000 315,250 1,140,250 2025 870,000 274,000 1,144,000 2026-2030 4,995,000 715,500 5,710,500 2031 1,110,000 33,300 1,143,300 Total $ 10,050,000 $ 2,512,300 $ 12,562,300 80 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 8 — Long-Term Obligations (Continued) B. Business-Type Activities 2011 CSD Note Payable to San Elijo Joint Powers Authority(SEJPA) On December 1, 2011, the City, 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 percent.) The average rate on the borrowing is approximately 2.0 percent. 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 percent of annual debt service. During the year ended June 30, 2020, principal and interest paid on the 2011 Note Payable was $60,734 and net revenue was $3,015,315, or 4965 percent of annual debt service. Management of CSD believes it is in compliance with these covenants for Fiscal Year 2019-20. The annual debt service requirements for the 2011 CSD Note Payable to San Elijo Joint Powers Authority outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 60,000 $ 1,710 $ 61,710 Total $ 60,000 $ 1,710 $ 61,710 2017 CSD Note Payable to San Elijo Joint Powers Authority(SEJPA) On July 6, 2017 SEJPA, on behalf of its members (the Cardiff Sanitary Division and the City of Solana Beach) issued 2017 Revenue Bonds (Clean Water Projects) for the purpose of funding facilities and improvements as part of SEJPA's capital improvement plan and certain costs of issuance. The 2017 revenue bonds are not the obligation of the City of Encinitas nor its component unit, the CSD. The City of Encinitas entered into a Series 2017 Loan Agreement dated June 1, 2017 as a successor to the CSD to assist in the financing of the CSD's respective share of the Series 2017 Revenue Bonds. CSD is responsible for the repayment of the loan in the amount of $11,057,500 of the total borrowing amount of $22,115,000 (50 percent). Annual debt service is approximately $670,000 from 2020 through 2047. The average rate on the borrowing is approximately 2.5 percent. The bonds were issued at a premium, which is being amortized over the life of the bonds on a straight-line basis. 81 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 8 — Long-Term Obligations (Continued) B. Business-Type Activities (Continued) 2017 CSD Note Payable to San Elijo Joint Powers Authority(SEJPA) (Continued) Encinitas has pledged its system revenues to pay for this outstanding obligation. System revenues are defined as gross revenues less operations and maintenance costs that are related to the collection, treatment, reclamation, recycling, and disposal of wastewater. Encinitas has covenanted to collect its system revenues which after allowances for contingencies and error in the estimates, shall produce gross revenues sufficient in each fiscal year to provide system revenues equal to at least 1.3 times the annual debt service. Total principal and interest remaining to be paid on the 2017 Note Payable as of June 30, 2020 is $18,053,822. During the year ended June 30, 2020, interest paid on the 2017 Note Payable was $451,388 and net revenue was $3,015,315, or 451 percent of annual debt service. Management of CSD believes it is in compliance with these covenants for Fiscal Year 2019-20. The annual debt service requirements for the 2017 CSD Note Payable to SEJPA outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 225,000 $ 444,863 $ 669,863 2022 230,000 438,113 668,113 2023 237,500 431,213 668,713 2024 245,000 424,088 669,088 2025 255,000 414,288 669,288 2026-2030 1,477,500 1,867,188 3,344,688 2031-2035 1,867,500 1,474,813 3,342,313 2036-2040 2,290,000 1,052,056 3,342,056 2041-2045 2,752,500 591,100 3,343,600 2046-2047 1,260,000 76,100 1,336,100 Total $ 10,840,000 $ 7,213,822 $ 18,053,822 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. 82 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 8- Long-Term Obligations (Continued) B. Business-Type Activities (Continued) 2007 SDWD Note Payable to R.E. Badger Water Facilities Financing Authority (WFFA) (Continued) Interest is due and payable semi-annually at rates ranging from 3.5 percent to 4.5 percent. Annual debt service is approximately $635,000 through 2025. The annual debt service requirements for the 2007 SDWD Note Payable to R.E. Badger Water Facilities Financing Authority outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 525,000 $ 111,465 $ 636,465 2022 545,000 89,396 634,396 2023 570,000 66,043 636,043 2024 595,000 40,915 635,915 2025 620,000 13,950 633,950 Total $ 2,855,000 $ 321,769 $ 3,176,769 2014 SDWD Water Revenue Refunding Bonds On September 18, 2014, SDWD issued $5,870,000 of Water Revenue Refunding Bonds, Series 2014, to defease and refund on a current basis, all of the outstanding 2004 Water Revenue Refunding Bonds. The bonds consist of serial bonds maturing from 2016 through 2024 in annual installments of $570,000 to $755,000. Interest is due and payable semi-annually at rates ranging from 3.0 percent to 4.0 percent. Annual debt service is approximately $780,000 through 2024. The bonds are subject to federal arbitrage requirements. The annual debt service requirements for the 2014 SDWD Water Refunding Bonds outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 665,000 $ 100,300 $ 765,300 2022 695,000 73,100 768,100 2023 725,000 44,700 769,700 2024 755,000 15,100 770,100 Total $ 2,840,000 $ 233,200 $ 3,073,200 83 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 8 — Long-Term Obligations (Continued) B. Business-Type Activities (Continued) Pledged Revenues 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 debt as of June 30, 2020, is $3,073,200. During the year ended June 30, 2020 principal and interest paid was $1,395,119 and net revenue was $4,672,150, or 335 percent of annual debt service. SDWD has covenanted to budget for net revenues each fiscal year of at least 115 percent of combined annual debt service. SDWD's management believes it is in compliance with these covenants for Fiscal Year 2019-20. 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 are due and payable monthly. Annual principal installments range from $52,417 in 2014 to $98,938 in 2031. The note bears interest at 90 percent of the ten-year US Treasury note, adjustable every six years. The EHA is solely responsible for repayment of this note. The annual debt service requirements for the 2004 Encinitas Housing Authority Note Payable outstanding at June 30, 2020 are as follows: Year Ending June 30 Principal Interest Total 2021 $ 84,115 $ 15,764 $ 99,879 2022 85,492 14,388 99,880 2023 86,891 12,989 99,880 2024 88,282 11,598 99,880 2025 89,757 10,122 99,879 2026-2030 471,289 28,108 499,397 2031-2032 103,088 946 104,034 Total $ 1,008,914 $ 93,915 $ 1,102,829 84 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 9— Interfund Receivables, Payable and Transfers A. Due To and From Other Funds Individual interfund receivables and payables at June 30, 2020 were as follows: Due from Due to Other Funds Other Funds Governmental Funds: General Fund $ 1,419,861 $ - Capital Improvements Capital Projects Fund 13,584,028 - Infrastructure Improvements Special Revenue Fund 14,411,678 Non-major Governmental Funds - 217,819 Enterprise Funds: Non-major Affordable Housing Enterprise Fund - 89,545 Internal Service Funds - 284,847 Total $ 15,003,889 $ 15,003,889 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. The amounts due to the Capital Improvements Capital Projects fund represent grant revenues due from other funds for capital projects. B. Transfers In and Out Transfers in and out between funds for the year ended June 30, 2020 were as follows: Transfers In Transfers Out General Fund Infrastructure Improvements $ 1,390,360 General Fund Non-Major Governmental Funds 666,138 General Fund Capital Projects Fund 560,943 2,617,441 Infrastructure Improvements Capital Projects Fund 174,514 Capital Projects Fund Infrastructure Improvements 5,080,791 Capital Projects Fund Non-Major Governmental Funds 2,962,799 Capital Projects Fund Non-Major Proprietary Fund 17,400 Capital Projects Fund General Fund 5,868,124 13,929,114 Non-Major Governmental Funds General Fund 3,944,014 Non-Major Governmental Funds Capital Projects Fund 62,616 Non-Major Governmental Funds Infrastructure Improvements 1,651 4,008,281 Internal Service Funds Internal Service Funds 132,000 Internal Service Funds General Fund 2,374,898 2,506,898 Major Proprietary Fund Infrastructure Improvements 12,433 Non-Major Proprietary Fund General Fund 23,633 Total $23,272,314 85 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 9— Interfund Receivables, Payable and Transfers (Continued) B. Transfers In and Out (Continued) Transfers into the General Fund consist of funds from the State Gasoline Tax, Development Impact Fees and a special subsidy for COVID19 personnel related cost from the Federal CARES Act. The City 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. The City's Development Impact Fee Funds transfer funds to the General Fund for qualified costs incurred, or to be incurred in the future years, by the General Fund for the construction of public facilities. The transfers into the General Fund also include a transfer from the Open Space Acquisition Fee Fund to a sub-fund, Opportunity Fund, for housing, land and the development of open space. Transfers into the Capital Improvements Capital Projects Fund represent funds from other governmental funds for capital expenditures. All capital projects are executed and expended through the Capital Improvements Capital Projects Fund. Transfers into the non-major governmental funds represent General Fund subsidies for the Senior Nutrition Program, the Community Development Block Grant (CDBG), the Section 8 Housing Program, the Home Program, and the Wiro Park Landscape and Lighting District. In 1998, the Council increased the Transient Occupancy Tax (TOT)from eight percent to ten percent. The additional two percent of TOT revenue increase is transferred to the Coastal Zone Management fund for beach and sand replenishment and stabilization projects. The transfers in to the non-major governmental funds also include transfers to the City's Debt Service Fund and the Encinitas Public Financing Authority Debt Service Fund to pay for the City's various debt service obligations. Transfers into the Internal Service Funds represent the City's annual contribution from the General Fund to the Self Insurance (Risk Management) Fund. The contribution is not mandated and is established by the City Council during the annual budget process. In addition, the General Fund also contributes toward vehicle replacement funds annually. 86 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 10 — Fund Balance and Net Position Classifications The City classifies fund balances, as shown on the Balance Sheet - Governmental Funds as of June 30, 2020 as follows: Major Funds Capital Infrastructure Improvements Improvements Other General Capital Projects Special Revenue Governmental Fund Fund Fund Funds Totals Nonspendable: Inventory and prepaid items $ 254,793 $ - $ - $ - $ 254,793 Long-term receivable 33,039 - - - 33,039 Total nonspendable 287,832 - - - 287,832 Restricted: Capital projects - 26,361,345 - - 26,361,345 Street maintenance and improvements - - - 1,325,895 1,325,895 Cable Franchise PEG funds - - - 242,052 242,052 Environmental initiatives - - - 840,686 840,686 Affordable housing - - - 200,057 200,057 Donations - - - 204,481 204,481 Parkland and open space - - - 906,678 906,678 Traffic mitigation - - - 1,953,192 1,953,192 Flood control - - - 448,245 448,245 Flexible saving account 167,194 - - - 167,194 Lighting and landscaping assessments - - - 3,304,927 3,304,927 Law enforcement - - - 317,724 317,724 Debt service 71 - - 85 156 Total restricted 167,265 26,361,345 - 9,744,022 36,272,632 Committed: Capital projects - 18,352,366 - - 18,352,366 Budget stabilization 1,560,690 - - - 1,560,690 Operating reserve 14,237,349 - - - 14,237,349 Special Project 410,000 - - - 410,000 Total committed 16,208,039 18,352,366 - - 34,560,405 Unassigned 10,542,872 - (13,240,690) - (2,697,818) Total Fund Balances $27,206,008 $ 44,713,711 $ (13,240,690) $ 9,744,022 $68,423,051 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. 87 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 10 — Fund Balance and Net Position Classifications (Continued) Categorization of Reserves under Adopted City Policies (Continued) 1) Contingency Reserve — represents funds that are committed for use only in exceptional circumstances such as catastrophic events that could negatively impact the financial condition of the City. Funding represents 20 percent of the following year's operating expenditures, and no drawdowns have ever been executed from this reserve. City Policy requires a 4/5 vote of the City Council to authorize draws on this reserve. The amount of the contingency reserve as of June 30, 2020 was $14,237,349. 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 two to five percent of the following year's budgeted operating revenues. Any changes to the level of funding for this reserve also require a 4/5 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 committed as of June 30, 2020 was $1,560,690. 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, 2020 was $10,542,872. Note 11 — Risk Management 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 $250,000 per occurrence, and for workers' compensation claims and losses up to $350,000 per occurrence. The City is a member of the California State Association of Counties, Excess Insurance Authority (CSAC EIA), a joint risk sharing pool which covers liability claims or losses above the City's $250,000 self-insured level. CSAC EIA is a separate legal entity formed by the participating municipalities and counties to provide pooled excess liability insurance coverage to its members. 88 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 11 — Risk Management (Continued) The members do not hold any ownership stake in CSAC EIA and have no claims to revenue or assets upon withdrawal. CSAC EIA 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 above $250,000 with excess coverage through CSAC EIA and excess carriers up to $50 million dollars. All members jointly share risk liability exposures in excess of each member's self-insured retention. 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 $350,000 and $5,000,000. Excess workers' compensation coverage between $5,000,000 and statutory limits 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 payable for liability and workers' compensation during the past two years are as follows: Year Ended Year Ended June 30, 2020 June 30, 2019 Claims payable, beginning of year $ 2,652,742 $ 2,513,481 Estimated incurred claims, net 1,812,951 425,000 Claims payments or closures (1,222,623) (285,739) Claims payable, end of year $ 3,243,070 $ 2,652,742 A. 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 paid the City $91,408 for the year ended June 30, 2020. 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. As of June 30, 2020, 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 two outstanding minor claims as of June 30, 2020 and did not pay any claims during the fiscal year. 89 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 12 — Commitments and Contingencies A. Lawsuits Numerous claims and suits have been filed against the City in the normal course of conducting City business. Based upon information received from the City Attorney and the self-insurance administrator, the estimated liability under such claims would be adequately covered by the reserve funds in the Self-Insurance Fund and by the excess insurance coverage afforded by CSAC and LAWCX (See Note 11). B. Grants Amounts received or owed from federal and state granting agencies are subject to audit and adjustment by grantor agencies. While no matters of noncompliance were disclosed by the audit of the financial statements or Single Audit of the Federal grant programs, grantor agencies may subject grant programs to additional compliance tests, which may result in disallowed costs. In the opinion of management, future disallowances of current or prior grant expenditures, if any, would not have a material adverse effect on the financial position of the City. C. Construction Commitments As of June 30, 2020, the City had remaining contractual commitments totaling approximately $9.0 million for capital projects related to its governmental and business-type activities. The more significant capital commitments included approximately $3.9 million for street improvement projects, approximately $4.3 million for park improvements and $0.5 million for CSD pump station upgrades and pipeline rehabilitation-capacity improvement projects. There were also commitments for drainage improvement projects and emergency repairs projects for approximately$0.3 million. Note 13 — California Public Employees' Retirement System The information in the following table includes the aggregate total pension related items for the Miscellaneous and Safety plans of the City and the Miscellaneous plan of SDWD: Miscellaneous Safety SDWD Total Net Pension Liabilities $ 24,649,339 $ 25,176,127 $ 7,577,802 $ 57,403,268 Deferred Outflow of Resources 5,475,873 6,531,702 2,502,847 14,510,422 Deferred Inflow of Resources 1,121,869 1,752,125 589,305 3,463,299 Pension Expense 5,110,859 4,148,554 206,981 9,466,394 The City has the following California Public Employees' Retirement Plans: 1. The Miscellaneous Plan of the City of Encinitas (Miscellaneous Plan) 2. The Safety Plan of the City of Encinitas (Safety Plan) a. Fire Plan of the City of Encinitas b. Lifeguard Plan of the City of Encinitas 3. The Miscellaneous Plan of the San Dieguito Water District (SDWD Plan) 90 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 13 — California Public Employees' Retirement System (Continued) Plan Descriptions Miscellaneous Plan The City of Encinitas has entered into separate defined benefit pension plans covering miscellaneous and safety employees with the California Public Employees' Retirement System (CalPERS). CalPERS 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 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 City selects optional benefit provisions from the benefit menu by contract and adopts those benefits through local ordinances. A full description of the pension plans regarding number of employees covered, benefit provisions, assumptions (for funding, but not accounting purposes), and membership information are listed in the June 30, 2017 Annual Actuarial Valuation Report. This report and CalPERS' audited financial statements are publicly available reports that can be obtained at CalPERS' website under "Forms and Publications." Safety Plan The Safety Plan is a cost-sharing multiple employer defined benefit plan in which the City participates with other public agencies that each have fewer than 100 active members and share the same benefit formula and includes both fire and lifeguard employees, and retirees. The Safety Plan is administered by the California Public Employees' Retirement System (CalPERS), which acts as a common investment and administrative agent for its participating member employers. Benefit provisions under the Safety Plan are established by State statutes within the Public Employees' Retirement Law. CalPERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership information that can be found on the CalPERS website. Copies of the CalPERS annual financial report may be obtained from the CalPERS Executive Office—400 P Street, Sacramento, California 95814. SDWD Plan The SDWD Plan is a cost-sharing multiple employer defined benefit plan that provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to members and beneficiaries, in which the District participates with other public agencies that each have fewer than 100 active members and share the same benefit formula. The Plan is administered by the California Public Employees' Retirement System (CalPERS), which acts as a common investment and administrative agent for its participating member employers. Benefit provisions under the Plan are established by State statutes within the Public Employee's Retirement Law. CalPERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership information that can be found on the CalPERS website. Copies of the CalPERS annual financial report may be obtained from the CalPERS Executive Office —400 P Street, Sacramento, California 95814. 91 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 13 — California Public Employees' Retirement System (Continued) Benefits Provided The City's Miscellaneous Plan is an agent multiple-employer plan that is part of the City's portion of CalPERS. The Miscellaneous Plan provides employees hired before October 13, 2012 with a Tier 1 benefit equal to 2.7 percent at 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 two percent at 60 years of age 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 CalPERS. In the case of the City, this will constitute a "Tier 3 miscellaneous plan" which provides a retirement benefit, referred to as the two percent at 62 years of age 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 City's Safety Plan provides Fire Department employees hired before June 23, 2012 with a Tier 1 benefit equal to three percent at 55 years of age, calculated based on the single highest year of qualifying compensation. Effective June 23, 2012, the City provides for modifications to the pension benefit formula for employees hired on or after the effective date (the "Tier 2 fire safety plan".) The three percent at 55 year of age 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 percent at 57 years of age formula. This plan also utilizes the mandated method of calculation based on the average of the highest 36 consecutive months of qualifying compensation. The City's Safety Plan also provides lifeguard employees hired before October 13, 2012 with a Tier 1 benefit equal to three percent at 55 years of age, calculated based on the single highest year of qualifying compensation. The lifeguards have Tier 2 and Tier 3 (PEPRA) plans which are identical to the Fire Plan described above. The SDWD Plan provides employees hired before October 13, 2012 with a Tier 1 benefit equal to 2.7 percent at 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 two percent at 60 years of age formula. In addition, 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 percent at 62 years of age 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. 92 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 13 — California Public Employees' Retirement System (Continued) Employees Covered by Benefit Terms As of the measurement date June 30, 2019, the following employees were covered by the benefit terms for the City's plans: Miscellaneous Safety SDWD Active employees 150 64 22 Inactive employees or beneficiaries currently receiving benefits 146 76 33 Inactive employees entitled to, but not yet receiving benefits 158 54 13 Total 454 194 68 Contributions Miscellaneous Plan Employee Contributions Active City Tier 1 miscellaneous members are required to contribute eight percent of their annual covered salary (the "employee contribution"). Effective October 13, 2012, all City Tier 1 miscellaneous members contribute the full eight percent, which is credited to their individual accounts. Members receiving the Tier 2 or Tier 3 benefits are required to contribute seven percent and 6.25 percent of their annual covered salary, respectively. 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 normal cost contribution rate for Fiscal Year 2019-20 was 10.838 percent for miscellaneous members. The employer contribution rates are calculated and established annually by CaIPERS, based on the actuarial methods and assumptions as adopted by the CalPERS Board of Administration. Safety Plan Active fire and lifeguard members are required to contribute 9 to 12.75 percent of their annual covered salary (the "employee contribution"). 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 2019-20 was 13.786 to 21.748 percent for fire members and 13.034 to 20.073 percent for lifeguard members. The employer contribution rates are calculated and established annually by CaIPERS, based on the actuarial methods and assumptions adopted by the CaIPERS Board of Administration. 93 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 13 — California Public Employees' Retirement System (Continued) SDWD Plan Active members in the Tier 1 Plan are required to contribute eight percent of their annual covered salary (the "employee contribution"). Effective October 13, 2012, all Tier 1 members contribute the full eight percent, which is credited to their individual accounts. Members receiving the Tier 2 or Tier 3 benefits are required to contribute seven percent, and 6.25 percent of their annual covered salary, respectively. The employee contribution requirements are established by State statute. SDWD 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 the year ended June 30, 2020 for Tier 1, Tier 2, and PEPRA employees were 13.182 percent, 8.081 percent, and 6.985 percent, respectively. 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. Net Pension Liability Actuarial Methods and Assumptions Used to Determine Total Pension Liability (All Plans) For the measurement period ended June 30, 2019, the total pension liability was determined by rolling forward the June 30, 2018 total pension liability. The June 30, 2018 and June 30, 2019 total pension liabilities were based on the following actuarial methods and assumptions: Actuarial Methods and Assumptions Used to Determine Total Pension Liability Actuarial Cost Method Entry Age Normal in accordance with the requirements of No. 68 Actuarial Assumptions: Discount Rate 7.15% Inflation 2.50% Salary Increases Varies by Entry Age and Service Mortality Rate Table Derived using CaIPERS' Membership Data for all funds Post Retirement Benefit Increase The lesser of contract COLA or 2.50% until Purchasing Power Protection Allowance floor on purchasing power applies, 2.50%thereafter Discount Rate The discount rate used to measure the total pension liability was 7.15%. The projection of cash flows used to determine the discount rate assumed that contributions from plan members will be made at the current member contribution rates and that contributions from employers will be made at statutorily required rates, actuarially determined. Based on those assumptions, the Plan's fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on plan investments was applied to all periods of projected benefit payments to determine the total pension liability. 94 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 13 — California Public Employees' Retirement System (Continued) Discount Rate (Continued) The long-term expected rate of return on pension plan investments was determined using a building-block method in which expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, CaIPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all of the funds' asset classes, expected compound (geometric) returns were calculated over the short-term (first ten years) and the long-term (11+ years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the rounded single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equal to the single equivalent rate calculated above and adjusted to account for assumed administrative expenses. The expected real rates of return by asset class are as followed: Assumed Asset Real Return Real Return Asset Class Allocation 1 - 10 2 11 + 3 Global equity 50.0% 4.80% 5.98% Fixed income 28.0 1.00 2.62 Inflation assets - 0.77 1.81 Private equity 8.0 6.30 7.23 Real assets 13.0 3.75 4.93 Liquidity 1.0 - (0.92) In the CalPERS CAFR, fixed income is included in global debt securities; liquidity is included in short-term investments; inflation assets are included in both global equity securities and global debt securities. 2 An expected inflation of 2.00 percent was used for this period. 3 An expected inflation of 2.92 percent was used for this period. 95 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 13 - California Public Employees' Retirement System (Continued) Changes in the Net Pension Liability The following tables show the changes in the net pension liability recognized over the measurement period for the Miscellaneous Plan: Increase (Decrease) Total Pension Plan Fiduciary Net Net Pension Liability Position Liability/(Asset) (a) (b) (c)_(a)-(b) Balance at June 30,2018(Valuation Date) $ 108,006,576 $ 84,619,814 $ 23,386,762 Changes Recognized for the Measurement Period: Service Cost 2,479,472 - 2,479,472 Interest on the total pension liability 7,738,502 - 7,738,502 Difference between expected and actual experience 1,229,327 - 1,229,327 Contributions from the employer - 3,638,301 (3,638,301) Contributions from employees - 1,018,181 (1,018,181) Net investment income, net of administrative expense - 5,588,433 (5,588,433) Benefit payments, including refunds of employee contributions (4,489,668) (4,489,668) - Administrative expense - (60,387) 60,387 Other expense - 196 (196) Net Changes during July 1,2018 to June 30,2019 $ 6,957,633 $ 5,695,056 $ 1,262,577 Balance at June 30,2019(Measurement Date) $ 114,964,209 $ 90,314,870 $ 24,649,339 As of June 30, 2020, the City reported net pension liabilities for its proportionate shares of the net pension liability of the Safety Plan as follows: Plan Total Plan Plan Net Pension Fiduciary Pension Liability Net Position Liability/(Asset) Balance at June 30, 2018 (Valuation date) $ 92,660,835 $ 69,535,698 $ 23,125,137 Balance at June 30, 2019 (Measurement date) 96,757,950 71,581,823 25,176,127 Net changes during 2018-2019 $ 4,097,115 $ 2,046,125 $ 2,050,990 96 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 13 — California Public Employees' Retirement System (Continued) The City's net pension liability for the Safety Plan is measured as the proportionate share of the net pension liability. The net pension liability of the Plan is measured as of June 30, 2019, and the total pension liability for each Plan used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2018 rolled forward to June 30, 2019 using standard update procedures. The City's proportion of the net pension liability was based on a projection of the City's long-term share of contributions to the pension plans relative to the projected contributions of all participating employers, actuarially determined. The City's proportionate share of the net pension liability for the Safety Plan as of measurement date June 30, 2019 was as follows: Safety Plan Proportionate share at June 30, 2018 0.39412% Proportionate share at June 30, 2019 0.40330% Change- Increase/(Decrease) 0.00918% As of June 30, 2020, the City reported net pension liabilities for its proportionate shares of the net pension liability of the SDWD Plan as follows: Plan Total Plan Plan Net Pension Fiduciary Pension Liability Net Position Liability/(Asset) Balance at June 30,2018(Valuation Date) $ 23,172,973 $ 16,099,922 $ 7,073,051 Balance at June 30,2019(Measurement Date) 23,722,943 16,145,141 7,577,802 Net changes during 2018-2019 $ 549,970 $ 45,219 $ 504,751 The City's net pension liability for the SDWD Plan is measured as the proportionate share of the net pension liability. The net pension liability of the Plan is measured as of June 30, 2019, and the total pension liability for the Plan used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2018 rolled forward to June 30, 2019 using standard update procedures. The District's proportion of the net pension liability was based on a projection of the District's long-term share of contributions to the pension plan relative to the projected contributions of all participating employers, actuarially determined. The City's proportionate share of the net pension liability for the SDWD Plan as of June 30 was as follows: SDWD Plan Proportionate share at June 30, 2018 0.18768% Proportionate share at June 30, 2019 0.18923% Change - Increase/(Decrease) 0.00155% 97 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 13 — California Public Employees' Retirement System (Continued) Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability of the Miscellaneous Plan, Safety Plan, and SDWD Plan as of the measurement date, calculated using the discount rate of 7.15 percent, as well as what the net pension liability would be if it were calculated using a discount rate that is one percentage point lower (6.15 percent) or one percentage point higher (8.15 percent) than the current rate: Plan's Net Pension Liability/(Asset) Discount Rate - 1% Current Discount Discount Rate + 1% (6.15%) Rate (7.15%) (8.15%) City Miscellaneous $ 40,603,703 $ 24,649,339 $ 11,514,058 City Safety 38,436,164 25,176,127 14,304,974 SDWD 10,768,610 7,577,802 4,944,015 $ 89,808,477 $ 57,403,268 $ 30,763,047 Pension Plan Fiduciary Net Position Detailed information about the Miscellaneous, Safety, and SDWD Plans' fiduciary net position is available in a separately issued CalPERS financial report. Amortization of Deferred Outflows and Inflows of Resources Under GASB No. 68, gains and losses related to changes in total pension liability and fiduciary net position are recognized in pension expense systematically over time. The first amortized amounts are recognized in pension expense for the year the gain or loss occurs. The remaining amounts are categorized as deferred outflows and deferred inflows of resources related to pensions and are to be recognized in future pension expense. The amortization period differs depending on the source of the gain or loss: Net difference between projected 5 years and actual earnings on pension plan investments All other amounts Straight-line amortization over the expected average remaining service lifetime (EARSL) of all members that are provided with benefits (active, inactive and retired) as of the beginning of the measurement period. 98 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 13 — California Public Employees' Retirement System (Continued) Pension Expense and Deferred Outflows/Inflows of Resources Related to Pension For the year ended June 30, 2020, the City recognized pension expense of $5,110,859, $4,148,554, and $206,981 for the Miscellaneous, Safety and SDWD plans, respectively. At June 30, 2020, the City reported deferred outflows resources and deferred inflows of resources related to pensions from the following sources: Miscellaneous Plan Safety Plan Deferred Deferred Deferred Deferred Outflows Inflows Outflows Inflows of Resources of Resources of Resources of Resources Contribution made after the measurement date $ 3,929,445 $ - $ 2,979,381 $ Difference between expected and actual experience 832,771 (391,993) 1,643,774 Difference between employer's contribution and proportionate share of contribution - - (1,106,470) Changes of assumptions 713,657 (277,142) 1,031,926 (201,379) Net difference between projected and actual earnings on (346,340) pension plan investments - (452,734) - Adjustments due to difference in proportions - 876,621 (97,936) Total $ 5,475,873 $ (1,121,869) $ 6,531,702 $ (1,752,125) The $3,929,445 and $2,979,381 reported as deferred outflows of resources related to contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the fiscal year ended June 30, 2021. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized as pension expense as follows: Miscellaneous Safety Plan Plan Measurement Deferred Outflows Deferred Outflows Period (Inflows) of (Inflows) of Ending June 30 Resources Resources 2020 $ 782,917 $ 1,526,985 2021 (369,976) (39,836) 2022 (76,177) 245,658 2023 87,795 67,389 2024 - - Thereafter - - $ 424,559 $ 1,800,196 99 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 13 — California Public Employees' Retirement System (Continued) Pension Expense and Deferred Outflows/Inflows of Resources Related to Pension (Continued) For the year ended June 30, 2020, the City recognized pension expense of$206,981 for the SDWD Plan. At June 30, 2020 the City reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred outflows Deferred inflows of Resources of Resources Contribution made after the measurement date $ 1,581,186 $ - Difference between expected and actual experience 526,310 (40,778) Changes of assumptions 361,345 (128,094) Net difference between projected and actual earnings on pension plan investments - (132,483) Difference between employer's actual contributions and proportionate share of contributions - (140,699) Adjustments due to difference in proportions 34,006 (147,251) Total $ 2,502,847 $ (589,305) The $1,581,186 reported as deferred outflows of resources related to contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the fiscal year ended June 30, 2021. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized as pension expense as follows: Measurement Deferred Period Outflows (Inflows) Ending June 30 Of Resources 2020 $ 403,827 2021 (153,176) 2022 54,934 2023 26,771 2024 - Thereafter - $ 332,356 Note 14— 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, 2019 and was used to determine the June 30, 2019 measurement date amounts. 100 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 14— Other Postemployment Benefits (OPEB) (Continued) A. Summary The information in the following table includes the aggregate total OPEB related items for the City and SDWD: City SDWD Total Net OPEB Liabilities $ 6,781,455 $ 225,019 $ 7,006,474 Deferred Outflow of Resources 1,315,490 69,930 1,385,420 Deferred Inflow of Resources 1,431,887 43,199 1,475,086 OPEB Expense 487,417 23,938 511,355 B. 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 defined benefit agent multiple-employer health benefit plan administered by CalPERS, to eligible employees who retire directly from the City. The City pays the cost for lifetime retiree and dependent medical benefits (average premium for CalPERS 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's financial obligation is to provide the CalPERS minimum required employee contribution ($136 per month in 2019, $139 per month in 2020, and in future years, indexed to medical CPI increases) except for former Encinitas Fire Protection District employees hired on or before March 15, 1995 who receive full retiree health benefits for both the employee and their dependents. 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. 75, which provides a means to fund the annual OPEB costs, referred to as the Actuarially Determined Contribution (ADC). The ADC includes the normal cost (current accrual for benefits being earned) plus an amortization of the unfunded accrued liability or net OPEB liability over 15 years on level-percentage of pay basis. The City's funding policy is to pre-fund the ADC through the Trust. Eligibility Employees of the City are eligible for retiree health benefits if they retire from the City and commence pension benefits under PERS (typically on or after age 50 with at least five years of PERS eligible service). Membership in the plan consisted of the following at June 30, 2019, the date of the latest actuarial valuation: City Plan Active plan members 226 Inactive plan members or beneficiaries currently receiving benefits 86 Total 312 101 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 14— Other Postemployment Benefits (OPEB) (Continued) B. City of Encinitas Retiree Health Plan (Continued) Net OPEB Liability The City's net OPEB liability was measured as of June 30, 2019. The total OPEB liability used to calculate the net OPEB liability was determined by an actuarial valuation as of June 30, 2019. The net OPEB liability at June 30, 2020 was: City Plan Increase(Decrease) Total OPEB Plan Fiduciary Net OPEB Liability Net Position Liability/(Asset) (a) (b) (c)_(a)-(b) Balance at June 30,2018(Valuation Date) $ 12,818,900 $ 4,070,007 $ 8,748,893 Changes Recognized for the Measurement Period: Service Cost 196,193 - 196,193 Interest on the total OPEB liability 880,167 - 880,167 Change of assumptions (26,216) (26,216) Difference between expected and actual experience (1,439,425) (1,439,425) Employer contributions - 1,270,357 (1,270,357) Net investment income - 308,901 (308,901) Benefit payments, including refunds of member contributions (882,565) (882,565) - Administrative expenses - (1,101) 1,101 Net Changes during July 1,2018 to June 30,2019 $ (1,271,846) $ 695,592 $ (1,967,438) Balance at June 30,2019(Measurement Date) $ 11,547,054 $ 4,765,599 $ 6,781,455 Actuarial Assumptions The net OPEB liability in the June 30, 2019 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement, unless otherwise specified: Actuarial Cost Method Entry Age Normal Actuarial Assumptions: Discount Rate 7.00% Inflation 2.50% Wage Inflation 2.75%per annum,in aggregate Investment Rate of Return 7.00%,assuming actuarially determined contributions funded into CERBT Investment Strategy 1. Mortality Rate Derived using CaIPERS'2017 experience study for the CalPERS pension plan Pre-retirement Turnover Derived using CaIPERS'2017 experience study for the CalPERS pension plan Merit Increases Merit increases from the most recent CalPERS pension plan valuation.The benefits are not payroll related but each individual's projected cost is allocated over their lifetime as a level-percentage of pay. The Experience Study Reports may be accessed on the CalPERS website www.calpers.ca.gov under Forms and Publications. 102 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 14— Other Postemployment Benefits (OPEB) (Continued) Actuarial Assumptions (Continued) The actuarial assumptions used in the June 30, 2019 valuation were based on the results of an actuarial experience study for the period July 1, 2018 to June 30, 2019. Discount Rate The discount rate used to measure the net OPEB liability was seven percent. This discount rate assumes the City continues to fully fund for its retiree health benefits through the California Employers' Retiree Benefit Trust (CERBT) under its investment allocation Strategy 1. The rate reflects the CERBT published median interest rate for Strategy 1 of 7.28 percent with an additional margin for adverse deviation. The table below reflects long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These geometric rates of return are net of administrative expenses. Target Long-Term Expected Asset Class Allocation Real Rate of Return* Global equity 59.00% 5.00% Fixed income 25.00% 3.00% Inflation assets 5.00% 2.00% Commodities 3.00% 3.00% REITs 8.00% 5.00% * Long-term expected rate of return is 7.00 percent Sensitivity of the Net OPEB Liability to Changes in the Discount Rate The following presents the net OPEB liability of the City, as well as what the City's net OPEB liability would be if it were calculated using a discount rate 1-percentage-point lower (six percent) or 1-percentage-point higher (eight percent)than the current discount rate: Plan's Net OPEB Liability/(Asset) Discount Rate - 1% Current Discount Discount Rate + 1% (6.00%) Rate (7.00%) (8.00%) $ 8,106,433 $ 6,781,455 $ 5,676,401 103 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 14— Other Postemployment Benefits (OPEB) (Continued) Sensitivity of the Net OPEB Liability to Changes in the Healthcare Cost Trend Rates The following presents the net OPEB liability of the City, as well as what the City's net OPEB liability would be if it were calculated using healthcare cost trend rates 1-percentage-point lower (5.5%HM0/5.5%PP0 decreasing to 4.0%HM0/4.0%PP0) or 1-percentage-point higher (7.5%HM0/7.5%PP0 decreasing to 6.0%HM0/6.0%PP0) than the current healthcare cost trend rates: Plan's Net OPEB Liability/(Asset) (5.50% HMO/5.50%PPO (6.50%HMO/6.50%13130 (7.50% HMO/7.50%PPO decreasing to decreasing to decreasing to 4.00% HMO/4.00% PPO) 5.00% HMO/5.00% PPO) 6.00%HMO/6.00% PPO) $ 5,620,487 $ 6,781,455 $ 8,175,324 Contributions The City's policy is to fund the ADC, which includes the normal cost (current accrual for benefits being earned) plus an amortization of the net (unfunded accrued) OPEB liability. OPEB Liabilities, OPEB Expense and Deferred Outflows/Inflows of Resources to OPEB For the year ended June 30, 2020, the City recognized OPEB expense of $487,417 for the City Plan. At June 30, 2020 the City reported deferred outflows of resources and deferred inflows of resources related to OPEB from the following sources: Deferred Deferred Outflows Inflows of Resources of Resources OPEB contribution made after the measurement period $ 1,315,490 $ - Changes of assumptions - (22,939) Difference between expected actual experience - (1,259,497) Net difference between projected and actual earnings on investments - (149,451) $ 1,315,490 $ (1,431,887) 104 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 14— Other Postemployment Benefits (OPEB) (Continued) OPEB Liabilities, OPEB Expense and Deferred Outflows/Inflows of Resources to OPEB (Continued) The $1,315,490 reported as deferred outflows of resources related to contributions subsequent to the measurement date will be recognized as a reduction of the net OPEB liability in the fiscal year ended June 30, 2020. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to OPEB will be recognized as OPEB expense as follows: Measurement Deferred Period Outflows (Inflows) Ending June 30 of Resources 2020 $ (245,247) 2021 (245,247) 2022 (206,478) 2023 (185,299) 2024 (183,205) Thereafter (366,411) $ (1,431,887) C. 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 as of June 30, 2019 was used to determine the June 30, 2019 measurement date amounts. Plan Description SDWD provides postretirement health care benefits through the Public Employees Medical and Hospital Care Act (PEMHCA), which is a defined benefit agent multiple-employer health benefit plan administered by CalPERS, 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. SDWD has elected to join the California Employers' Retiree Benefit Trust (the "Trust") in accordance with GASB Statement No. 75, which provides a means to fund the annual OPEB costs, referred to as the Actuarially Determined Contribution (ADC). The ADC includes the normal cost (current accrual for benefits being earned) plus an amortization of the unfunded accrued liability or net OPEB liability over 15 years on a level-percentage of pay basis. SDWD's funding policy is to pre-fund the ADC through the trust. 105 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 14— Other Postemployment Benefits (OPEB) (Continued) Eligibility Employees of SDWD are eligible for retiree health benefits if they retire from SDWD and commence pension benefits under CaIPERS (typically on or after age 50 with at least five years of CaIPERS eligible service). Membership in the plan consisted of the following at June 30, 2019, the date of the latest actuarial valuation: Active plan members 24 Inactive plan members or beneficiaries currently receiving benefits 21 Total 45 Change in the Net OPEB Liability SDWD's net OPEB liability was measured as of June 30, 2019. The total OPEB liability used to calculate the net OPEB liability was determined by an actuarial valuation as of June 30, 2019. The net OPEB liability at June 30, 2020 was: Increase (Decrease) Total OPEB Plan Fiduciary Net Net OPEB Liability Position Liability/(Asset) (a) (b) (c)_(a)-(b) Balance at June 30, 2019 $ 516,772 $ 229,666 $ 287,106 (Measurement Date:June 30,2018) Changes Recognized for the Measurement Period: Service cost 14,633 - 14,633 Interest on the total OPEB liability 36,301 - 36,301 Changes of benefit terms - - - Difference between expected and actual experience (43,215) - (43,215) Changes of assumptions 1,843 - 1,843 Contributions from the employer - 55,068 (55,068) Contributions from employees - -Net investment income, net of administrative expense 16,640 (16,640) Benefit payments, including refunds of employee contributions (25,651) (25,651) - Administrative expense - (59) 59 Other expenses - -Net Changes (16,089) 45,998 (62,087) Balance at June 30, 2020 $ 500,683 $ 275,664 $ 225,019 (Measurement Date:June 30,2019) 106 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 14— Other Postemployment Benefits (OPEB) (Continued) C. San Dieguito Water District— Retiree Health Plan (Continued) Actuarial Assumptions The net OPEB liability in the June 30, 2019 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement, unless otherwise specified: Actuarial Cost Method Entry Age Normal Actuarial Assumptions: Discount Rate 7.00% Inflation 2.50% Wage Inflation 2.75%per annum,in aggregate Investment Rate of Return 7.00%,assuming actuarially determined contributions funded into CERBT Investment Strategy 1. Mortality Rate' Derived using CaIPERS'2017 experience study for the CalPERS pension plan Pre-retirement Turnover Derived using CaIPERS'2017 experience study for the CaIPERS pension plan Merit Increases Merit increases from the most recent CalPERS pension plan valuation.The benefits are not payroll related but each individual's projected cost is allocated over their lifetime as a level-percentage of pay. The Experience Study Reports may be accessed on the CalPERS website www.calpers.ca.gov under Forms and Publications. Discount Rate The discount rate used to measure the net OPEB liability was 7.00 percent. The projection of cash flows used to determine the discount rate assumed that District contributions will be made at rates equal to the actuarily determined contribution rates. Based on those assumptions, the OPEB plan's fiduciary net position was projected to be available to make all projected OPEB payments for current active and inactive employees and beneficiaries. Therefore, the long-term expected rate of return on OPEB plan investments was applied to all periods of projected benefit payments to determine the total OPEB liability. The table below reflects long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These geometric rates of return are net of administrative expenses. Long-Term Target Expected Real Asset Class Allocation Rate of Return Global equity 59.00% 5.50% Fixed income 25.00% 2.35% Inflation assets 5.00% 1.50% Commodities 3.00% 1.75% REITs 8.00% 3.65% Long-term expected rate of return is seven percent 107 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 14— Other Postemployment Benefits (OPEB) (Continued) C. San Dieguito Water District— Retiree Health Plan (Continued) Sensitivity of the Net OPEB Liability to Changes in the Discount Rate The following presents the net OPEB liability of SDWD, as well as what SDWD's net OPEB liability would be if it were calculated using a discount rate 1-percentage point lower (6.00 percent) or 1- percentage point higher (8.00 percent)than the current discount rate: Discount Rate - 1% Current Discount Discount Rate + 1% (6.00%) Rate (7.00%) (8.00%) Net OPEB Liability $ 282,813 $ 225,019 $ 176,556 Sensitivity of the Net OPEB Liability to Changes in the Healthcare Cost Trend Rates The following presents the net OPEB liability of SDWD, as well as what SDWD's net OPEB liability would be if it were calculated using healthcare cost trend rates 1-percentage point lower (5.5%HM0/5.5%PP0 decreasing to 4.0%HM0/4.0%PP0) or 1-percentage point higher (7.5%HM0/7.5%PP0 decreasing to 6.0%HM0/6.0%PP0) than the current healthcare cost trend rates: (5.50%HMO/5.50%PPO (6.50% HMO/6.50%PPO (7.50%HMO/7.50%PPO decreasing to decreasing to decreasing to 4.00%HMO/4.00%PPO) 5.00%HMO/5.00%PPO) 6.00%HMO/6.00%PPO) Net OPEB Liability $ 171,707 $ 225,019 $ 289,357 Contributions SDWD's policy is to fund the ADC, which includes the normal cost (current accrual for benefits being earned) plus an amortization of the net (unfunded accrued) OPEB liability. OPEB Expense and Deferred Outflows/Inflows of Resources to OPEB For the year ended June 30, 2020, SDWD recognized OPEB expense of $23,938 for the SDWD Plan. At June 30, 2020, SDWD reported deferred outflows of resources and deferred inflows of resources related to OPEB from the following sources: Deferred Outflows Deferred Inflows of Resources of Resources OPEB contribution subsequent to the $ 68,350 $ - Changes of assumptions 1,580 Net difference between projected and actual earnings on OPEB plan investments - (43,199) Total $ 69,930 $ (43,199) 108 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 14— Other Postemployment Benefits (OPEB) (Continued) C. San Dieguito Water District— Retiree Health Plan (Continued) OPEB Expense and Deferred Outflows/Inflows of Resources to OPEB (Continued) The $68,350 reported as deferred outflows of resources related to contributions subsequent to the measurement date will be recognized as a reduction of the net OPEB liability in the fiscal year ended June 30, 2021. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to OPEB will be recognized as OPEB expense as follows: Measurement Deferred Period Outflows (Inflows) Ending June 30 of Resources 2020 $ (8,584) 2021 (8,584) 2022 (6,817) 2023 (5,819) 2024 (5,911) Thereafter (5,904) $ (41,619) Note 15— Encinitas Ranch Golf Authority The Encinitas Ranch Golf Authority (the "Golf 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 Golf 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. 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 Golf Authority are not the debts and obligations of the City or SDWD. Separate audited financial statements of the Golf Authority are available at the City's administrative office. 109 City of Encinitas Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2020 Note 16 — Special Assessment Debt City of Encinitas - Community Facilities District (CFD) #1: Encinitas Ranch Community During Fiscal Year 2012-13, the City, on behalf of the residents and businesses of the Community Facilities District ("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 six percent of the average annual debt service of the prior bonds. As of June 30, 2020, the outstanding balance on the 2012 Special Tax Refunding Bonds was $22,300,000. 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. City of Encinitas—Duties and Responsibilities The City acts as the agent for this Assessment District, collecting the assessments and paying the CFD's bills, as well as other administrative duties. The City has no duty or obligation to pay any liabilities or potential liabilities of the CFD. Neither the full faith and credit, nor the taxing power of the City or any other City related agency, is pledged in connection with this bond issue. Therefore, such bonds are not considered to be a liability of the City and are not included in the accompanying basic financial statements. Note 17 — Other Required Disclosures Deficit Fund Balances/Net Position At June 30, 2020, the Infrastructure Improvements Special Revenue fund had a fund deficit of $13,290,860. The deficit is anticipated to be funded from future grants, other revenues, and operating or capital transfers. At June 30, 2020, the Wastewater Support Internal Service fund had a fund deficit of $334,592. The deficit is anticipated to be funded by Cardiff Sanitary Division and Encinitas Sanitary Division funds. At June 30, 2020, the Vehicle Maintenance Internal Service fund had a deficit of $180,246. The deficit is anticipated to be funded by the General Fund, the Cardiff Sanitary Division, Encinitas Sanitary Division and San Dieguito Water District funds. 110 REQUIRED SUPPLEMENTARY INFORMATION 111 This page intentionally left blank. 112 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 1 — Budgetary Information Budget 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. The 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 amount includes any amendments approved 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 Fund 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 either be 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. 113 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 2- Budgetary Comparison Schedule General Fund Budgeted Amounts Variance with Original Final Actual Final Budget REVENUES: Taxes: Property $ 48,366,974 $ 48,366,974 $ 49,520,037 $ 1,153,063 Real property transfer 520,000 520,000 632,882 112,882 Sales 13,677,709 11,782,402 13,744,880 1,962,478 Franchise 2,230,414 2,230,414 2,183,571 (46,843) Transient occupancy 2,131,887 1,961,372 1,906,448 (54,924) Total taxes 66,926,984 64,861,162 67,987,818 3,126,656 Licenses and permits 280,200 280,200 263,518 (16,682) Intergovernmental 616,547 662,897 780,807 117,910 Charges for services 7,354,684 7,231,654 6,629,818 (601,836) Fines,forfeitures and penalties 709,753 709,753 655,032 (54,721) Use of money and property 847,489 847,489 2,810,704 1,963,215 Other 559,811 559,811 712,659 152,848 Total revenues 77,295,468 75,152,966 79,840,356 4,687,390 EXPENDITURES: General government: City Council 477,736 477,736 426,127 51,609 City Attorney 380,000 701,621 667,378 34,243 City Manager 4,977,607 5,040,183 4,715,148 325,035 City Clerk 434,314 434,314 416,596 17,718 Finance 2,015,008 2,045,608 1,928,026 117,582 Non-departmental 4,597,466 5,023,653 4,480,969 542,684 Total general government 12,882,131 13,723,115 12,634,244 1,088,871 Public safety: Law enforcement 15,997,406 15,997,406 15,875,521 121,885 Fire and marine safety 17,048,555 17,415,837 16,780,731 635,106 Total public safety 33,045,961 33,413,243 32,656,252 756,991 Public works: Administration 456,020 483,430 478,054 5,376 Environmental programs 5,840 5,840 1,389 4,451 Street maintenance 3,075,008 3,075,008 2,882,810 192,198 Facility maintenance 1,643,735 1,645,955 1,482,048 163,907 Stormwater 1,570,517 1,570,517 1,418,821 151,696 Total public works $ 6,751,120 $ 6,780,750 $ 6,263,122 $ 517,628 114 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 2- Budgetary Comparison Schedule (Continued) General Fund (Continued) Budgeted Amounts Variance with Original Final Actual Final Budget Development services-planning: Planning $ 3,409,733 $ 3,627,532 $ 3,381,911 $ 245,621 Code enforcement 2,389,768 2,690,903 2,265,029 425,874 Building services 773,236 778,616 764,021 14,595 Total development services-planning 6,572,737 7,097,051 6,410,961 686,090 Development services-engineering: City engineering 1,218,777 1,232,025 1,038,036 193,989 Traffic engineering 688,204 706,204 622,860 83,344 Coastal zone management 1,285,604 1,285,604 1,123,590 162,014 Total development services-engineering 3,192,585 3,223,833 2,784,486 439,347 Parks and recreation: Administration 1,210,025 1,222,534 1,199,903 22,631 Park services 2,412,460 2,384,166 2,249,731 134,435 Beach services 701,447 701,447 544,159 157,288 Recreational services 781,545 793,516 688,288 105,228 Community and senior center 2,444,391 2,570,836 2,030,955 539,881 Total parks and recreation 7,549,868 7,672,499 6,713,036 959,463 Capital outlay: Parks and recreation 5,500 5,848 1,350 4,498 Total capital outlay 5,500 5,848 1,350 4,498 Total expenditures* 69,999,902 71,916,339 67,463,451 4,452,888 EXCESS OF REVENUES OVER EXPENDITURES 7,295,566 3,236,627 12,376,905 9,140,278 OTHER FINANCING SOURCES (USES) Transfers in-operating 1,206,321 1,758,678 2,056,498 297,820 Transfers in-capital 1,059,542 1,489,135 560,943 (928,192) Transfers out-operating (3,780,379) (4,107,000) (3,723,934) 383,066 Transfersout-capital (2,898,639) (4,768,124) (4,768,124) - Transfers out-debt service (3,730,858) (3,730,858) (3,718,611) 12,247 Total other financing sources(uses) (8,144,013) (9,358,169) (9,593,228) (235,059) NET CHANGE IN FUND BALANCE $ (848,447) $ (6,121,542) 2,783,677 $ 8,905,219 Fund balance -beginning of year 24,422,331 Fund balance -end of year $ 27,206,008 *The original budget includes an amendment of$434,380 approved by the City Council before the fiscal year began. 115 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 2— Budgetary Comparison Schedule (Continued) Infrastructure Improvements Special Revenue Fund Original Final Actual Variance with Budget Budget Amounts Final Budget REVENUES: Taxes and assessments $ 532,972 $ 532,972 $ 489,481 $ (43,491) Intergovernmental 6,181,804 7,935,187 7,442,981 (492,206) Use of money and property - - 64,813 64,813 Total revenues 6,714,776 8,468,159 7,997,275 (470,884) EXPENDITURES: Current: General government 239,785 254,285 594,138 (339,853) Development services - planning - 250,000 - 250,000 Total expenditures 239,785 504,285 594,138 (89,853) REVENUES OVER (UNDER) EXPENDITURES 6,474,991 7,963,874 7,403,137 (560,737) OTHER FINANCING SOURCES (USES): Transfers in - 174,514 174,514 - Transfers out (5,795,881) (6,027,010) (6,485,235) (458,225) Total other financing sources (uses) (5,795,881) (5,852,496) (6,310,721) (458,225) NET CHANGE IN FUND BALANCE $ 679,110 $ 2,111,378 1,092,416 $ (1,018,962) Fund balance - beginning of year (14,333,106) Fund balance -end of year $ (13,240,690) 116 This page intentionally left blank. 117 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Measurement period 2018-19 2017-18 2016-17 Net change in total pension liability Total pension liability - beginning Total pension liability - ending (a) Plan fiduciary net position Net change in plan fiduciary net position Plan fiduciary net position - beginning Plan fiduciary net position - ending (b) Net pension liability - ending (a)-(b) Notes to Schedule: Benefit changes Changes in Assumptions: Note 3 - Schedule of Changes in the Net Pension Liability and Related Ratios Last Ten Fiscal Years* City Miscellaneous Plan City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Measurement period 2015-16 2014-15 2013-14 Net change in total pension liability Total pension liability - beginning Total pension liability - ending (a) Plan fiduciary net position Net change in plan fiduciary net position Plan fiduciary net position - beginning Plan fiduciary net position - ending (b) Net pension liability - ending (a)-(b) Notes to Schedule: Benefit changes Changes in Assumptions: Note 3 - Schedule of Changes in the Net Pension Liability and Related Ratios (Continued) Last Ten Fiscal Years* City Miscellaneous Plan City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 4-Schedule of the City's Proportionate Share of the Net Pension Liability Last Ten Fiscal Years* Safety Plan Measurement period 2018-19 2017-18 2016-17 Plan's proportion of the net pension liability 0.40330% 0.39412% 0.39412% Plan's proportionate share of the net pension liability $ 25,176,127 $ 23,125,137 $ 22,930,965 Plan's covered payroll $ 6,117,357 $ 6,197,680 $ 6,017,165 Plan's proportionate share of the net pension liability as a percentage of covered payroll 411.55% 373.13% 381.09% Plan's fiduciary net position $ 71,581,823 $ 69,535,698 $ 67,653,362 Plan's fiduciary net position as a percentage of the total pension liability 73.98% 75.04% 74.69% Plan's proportionate share of aggregate employer contributions $ 2,457,135 $ 2,203,690 $ 1,108,343 Notes to Schedule: Benefit changes There were no changes to benefit terms that applied to all members of the Public Agency Pool. Changes in assumptions In 2018, demographic assumptions and inflation rate were changed in accordance to CaIPERS Experience Study and Review of Actuarial Assumptions December 2017. In 2017,the accounting discount rate was reduced from 7.65 percei to 7.15 percent. *Fiscal Year 2014-15 was the first year of implementation;therefore, only six years of information are shown. 120 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 4 -Schedule of the City's Proportionate Share of the Net Pension Liability(Continued) Last Ten Fiscal Years* Safety Plan Measurement period 2015-16 2014-15 2013-14 Plan's proportion of the net pension liability 0.38281% 0.35376% 0.22994% Plan's proportionate share of the net pension liability $ 19,826,444 $ 14,576,416 $ 14,308,774 Plan's covered payroll $ 5,841,908 $ 5,671,755 $ 5,115,288 Plan's proportionate share of the net pension liability as a percentage of covered payroll 339.38% 257.00% 279.73% Plan's fiduciary net position $ 63,591,785 $ 65,540,377 $ 62,697,310 Plan's fiduciary net position as a percentage of the total pension liability 76.23% 81.81% 81.42% Plan's proportionate share of aggregate employer contributions $ 1,609,491 $ 1,250,672 $ 1,775,034 Notes to Schedule: Benefit changes There were no changes to benefit terms that applied to all members of the Public Agency Pool. Changes in assumptions In 2018, demographic assumptions and inflation rate were changed in accordance to CaIPERS Experience Study and Review of Actuarial Assumptions December 2017. In 2017,the accounting discount rate was reduced from 7.65 percer to 7.15 percent. *Fiscal Year 2014-15 was the first year of implementation;therefore, only six years of information are shown. 121 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 4-Schedule of the City's Proportionate Share of the Net Pension Liability(Continued) Last Ten Fiscal Years* San Dieguito Water District Plan Measurement period 2018-19 2017-18 2016-17 Plan's proportion of the net pension liability 0.18923% 0.18768% 0.18116% Plan's proportionate share of the net pension liability $ 7,577,802 $ 7,073,051 $ 7,141,232 Plan's covered payroll $ 1,887,782 $1,918,865 $1,862,975 Plan's proportionate share of the net pension liability as a percentage of covered payroll 401.41% 368.61% 383.32% Plan's fiduciary net position $ 16,145,141 $ 16,145,141 $ 15,991,467 Plan's fiduciary net position as a percentage of the total pension liability 68.06% 69.48% 69.13% Plan's proportionate share of aggregate employer contributions $ 585,749 $ 504,492 $ 472,819 Notes to Schedule: Benefit changes There were no changes to benefit terms that applied to all members of the Public Agency Pool. Changes in assumptions In 2018, demographic assumptions and inflation rate were changed in accordance to CaIPERS Experience Study and Review of Actuarial Assumptions. In 2017,the accounting discount rate was reduced from 7.65 percent to 7.15 percent. *Fiscal Year 2014-15 was the first year of implementation; therefore, only six years of information are shown. 122 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 4-Schedule of the City's Proportionate Share of the Net Pension Liability(Continued) Last Ten Fiscal Years* San Dieguito Water District Plan Measurement period 2015-16 2014-15 2013-14 Plan's proportion of the net pension liability 0.18103% 0.18296% 0.06074% Plan's proportionate share of the net pension liability $ 6,288,631 $ 5,019,493 $ 3,779,285 Plan's covered payroll $ 1,808,714 $ 1,756,033 $ 1,712,639 Plan's proportionate share of the net pension liability as a percentage of covered payroll 347.69% 285.84% 220.67% Plan's fiduciary net position $ 15,586,708 $ 16,358,655 $ 18,489,458 Plan's fiduciary net position as a percentage of the total pension liability 71.25% 76.52% 83.03% Plan's proportionate share of aggregate employer contributions $ 356,509 $ 271,845 $ 241,133 Notes to Schedule: Benefit changes There were no changes to benefit terms that applied to all members of the Public Agency Pool. Changes in assumptions In 2018, demographic assumptions and inflation rate were changed in accordance to CaIPERS Experience Study and Review of Actuarial Assumptions. In 2017,the accounting discount rate was reduced from 7.65 percent to 7.15 percent. "Fiscal Year 2014-15 was the first year of implementation;therefore, only six years of information are shown. 123 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Fiscal Year 2019-20 2018-19 2017-18 Contribution deficiency (excess) Notes to Schedule Methods and assumptions used to determine contribution rates: Note 5 - Schedule of Contributions - Pension Last Ten Fiscal Years* City Miscellaneous Plan City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Fiscal Year 2016-17 2015-16 2014-15 Contribution deficiency (excess) Notes to Schedule Methods and assumptions used to determine contribution rates: Note 5 - Schedule of Contributions - Pension (Continued) Last Ten Fiscal Years* City Miscellaneous Plan City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Fiscal Year 2019-20 2018-19 2017-18 Contribution deficiency (excess) Notes to Schedule Methods and assumptions used to determine contribution rates: Last Ten Fiscal Years* Safety Plan Note 5 - Schedule of Contributions - Pension (Continued) City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Fiscal Year 2016-17 2015-16 2014-15 Contribution deficiency (excess) Notes to Schedule Methods and assumptions used to determine contribution rates: Last Ten Fiscal Years* Safety Plan Note 5 - Schedule of Contributions - Pension (Continued) City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 5 - Schedule of Contributions - Pension (Continued) Fiscal Year 2019-20 2018-19 2017-18 Contribution deficiency (excess) Notes to Schedule Methods and assumptions used to determine contribution rates: Last Ten Fiscal Years* San Dieguito Water District Plan City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 5 - Schedule of Contributions - Pension (Continued) 2016-17 2015-16 2014-15 Contribution deficiency (excess) Notes to Schedule Methods and assumptions used to determine contribution rates: Last Ten Fiscal Years* San Dieguito Water District Plan City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 6-Schedule of Changes in the Net OPEB Liability and Related Ratios Last Ten Fiscal Years* City Plan Measurement Period 2018-19 2017-18 2016-17 Total OPEB liability Service cost $ 196,193 $ 190,479 $ 178,018 Interest 880,167 867,343 856,058 Changes of benefit terms - - - Differences between expected and actual experience (1,439,425) - - Changes of assumptions (26,216) - - Benefit payments, including refunds of member contributions (882,565) (878,114) (892,532) Net change in total OPEB liability (1,271,846) 179,708 141,544 Total OPEB liability-beginning 12,818,900 12,639,192 12,497,648 Total OPEB liability-ending (a) $ 11,547,054 $ 12,818,900 $ 12,639,192 OPEB fiduciary net position Contributions-employer $ 1,270,357 $ 1,102,937 $ 1,092,690 Net investment income 308,900 358,109 403,267 Benefit payments, including refunds of member contributions (882,565) (878,114) (892,532) Administrative expense (1,100) (2,366) (2,046) Other expense - (4,620) - Net change in plan fiduciary net position 695,592 575,946 601,379 Plan fiduciary net position - beginning 4,070,007 3,494,061 2,892,682 Plan fiduciary net position -ending (b) 4,765,599 4,070,007 3,494,061 Plan net OPEB liability-ending (a) - (b) $ 6,781,455 $ 8,748,893 $ 9,145,131 Plan fiduciary net position as a percentage of the total OPEB Liability 41.27% 31.75% 27.64% Covered-employee payroll $22,403,865 $ 21,767,304 $ 17,816,557 Plan net OPEB liability as a percentage of covered-employee payroll 30.27% 40.19% 51.33% * Fiscal Year 2017-18 was the first year of implementation; therefore, only three years of information are shown. 130 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 6 - Schedule of Changes in the Net OPEB Liability and Related Ratios (Continued) Last Ten Fiscal Years* San Dieguito Water District Plan Measurement Period 2018-19 2017-18 2016-17 Total OPEB liability Service cost $ 14,633 $ 14,241 $ 13,309 Interest 36,301 34,637 33,225 Differences between expected and actual experience (43,215) - - Changes of assumptions 1,843 - - Benefit payments, including refunds of member contributions (25,651) (25,346) (29,268) Net change in total OPEB liability (16,089) 23,532 17,266 Total OPEB liability - beginning 516,772 493,240 475,974 Total OPEB liability -ending (a) $ 500,683 $ 516,772 $ 493,240 OPEB fiduciary net position Contributions - employer $ 55,068 $ 59,205 $ 63,332 Net investment income 16,640 18,590 18,770 Benefit payments, including refunds of member contributions (25,651) (25,346) (29,268) Administrative expense (59) (358) (95) Net change in plan fiduciary net position 45,998 52,091 52,739 Plan fiduciary net position - beginning 229,666 177,575 124,836 Plan fiduciary net position - ending (b) 275,664 229,666 177,575 Plan net OPEB liability - ending (a) - (b) $ 225,019 $ 287,106 $ 315,665 Plan fiduciary net position as a percentage of the total OPEB Liability 55.06% 44.44% 36.00% Covered-employee payroll $ 1,903,385 $ 1,978,669 $ 1,802,043 Plan net OPEB liability as a percentage 11.82% 14.51% 17.52% of covered-employee payroll * Fiscal Year 2017-18 was the first year of implementation; therefore, only three years of information are shi 131 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 7 - Schedule of Contributions - OPEB Last Ten Fiscal Years* City Plan Fiscal Year 2019-20 2018-19 2017-18 Actuarially determined contribution (ADC) $ 1,117,605 $ 958,415 $ 930,499 Contributions in relation to the ADC (1,315,490) (1,269,129) (1,092,690) Contribution deficiency (excess) $ (197,885) $ (310,714) $ (162,191) Covered employee payroll $23,224,242 $22,403,865 $21,767,304 Contributions as a percentage of covered employee payroll 5.66% 5.66% 5.02% Notes to Schedule Actuarial methods and assumptions used to set the actuarially determined contributions for Fiscal Year 2019-20 were from the June 30, 2019 actuarial valuation report. Methods and assumptions used to determine contribution rates: Actuarial cost method Entry Age Normal Amortization method/period Level percentage of payroll over a closed rolling 15-year period Asset valuation method Market value Inflation 2.50% per annum Payroll growth 2.75% per annum, in aggregate Investment rate of return 7% per annum. Assumes investing in California Employers' Retirees Benefit Trust asset allocation Strategy 1. Retirement age According to the retirement rates under the most recent CalPERS pension plan experience study. Mortality Pre-retirement mortality probability based on 2014 CalPERS 1997-2011 Experience Study covering CalPERS participants. Post-retirement mortality probability based on CalPERS Experience Study 2007-2011 covering participants in CalPERS. * Fiscal Year 2017-18 was the first year of implementation; therefore, only three years of information are shown. 132 City of Encinitas Required Supplementary Information For the Year Ended June 30, 2020 Note 7 -Schedule of Contributions - OPEB (Continued) Last Ten Fiscal Years* San Dieguito Water District Plan Fiscal Year 2019-20 2018-19 2017-18 Actuarially determined contribution (ADC) $ 48,200 $ 53,291 $ 52,780 Contributions in relation to the ADC (68,350) (66,983) (63,332) Contribution deficiency (excess) $ (20,150) $ (13,692) $ (10,552) Covered employee payroll $2,046,974 $1,903,385 $1,978,669 Contributions as a percentage of covered employee payroll 3.34% 3.52% 3.20% Notes to Schedule Actuarial methods and assumptions used to set the actuarially determined contributions for Fiscal Year 2019-20 were from the June 30, 2019 actuarial valuation report. Methods and assumptions used to determine contribution rates: Actuarial cost method Entry Age Normal Amortization method/period Level percentage of payroll over a closed rolling 15-year period Asset valuation method Market value Inflation 2.50% per annum Payroll growth 2.75% per annum, in aggregate Investment rate of return 7% per annum. Assumes investing in California Employers' Retirees Benefit Trust asset allocation Strategy 1. Retirement age According to the retirement rates under the most recent CalPERS pension plan experience study. Mortality Pre-retirement mortality probability based on 2014 CalPERS 1997-2011 Experience Study covering CalPERS participants. Post-retirement mortality probability based on CalPERS Experience Study 2007-2011 covering participants in CalPERS. * Fiscal Year 2017-18 was the first year of implementation; therefore, only three years of information are shown. 133 This page intentionally left blank. SUPPLEMENTARY INFORMATION This page intentionally left blank. NON-MAJOR GOVERNMENTAL FUNDS SPECIAL REVENUE FUNDS: Grants and Housing - Development Impact - Lighting and Landscaping - DEBT SERVICE FUNDS: City Debt Service - Encinitas Public Financing Authority - City of Encinitas Combining Balance Sheet Non-Major Governmental Funds June 30, 2020 Special Revenue Grants and Development Lighting and Housing Impact Landscaping ASSETS Cash and investments $ 1,409,291 $ 4,251,088 $ 4,362,442 Receivables 319,025 - 25,188 Interest receivable 7,644 52,644 17,703 Long-term receivable 194,466 256,320 - Restricted cash and investments - - - Total assets $ 1,930,426 $ 4,560,052 $ 4,405,333 LIABILITIES, DEFERRED INFLOWS OF RESOURCES,AND FUND BALANCES LIABILITIES Accounts payable and accrued liabilities $ 173,656 $ - $ 252,350 Due to other funds 217,819 - - Deposits and other liabilities - 21,405 - Total liabilities 391,475 21,405 252,350 DEFERRED INFLOWS OF RESOURCES Unavailable revenue 230,324 256,320 - Total deferred inflows of resources 230,324 256,320 - Fund Balances Restricted 1,308,627 4,282,327 4,152,983 Total fund balances 1,308,627 4,282,327 4,152,983 Total liabilities, deferred inflows of resources and fund balances $ 1,930,426 $ 4,560,052 $ 4,405,333 (Continued) 138 City of Encinitas Combining Balance Sheet (Continued) Non-Major Governmental Funds June 30, 2020 Debt Service Total Encinitas Public Other City Financing Governmental Debt Service Authority Funds ASSETS Cash and investments $ - $ - $ 10,022,821 Receivables - - 344,213 Interest receivable - - 77,991 Long-term receivable - - 450,786 Restricted cash and investments - 85 85 Total assets $ - $ 85 $ 10,895,896 LIABILITIES, DEFERRED INFLOWS OF RESOURCES,AND FUND BALANCES LIABILITIES Accounts payable and accrued liabilities $ - $ - $ 426,006 Due to other funds - - 217,819 Deposits and other liabilities - - 21,405 Total liabilities - - 665,230 DEFERRED INFLOWS OF RESOURCES Unavailable revenue - - 486,644 Total deferred inflows of resources - 486,644 Fund Balances Restricted - 85 9,744,022 Total fund balances - 85 9,744,022 Total liabilities, deferred inflows of resources and fund balances $ - $ 85 $ 10,895,896 (Concluded) 139 City of Encinitas Combining Statement of Revenues, Expenditures, and Changes in Fund Balances Non-Major Governmental Funds For the Year Ended June 30, 2020 Special Revenue Grants and Development Lighting and Housing Impact Landscaping REVENUES: Taxes and assessments $ 355,519 $ - $ 2,231,743 Intergovernmental 984,666 - - Development impact fees - 2,248,578 - Use of money and property 156,223 495,343 201,870 Other 525,475 - - Total revenues 2,021,883 2,743,921 2,433,613 EXPENDITURES: Current: General government 129,999 - - Public safety 272,055 - - Public works 581,443 - 548,176 Development services-planning 208,762 - - Development services-engineering - - 540,417 Parks and recreation 305,896 - 940,368 Capital outlay 341,351 - - Debt service: Principal - - Interest and fiscal charges - - Total expenditures 1,839,506 - 2,028,961 REVENUES OVER (UNDER)EXPENDITURES 182,377 2,743,921 404,652 OTHER FINANCING SOURCES(USES): Transfers in 270,268 1,750 17,652 Transfers out (308,953) (3,279,984) (40,000) Total other financing sources(uses) (38,685) (3,278,234) (22,348) NET CHANGE IN FUND BALANCES 143,692 (534,313) 382,304 FUND BALANCES: Beginning of year 1,164,935 4,816,640 3,770,679 End of year $ 1,308,627 $ 4,282,327 $ 4,152,983 (Continued) 140 City of Encinitas Combining Statement of Revenues, Expenditures, and Changes in Fund Balances (Continued) Non-Major Governmental Funds For the Year Ended June 30, 2020 Debt Service Total Encinitas Public Other City Financing Governmental Debt Service Authority Funds REVENUES: Taxes and assessments $ - $ - $ 2,587,262 Intergovernmental - - 984,666 Development impact fees - - 2,248,578 Use of money and property - 613 854,049 Other - - 525,475 Total revenues - 613 7,200,030 EXPENDITURES: Current: General government - - 129,999 Public safety - - 272,055 Public works - - 1,129,619 Development services-planning - - 208,762 Development services-engineering - - 540,417 Parks and recreation - - 1,246,264 Capital outlay - - 341,351 Debt service: Principal 160,045 1,865,000 2,025,045 Interest and fiscal charges 23,512 1,671,739 1,695,251 Total expenditures 183,557 3,536,739 7,588,763 REVENUES OVER (UNDER)EXPENDITURES (183,557) (3,536,126) (388,733) OTHER FINANCING SOURCES(USES): Transfers in 183,557 3,535,054 4,008,281 Transfers out - - (3,628,937) Total other financing sources(uses) 183,557 3,535,054 379,344 NET CHANGE IN FUND BALANCES - (1,072) (9,389) FUND BALANCES: Beginning of year - 1,157 9,753,411 End of year $ - $ 85 $ 9,744,022 141 City of Encinitas Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual Grants and Housing Special Revenue Fund For the Year Ended June 30, 2020 REVENUES: Total revenues EXPENDITURES: Total expenditures REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) Total other financing sources (uses) NET CHANGE IN FUND BALANCE FUND BALANCE: City of Encinitas Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual Development Impact Special Revenue Fund For the Year Ended June 30, 2020 REVENUES: Total revenues Expenditures: REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) Total other financing sources (uses) NET CHANGE IN FUND BALANCE FUND BALANCE: City of Encinitas Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual Lighting and Landscaping Special Revenue Fund For the Year Ended June 30, 2020 REVENUES: Total revenues EXPENDITURES: Total expenditures REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) Total other financing sources (uses) NET CHANGE IN FUND BALANCE FUND BALANCE: Internal Service Funds Internal Service Funds Risk Management - Wastewater Support - Vehicle Maintenance - Vehicle Replacement - City of Encinitas Combining Statement of Net Position All Internal Service Funds June 30, 2020 ASSETS Total current assets Noncurrent assets: Total noncurrent assets Total assets DEFERRED OUTFLOWS OF RESOURCES Total deferred outflows of resources LIABILITIES Current liabilities: Total current liabilities DEFERRED INFLOWS OF RESOURCES Total deferred inflows of resources Noncurrent liabilities: Total noncurrent liabilities Total liabilities NET POSITION Total net position City of Encinitas Combining Statement of Revenues, Expenses, and Changes in Net Position All Internal Service Funds For the Year Ended June 30, 2020 OPERATING REVENUES: Total operating revenues OPERATING EXPENSES: Total operating expenses Operating income (loss) NONOPERATING REVENUES: Total nonoperating revenues INCOME (LOSS) BEFORE CAPITAL CONTRIBUTIONS AND TRANSFERS Total capital contributions and transfers Net change in net position NET POSITION: City of Encinitas Combining Statement of Cash Flows All Internal Service Funds For the Year Ended June 30 , 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net cash provided by (used in) operating activities CASHFLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Net cash (used in) capital and related financing activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Net cash provided by (used in) noncapital financing activities Net increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS: RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net cash provided by (used in) operating activities There were no non-cash capital and related financing activities. AGENCY FUND FIDUCIARY FUNDS Community Facilities District #1 This page intentionally left blank. City of Encinitas Statement of Changes in Assets and Liabilities Agency Funds For the Year Ended June 30, 2020 Community Facilities District #1 Assets: Total assets Liabilities: Total liabilities This page intentionally left blank. City of Encinitas Statistical Section (Unaudited) This section of the City of Encinitas' Comprehensive Annual Financial Report presents detailed information as a context for understanding what the information in the financial statements, note disclosures, required supplementary and supplementary information says about the City's overall financial health. Contents Paqe Financial Trends -These schedules contain trend information to help the reader understand how the City's financial performance and well-being have changed over time. 1 Net Position by Components 154 2 Changes in Net Position 156 3 Fund Balances of Governmental Funds 160 4 Changes in Fund Balances of Governmental Funds 162 Revenue Capacity-These schedules contain information to help the reader assess the City's most significant local revenue source which is property tax. 5 Assessed Value of Taxable Property 164 6 Principal Property Taxpayers 165 7 Property Tax Levies and Collections 166 8 Direct and Overlapping Property Tax Rates 168 Debt Capacity-These schedules present information to help the reader assess the affordability of the City's current levels of outstanding debt and the City's ability to issue additional debt in the future. 9 Ratios of Outstanding Debt by Type 172 10 Ratios of General Bonded Debt Outstanding 174 11 Schedule of Direct and Overlapping Bonded Debt 175 12 Legal Debt Margin Information 176 13 Historical Debt Service Coverage 178 Demographics and Economic Information -These schedules offer demographics and economic indicators to help the reader understand the environment within which the City's financial activities take place. 14 Demographic and Economic Statistics 180 15 General Governmental Tax Revenue by Source 181 16 Taxable Sales by Business Type 182 17 Principal Employers 183 Operating Information-These schedules contain service and infrastructure data to help the reader understand how the information in the City's financial report relates to the services the City provides and the activities it performs. 18 Full-time and Part-Time Employees by Function 184 19 Operating Indicators by Function 186 20 Capital Asset Statistics by Function 188 21 Cardiff Sanitary Division-Summary of Operational Data 192 22 San Dieguito Water District-Summary of Operational Data 196 Sources: Unless otherwise noted, the information in these schedules was derived from the Comprehensive Annual Financial Reports for the relevant year. 153 City of Encinitas Net Position by Component Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Years 2020 2019 2018 2017 2016 Government activities: Net investment in capital assets $ 181,288,734 $ 172,580,765 $ 169,553,838 $ 165,759,601 $ 162,923,350 Restricted 23,031,942 20,997,390 19,779,315 19,867,542 30,996,309 Unrestricted 528,847 7,357,189 1,963,535 9,510,235 (580,736) Total governmental activities net position 204,849,523 200,935,344 191,296,688 195,137,378 193,338,923 Business-type activities: Net investment in capital assets 38,060,921 38,074,788 36,547,324 44,977,544 42,501,264 Restricted 390,925 411,895 421,938 20,237 1,377,006 Unrestricted 105,330,676 99,808,547 95,173,238 79,286,895 75,512,969 Total business-type activities net position 143,782,522 138,295,230 132,142,500 124,284,676 119,391,239 Primary government: Net investment in capital assets 219,349,655 210,655,553 206,101,162 210,737,145 205,424,614 Restricted 23,422,867 21,409,285 20,201,253 19,887,779 32,373,315 Unrestricted 105,859,523 107,165,736 97,136,773 88,797,130 74,932,233 Total primary government net position $ 348,632,045 339,230,574 $ 323,439,188 $ 319,422,054 $ 312,730,162 Source: Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2020 154 City of Encinitas Net Position by Component (Continued) Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Years 2015 2014 2013 2012 2011 Government activities: Net investment in capital assets $ 157,304,041 $ 161,902,991 $ 157,395,370 $ 153,516,469 $ 139,575,875 Restricted 18,741,022 17,363,704 9,980,695 - - Unrestricted 9,229,896 38,446,880 37,646,551 43,857,634 56,799,902 Total governmental activities net position 185,274,959 217,713,575 205,022,616 197,374,103 196,375,777 Business-type activities: Net investment in capital assets 39,806,764 54,362,661 32,247,941 25,155,766 30,076,172 Restricted - 1,039,739 - - - Unrestricted 75,781,002 62,426,804 79,816,600 83,232,015 72,608,845 Total business-type activities net position 115,587,766 117,829,204 112,064,541 108,387,781 102,685,017 Primary government: Net investment in capital assets 197,110,805 216,265,652 189,643,311 178,672,235 169,652,047 Restricted 18,741,022 18,403,443 9,980,695 - - Unrestricted 85,010,898 100,873,684 117,463,151 127,089,649 129,408,747 Total primary government net position $ 300,862,725 $ 335,542,779 $ 317,087,157 $ 305,761,884 $ 299,060,794 Source: Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2020 155 City of Encinitas Changes in Net Position Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Years 2020 2019 2018 2017 2016 Expenses: Government activities: General government $ 17,335,001 $ 15,280,238 $ 14,403,144 $ 11,737,634 $ 11,750,737 Public safety 35,791,015 33,160,544 30,762,894 29,437,181 27,255,755 Public works 11,859,286 9,166,709 8,325,467 9,205,570 11,743,123 Planning 7,027,696 6,878,364 8,741,589 6,935,754 7,255,460 Engineering services 6,309,896 6,762,441 7,492,540 8,918,281 4,591,315 Parks and recreation 10,079,123 9,809,964 8,429,448 7,046,255 6,778,769 Interest and fiscal charges on long-term debt 1,569,705 1,655,750 1,755,100 2,237,069 2,494,815 Total governmental activities expenses 89,971,722 82,714,010 79,910,182 75,517,744 71,869,974 Business-type activities: Cardiff Sanitary Division 3,093,405 3,548,203 3,086,434 3,308,454 3,857,531 San Dieguito Water District 16,503,660 16,615,687 13,800,288 13,970,919 13,462,935 Encinitas Sanitary Division 3,271,260 2,044,676 1,652,061 2,037,116 2,306,540 Affordable Housing 1,676,260 1,576,162 1,464,181 1,449,917 1,440,124 Recreation Programs - - - - - Total business-type activities expenses 24,544,585 23,784,728 20,002,964 20,766,406 21,067,130 Total primary government expenses 114,516,307 106,498,738 99,913,146 96,284,150 92,937,104 Program revenues: Government activities: Charges for services: General government 1,804,550 1,239,815 1,815,086 1,675,799 1,594,277 Public safety 1,521,745 2,075,725 1,421,393 1,148,567 1,009,713 Public works 1,776 57,786 394,647 65,746 107,279 Planning and building 3,417,094 2,936,898 3,262,604 2,954,523 2,800,413 Engineering services 970,837 1,782,402 1,874,562 1,143,830 1,367,902 Parks and recreation 1,029,655 1,310,426 1,405,704 1,796,918 1,741,619 Operating grants and contributions 4,401,599 4,421,588 3,253,127 3,419,730 3,349,186 Capital grants and contributions 6,784,821 6,626,283 4,851,823 4,407,963 5,409,098 Total governmental activities program revenues 19,932,077 20,450,923 18,278,946 16,613,076 17,379,487 Business-type activities: Charges for services: Cardiff Sanitary Division 5,046,841 4,937,942 4,885,227 4,788,884 4,761,486 San Dieguito Water District 16,835,266 15,727,590 16,852,732 14,851,977 14,684,387 Encinitas Sanitary Division 2,744,193 2,698,745 2,711,075 2,819,006 2,855,690 Affordable Housing 270,931 260,848 225,468 213,124 218,148 Recreation Programs - - - - - Operating grants and contributions 1,246,133 1,142,424 1,093,800 1,099,366 1,068,549 Capital grants and contributions 593,179 728,700 560,651 736,370 681,412 Total business-type activities program revenues 26,736,543 25,496,249 26,328,953 24,508,727 24,269,672 Total primary government program revenues 46,668,620 45,947,172 44,607,899 41,121,803 41,649,159 Governmental activities (70,039,645) (62,263,087) (61,631,236) (58,904,668) (54,490,487) Business-type activities 2,191,958 1,711,521 6,325,989 3,742,321 3,202,542 Total net revenue(expense) $(67,847,687) $(60,551,566) $(55,305,247) $(55,162,347) $(51,287,945) 156 City of Encinitas Changes in Net Position (Continued) Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Years 2015 2014 2013 2012 2011 Expenses: Government activities: General government $ 10,810,882 $ 9,549,338 $ 10,616,440 $ 12,064,527 $ 10,912,556 Public safety 25,762,703 25,146,843 24,629,613 23,062,746 22,324,624 Public works 11,565,315 10,239,746 10,851,147 8,560,330 10,981,355 Planning 6,550,992 5,853,995 4,353,831 5,008,179 5,539,148 Engineering services 6,253,352 3,988,720 3,813,678 5,817,932 3,646,306 Parks and recreation 5,205,986 4,735,864 5,542,550 5,578,716 6,243,769 Interest and fiscal charges on long-term debt 2,311,944 1,913,349 1,932,904 1,811,714 2,029,477 Total governmental activities expenses 68,461,174 61,427,855 61,740,163 61,904,144 61,677,235 Business-type activities: Cardiff Sanitary Division 4,262,565 2,922,446 3,373,704 3,385,439 3,715,529 San Dieguito Water District 15,005,767 13,552,862 12,200,431 12,448,911 11,622,126 Encinitas Sanitary Division 1,731,770 2,438,692 1,983,786 1,719,176 1,992,334 Affordable Housing 1,408,226 1,405,225 1,499,863 1,492,811 244,748 Recreation Programs 1,331,565 1,300,555 1,153,840 1,187,788 - Total business-type activities expenses 23,739,893 21,619,780 20,211,624 20,234,125 17,574,737 Total primary government expenses 92,201,067 83,047,635 81,951,787 82,138,269 79,251,972 Program revenues: Government activities: Charges for services: General government 1,629,857 1,800,630 1,775,756 1,789,943 2,453,152 Public safety 160,178 202,220 91,495 99,047 98,202 Public works 759,918 - - - - Planning and building 2,737,225 2,874,894 1,894,785 2,155,076 1,816,765 Engineering services 1,055,311 1,075,885 955,986 736,786 1,063,822 Parks and recreation 46,846 35,791 39,946 14,580 1,149,350 Operating grants and contributions 3,878,422 4,345,931 3,759,864 5,896,502 6,964,053 Capital grants and contributions 4,126,194 8,756,281 6,462,979 3,626,279 4,854,393 Total governmental activities program revenues 14,393,951 19,091,632 14,980,811 14,318,213 18,399,737 Business-type activities: Charges for services: Cardiff Sanitary Division 4,528,551 4,605,867 4,755,573 4,970,662 4,830,204 San Dieguito Water District 14,785,858 15,297,718 13,687,156 12,922,922 12,438,502 Encinitas Sanitary Division 2,841,235 2,879,605 2,933,319 2,897,592 2,895,879 Affordable Housing 247,349 216,728 214,115 214,503 216,723 Recreation Programs 1,321,471 1,269,179 1,059,009 1,273,007 - Operating grants and contributions 1,061,698 994,607 1,103,639 1,105,851 - Capital grants and contributions 483,425 1,066,769 1,003,057 460,688 712,827 Total business-type activities program revenue: 25,269,587 26,330,473 24,755,868 23,845,225 21,094,135 Total primary government program revenues 39,663,538 45,422,105 39,736,679 38,163,438 39,493,872 Governmental activities (54,067,223) (42,336,223) (46,759,352) (47,585,931) (43,277,498) Business-type activities 1,529,694 4,710,693 4,544,244 3,611,100 3,519,398 Total net revenue(expense) $(52,537,529) $(37,625,530) $(42,215,108) $(43,974,831) $(39,758,100) 157 City of Encinitas Changes in Net Position (Continued) Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Years 2020 2019 2018 2017 2016 General Revenues and Other Changes in Net Position: Governmental activities: Taxes Property and documentary transfer taxes $ 51,251,719 $ 49,237,265 $ 46,311,814 $ 43,494,220 $ 41,210,485 Sales taxes 13,744,880 13,694,647 13,252,053 12,549,609 14,166,771 Transient occupancy taxes 2,383,060 2,775,771 2,562,484 2,216,145 2,018,024 Franchise taxes 2,539,090 2,571,367 2,587,443 2,545,854 2,794,144 Intergovernmental revenues 182,449 185,380 97,163 251,919 388,876 Investment income 3,030,295 2,613,728 958,172 770,634 611,350 Other general revenues 804,984 827,490 452,275 961,475 956,824 Gain/(Loss)on sale of assets 36,013 12,739 61,400 1,937 8,865 Impairment loss on capital assets - - - (2,088,668) - Transfers (18,666) (16,644) 20,018 - 399,112 Total governmental activities 73,953,824 71,901,743 66,302,822 60,703,125 62,554,451 Business-type activities: Property taxes 1,159,681 1,110,248 1,030,168 959,873 906,106 Intergovernmental-unrestricted - - - (31,828) - Investment income 1,716,759 1,393,446 (446,745) 6,925 (63,690) Other general revenues 400,228 1,306,547 1,247,955 - 153,667 Gain/(Loss)on sale of assets - 614,324 8,285 216,146 4,010 Transfers 18,666 16,644 (20,018) - (399,112) Total business-type activities 3,295,334 4,441,209 1,819,645 1,151,116 600,981 Total primary government 77,249,158 76,342,952 68,122,467 61,854,241 63,155,432 Changes in Net Position Government activities 3,914,179 9,638,656 4,671,586 1,798,457 8,063,964 Business-type activities 5,487,292 6,152,730 8,145,634 4,893,437 3,803,523 Total primary government $ 9,401,471 $ 15,791,386 $ 12,817,220 $ 6,691,894 $ 11,867,487 The City reports recreation programs as a business-type activity beginning in Fiscal Year 2011-12. Source: Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2020 158 City of Encinitas Changes in Net Position (Continued) Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Years 2015 2014 2013 2012 2011 General Revenues and Other Changes in Net Position: Governmental activities: Taxes Property and documentary transfer taxes $ 38,508,558 $ 36,414,507 $ 34,974,578 $ 32,788,129 $ 32,292,988 Sales taxes 12,569,119 12,067,360 11,585,145 10,613,188 10,244,506 Transient occupancy taxes 1,828,116 1,570,459 1,491,998 1,413,926 1,276,980 Franchise taxes 2,761,335 2,614,844 2,323,616 2,144,162 2,108,420 Intergovernmental revenues 814,337 479,026 541,079 635,097 1,488,770 Investment income 880,989 705,849 552,512 387,066 657,796 Other general revenues 1,567,168 1,257,002 1,596,026 1,780,543 1,695,520 Gain/(Loss)on sale of assets 107,177 (48,320) - - - Impairment loss on capital assets - - - - - Transfers (36,068) (33,545) 1,809,656 (668,877) - Total governmental activities 59,000,731 55,027,182 54,874,610 49,093,234 49,764,980 Business-type activities: Property taxes 834,994 787,242 749,378 725,551 706,175 Intergovernmental-unrestricted - - 189,676 - - Investment income (60,169) 357,357 3,118 188,259 508,089 Other general revenues 63,768 63,768 - - 401,013 Gain/(Loss)on sale of assets 18,085 (187,942) - - - Transfers 36,068 33,545 (1,809,656) 668,877 - Total business-type activities 892,746 1,053,970 (867,484) 1,582,687 1,615,277 Total primary government 59,893,477 56,081,152 54,007,126 50,675,921 51,380,257 Changes in Net Position Government activities 4,933,508 12,690,959 8,115,258 1,507,303 6,487,482 Business-type activities 2,422,440 5,764,663 3,676,760 5,193,787 5,134,675 Total primary government $ 7,355,948 $ 18,455,622 $ 11,792,018 $ 6,701,090 $ 11,622,157 The City reports recreation programs as a business-type activity beginning in Fiscal Year 2011-12. Source: Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2020 159 City of Encinitas Fund Balances of Governmental Funds Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Years 2020 2019 2018 2017 2016 General fund: Reserved $ - $ - $ - $ - $ - Unreserved,designated - - - - - Unreserved, undesignated - - - - - Nonspendable 287,832 266,828 267,203 727,094 1,109,424 Restricted 167,265 383 251 1,472,372 - Committed 16,208,039 15,545,889 14,691,792 13,937,399 - Assigned - - - - - Unassigned 10,542,872 8,609,231 12,334,212 9,514,727 31,775,120 Total general fund $ 27,206,008 24,422,331 27,293,458 25,651,592 32,884,544 All other governmental funds: Reserved - - - - - Unreserved,designated - - - - - Nonspendable - - - 296,234 287,756 Restricted 36,105,367 36,435,142 34,724,312 30,282,525 4,305,652 Committed 18,352,366 24,412,850 17,760,602 18,998,215 1,626,219 Assigned - - - - 24,776,682 Unassigned (13,240,690) (15,438,135) (14,945,248) (12,183,589) - Total all other governmental funds 41,217,043 45,409,857 37,539,666 37,393,385 30,996,309 Total all governmental funds $ 68,423,051 $ 69,832,188 $ 64,833,124 $ 63,044,977 $ 63,880,853 (1)GASB No.54 required changes in reporting categories for fund balances and was implemented in Fiscal Year 2010-11. Source:Comprehensive Annual Financial Report Fiscal Year Ended June 30,2020 160 City of Encinitas Fund Balances of Governmental Funds (Continued) Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Years 2015 2014 2013 2012 2011(1) General fund: Reserved $ $ - $ - $ - $ - Unreserved,designated - - - - Unreserved,undesignated - - - - Nonspendable 1,535,601 2,052,250 1,980,075 2,868,533 2,648,338 Restricted 3,009,269 4,079 7,996,400 - 633,245 Committed 8,266,796 8,136,886 9,847,719 19,371,624 42,274,327 Assigned 561,762 561,762 561,762 - - Unassigned 28,029,019 25,151,131 21,160,822 17,964,935 1,850,582 Total general fund 41,402,447 35,906,108 41,546,778 40,205,092 47,406,492 All other governmental funds: Reserved - - - - - Unreserved,designated - - - - - Nonspendable - 1,565 - - 145,686 Restricted 18,741,022 17,358,060 13,036,985 13,471,421 8,290,163 Committed - - - - 7,570,021 Assigned - - 2,135,100 2,169,209 - Unassigned - - - - - Total all other governmental funds 18,741,022 17,359,625 15,172,085 15,640,630 16,005,870 Total all governmental funds $ 60,143,469 $ 53,265,733 $ 56,718,863 $ 55,845,722 $ 63,412,362 (1)GASB No.54 required changes in reporting categories for fund balances and was implemented in Fiscal Year 2010-11. Source: Comprehensive Annual Financial Report Fiscal Year Ended June 30,2020 161 City of Encinitas Changes in Fund Balances of Governmental Funds Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Years 2020 2019 2018 2017 2016 Revenues: Taxes and assessments $ 71,064,561 $ 69,403,416 $ 65,845,166 $ 61,934,421 $ 61,325,308 Intergovernmental 9,208,454 7,161,806 6,966,193 6,436,599 6,689,475 Charges for services 6,629,818 7,383,043 7,280,374 6,688,958 6,585,518 Fines,forfeitures,and penalties 655,032 794,237 704,216 850,153 889,388 Use of money and property 3,729,566 3,437,985 1,126,652 1,285,049 1,222,730 Other 3,750,230 3,089,553 2,566,551 2,215,452 2,804,043 Total Revenues 95,037,661 91,270,040 84,489,152 79,410,632 79,516,462 Expenditures: Current: General government 13,358,381 12,783,602 12,213,808 10,017,430 9,288,227 Public safety 32,928,307 31,494,405 29,478,104 27,724,959 26,976,136 Public works 7,392,741 5,875,143 5,033,316 6,351,537 6,305,340 Planning and building 6,619,723 6,570,840 6,017,914 5,110,298 5,159,777 Engineering services 3,324,903 3,851,316 3,504,336 4,368,601 4,298,563 Parks and recreation 7,959,300 7,954,529 7,879,881 6,610,308 6,366,337 Capital outlay 18,749,583 11,925,637 12,933,995 12,230,552 10,799,083 Debt service: Principal 2,025,045 1,949,298 2,128,758 2,853,417 2,783,268 Interest and fiscal charges 1,695,251 1,774,333 1,899,328 2,077,770 2,372,231 Bond issuance costs - - - - - Total expenditures 94,053,234 84,179,103 81,089,440 77,344,872 74,348,962 Excess(deficiency)of revenues over(under)expenditures 984,427 7,090,937 3,399,712 2,065,760 5,167,500 Other Financing Sources(Uses): Transfers in 20,729,350 25,249,787 30,412,724 35,159,839 44,550,246 Transfers out (23,122,914) (27,341,660) (32,024,289) (36,650,845) (45,577,444) Proceeds from capital lease - Proceeds from sale of property - 15,645,000 Issuance of debt 11,955,000 115 Premium on debt 1,360,284 772,212 Deposit to escrow for bond refunding (14,725,914) (16,820,243) Bond discounts Total other financing sources(uses) (2,393,564) (2,091,873) (1,611,565) (2,901,636) (1,430,114) Net change in fund balances $ (1,409,137) $ 4,999,064 $ 1,788,147 $ (835,876) $ 3,737,386 Debt service as a percentage of noncapital expenditures 4.6% 4.8% 5.4% 6.9% 7.5% Source:Comprehensive Annual Financial Report Fiscal Year Ended June 30,2020 162 City of Encinitas Changes in Fund Balances of Governmental Funds (Continued) Last Ten Fiscal Years (Accrual Basis of Accounting) Fiscal Years 2015 2014 2013 2012 2011 Revenues: Taxes and assessments $ 56,825,628 $ 53,830,193 $ 51,528,542 $ 49,089,142 $ 48,100,768 Intergovernmental 7,022,485 5,025,480 8,520,220 6,537,855 8,369,571 Charges for services 5,315,721 5,479,847 4,450,756 4,406,737 6,376,261 Fines,forfeitures,and penalties 802,936 632,776 611,029 657,364 856,392 Use of money and property 899,807 724,310 572,481 639,676 657,798 Other 2,456,996 3,654,621 2,141,439 2,715,266 3,803,927 Total Revenues 73,323,573 69,347,227 67,824,467 64,046,040 68,164,717 Expenditures: Current: General government 9,362,214 9,109,412 9,430,487 9,277,443 10,155,732 Public safety 24,902,920 24,164,979 23,655,367 22,853,121 22,107,692 Public works 6,682,424 6,281,800 6,057,646 5,843,228 6,051,253 Planning and building 5,082,589 4,716,315 4,238,882 4,655,501 5,539,148 Engineering services 4,162,630 3,949,352 3,716,994 3,804,813 3,646,306 Parks and recreation 5,091,224 4,672,683 4,377,047 4,333,303 5,293,664 Capital outlay 18,440,036 14,548,894 18,836,006 12,803,379 8,559,193 Debt service: Principal 2,730,686 2,661,976 2,295,614 2,359,932 2,481,223 Interest and fiscal charges 2,170,164 1,937,144 2,050,068 1,872,773 2,056,501 Bond issuance costs - - - - 395,404 Total expenditures 78,624,887 72,042,555 74,658,111 67,803,493 66,286,116 Excess(deficiency)of revenues over(under)expenditures (5,301,314) (2,695,328) (6,833,644) (3,757,453) 1,878,601 Other Financing Sources(Uses): Transfers in 24,514,293 20,570,966 23,363,240 17,661,946 13,133,224 Transfers out (25,509,616) (21,328,768) (24,208,239) (18,354,656) (13,133,224) Proceeds from capital lease - - 555,384 599,639 - Proceeds from sale of property 13,174,373 - 7,865,000 - 19,530,000 Issuance of debt - - - - - Premium on debt - - 131,400 - 215,515 Deposit to escrow for bond refunding - - - - - Bond discounts - - - - (19,040,000) Total other financing sources(uses) 12,179,050 (757,802) 7,706,784 (93,071) 705,515 Net change in fund balances $ 6,877,736 $ (3,453,130) $ 873,140 $ (3,850,524) $ 2,584,116 Debt service as a percentage of noncapital expenditures 7.6% 7.8% 7.3% 7.2% 7.6% Source: Comprehensive Annual Financial Report Fiscal Year Ended June 30,2020 163 City of Encinitas Assessed Value of Taxable Property Last Ten Fiscal Years (In thousands of dollars) Total Net Taxable Fiscal Year Residential Commercial Industrial All Other Assessed Value Total Direct Ended June 30 Property Property Property Property(1) (2) Tax Rate%(3) 2020 $ 15,019,491 $ 1,624,044 $ 44,910 $ 471,498 $ 17,159,943 0.23819% 2019 14,191,006 1,546,386 44,994 590,531 16,372,917 0.23769% 2018 13,453,667 1,436,502 42,618 433,992 15,366,779 0.23749% 2017 12,622,536 1,390,398 41,805 417,474 14,472,213 0.24019% 2016 11,864,809 1,359,004 41,187 437,972 13,702,972 0.23978% 2015 11,073,358 1,323,412 39,665 433,569 12,870,004 0.24534% 2014 10,393,910 1,300,287 39,501 413,663 12,147,361 0.24570% 2013 10,030,357 1,247,785 37,766 408,020 11,723,928 0.23974% 2012 9,886,681 1,154,923 34,944 421,308 11,497,856 0.23866% 2011 9,767,731 1,110,811 36,036 427,619 11,342,197 0.23472% Taxable Assessed Value $16,000,000 (In thousands) $14,000,000 $12,000,000 $10,000,000 $8,000,000 •Residential Commercial $6,000,000 - .Industrial $4,000,000 $2,000,000 $0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Fiscal Years (1)All Other Property includes the following categories:dry farm,institutional,irrigated,recreational,vacant land, exempt and unsecured properties. (2)The"total net taxable assessed value"is net of tax-exempt property. Homeowners'exemptions are not included in the totals shown. (3)The total direct tax rate is the City's proportionate share of Proposition 13 property taxes collected within the tax area. Source: HdL Companies 164 City of Encinitas Principal Property Taxpayers Current Fiscal Year and Nine Years Ago 2020 2011 Taxable %of Total Taxable %of Total Assessed City Assessed Assessed City Assessed Taxpayer Secured Value Rank Secure Value Secured Value Rank Secure Value TRC Encinitas Village LLC $ 102,502,299 1 0.60% $ - - - Collwood Pines Apartments 81,811,027 2 0.48% 54,989,195 1 0.49% Belmont Village 60,651,170 3 0.35% 34,888,651 3 0.31% Pacifico Encinitas Apartment 53,937,600 4 0.31% - - - Encinitas Town Center Association 39,647,819 5 0.23% 32,047,374 7 0.28% NCHC3 LLC 37,437,936 6 0.22% - - - Weingarten Nostat Inc 36,726,296 7 0.21% - - - Encinitas MarketPlace LLC 32,402,500 8 0.19% - - - SS L Landlord LLC 26,415,600 9 0.15% - - - Mission Ridge LLC 25,776,141 10 0.15% - - - Vons Companies Inc. 25,021,750 11 0.15% 23,656,410 10 0.21% Paul H Meardon Trust 24,778,879 12 0.14% - - - RPG Pacifica Station LLC 24,480,000 13 0.14% - - - Keith B.and Sara S. Harrison 22,998,798 14 0.13% 13,783,984 24 0.12% Shea Homes LP 22,399,779 15 0.13% - - RAF Pacifica Encinitas 21,450,000 16 0.13% - - Quail Pointe Apartment Homes LP 21,420,297 17 0.12% 18,521,307 16 0.16% Sterling Family Trust 19,859,936 18 0.12% 17,088,066 18 0.15% Plenc El Camino LLC 19,565,707 19 0.11% 16,762,733 20 0.15% Los Angeles Fitness Int'I LLC 19,555,774 20 0.11% - - Home Depot USA Inc. 18,283,005 21 0.11% 30,141,290 9 0.27% Encinitas Beach Hotel Venture 17,079,828 22 0.10% - - Camino Village LLC 16,325,186 23 0.10% Essex Heights LLC 16,264,417 24 0.09% Golden Eagle Annuity Invest LP 15,994,271 25 0.09% - - PK III Encinitas Marketplace LP - - 39,923,138 2 0.35% John W.and Jeanne M.Skow - - 33,184,744 4 0.29% North Coast Health Center LLC - - 32,167,480 5 0.28% Lofts at Moonlight Beach LLC - - 32,157,075 6 0.28% WRI El Camino LP - - 31,738,510 8 0.28% Urschel Laboratories Inc. - - 22,349,242 11 0.20% ASN Encinitas LLC - - 22,340,551 12 0.20% North Coast Business Park - - 21,902,917 13 0.19% SDCC Properties - - 21,796,618 14 0.19% KSL Encinitas Resort Corporation - - 21,485,238 15 0.19% Encinitas Plaza LLC - - 17,237,911 17 0.15% Scripps Health - - 17,027,828 19 0.15% Hughes Encinitas Limited - - 16,359,579 21 0.14% Encinitas Terraces LLC - - 14,023,187 22 0.12% Terramar Retail Centers LLC - - 13,990,000 23 0.12% Bellflower Capital LP - - 13,606,399 25 0.12% 802,786,015.00 4.66% $ 613,169,427 5.29% Source: HdL Companies 165 City of Encinitas Property Tax Levies and Collections Last Ten Fiscal Years Collected within the Fiscal Taxes Levied Fiscal Year of Levy Collections Total Collections to Date Year Ended for the Percent in Subsequent Percentage of June 30 Fiscal Year Amount of Levy Years Amount Levy 2020 $ 55,190,058 $ 54,143,122 98.10% $ - $ 54,143,122 98.10% 2019 53,427,075 52,652,248 98.55% 540,612 52,652,248 98.55% 2018 50,804,445 50,172,791 98.76% 171,827 50,344,617 99.09% 2017 48,540,436 47,871,961 98.62% 330,704 48,202,665 99.30% 2016 34,443,972 33,961,174 98.60% 235,730 34,196,904 99.28% 2015 32,251,814 31,755,994 98.46% 168,077 31,924,071 98.98% 2014 30,550,301 30,009,574 98.23% 133,208 30,142,782 98.67% 2013 29,207,237 28,712,036 98.30% 157,287 28,869,323 98.84% 2012 28,100,611 27,540,858 98.01% 238,418 27,779,276 98.86% 2011 27,541,487 26,888,921 97.63% 548,636 27,437,557 99.62% Source:County of San Diego Auditor and Controller: Property Tax Apportionment 166 UNII This page intentionally left blank. 167 City of Encinitas Direct and Overlapping Property Tax Rates Last Ten Fiscal Years Fiscal Years 2020 2019 2018 2017 2016 City of Encinitas Basic Rate 0.23819 0.23769 0.23695 0.23644 0.23978 City of Encinitas Total Direct Rate(1) 0.23819 0.23769 0.23695 0.23644 0.23978 Overlapping Rates: (2) City of Encinitas 0.24020 0.24020 0.24020 0.24020 0.24020 Encinitas Landscape&Lighting District 0.02100 0.02100 0.02100 0.02100 0.02100 Autistic Pupils Minors Elementary 0.00000 0.00000 0.00000 0.00000 0.00000 Autistic Pupils Minors High 0.00000 0.00000 0.00000 0.00000 0.00000 Cardiff, Encinitas Elementary 0.24870 0.24870 0.24870 0.24870 0.24870 Children's Institutions Tuition 0.00107 0.00107 0.00107 0.00107 0.00107 County General 0.08020 0.08020 0.08020 0.08020 0.08020 County Library 0.01969 0.01969 0.01969 0.01969 0.01969 County School Service 0.00643 0.00643 0.00643 0.00643 0.00643 County School Service-Capital Outlay 0.00161 0.00161 0.00161 0.00161 0.00161 County Service Area No. 17 0.00251 0.00251 0.00251 0.00251 0.00251 CWA San Dieguito Water District,OMWD 0.02510 0.02510 0.02510 0.02510 0.02510 Development Centers for Handicapped Elementary 0.00000 0.00000 0.00000 0.00000 0.00000 Development Centers for Handicapped High 0.00000 0.00000 0.00000 0.00000 0.00000 Educable Mentally Retarded Minors 0.00161 0.00161 0.00161 0.00161 0.00161 Educational Revenue Augmentation Fund 0.08620 0.08620 0.08620 0.08620 0.08620 Mira Costa Community College 0.08150 0.08150 0.08150 0.08150 0.08150 Physically Handicapped Minors Elementary 0.00268 0.00268 0.00268 0.00268 0.00268 Physically Handicapped Minors High 0.00268 0.00268 0.00268 0.00268 0.00268 Regional Occupational Centers 0.00375 0.00375 0.00375 0.00375 0.00375 San Dieguito Union High 0.13610 0.13610 0.13610 0.13610 0.13610 San Dieguito Water District 0.03590 0.03590 0.03590 0.03590 0.03590 Trainable Mentally Retarded Minors Elementary 0.00161 0.00161 0.00161 0.00161 0.00161 Trainable Mentally Retarded Minors High 0.00161 0.00161 0.00161 0.00161 0.00161 Oceanside(19/85001),Vista(19/85701)Projects 0.00000 0.00000 0.00000 0.00000 0.00000 Total Prop 13 Rate(3) 1.00000 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) General Fund tax rates are representative and based upon the direct and overlapping rates for the largest General Fund tax 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 one percent 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 two percent). With few exceptions,property is only reassessed at the time that it was 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. 168 City of Encinitas Direct and Overlapping Property Tax Rates (Continued) Last Ten Fiscal Years Fiscal Years 2015 2014 2013 2012 2011 City of Encinitas Basic Rate 0.24534 0.24002 0.23974 0.23866 0.23472 City of Encinitas Total Direct Rate(1) 0.24534 0.24002 0.23974 0.23866 0.23472 Overlapping Rates: (2) City of Encinitas 0.24020 0.24020 0.24020 0.24020 0.26648 Encinitas Landscape&Lighting District 0.02100 0.02100 0.02100 0.02100 0.01596 Autistic Pupils Minors Elementary 0.00000 0.00000 0.00000 0.00000 0.00009 Autistic Pupils Minors High 0.00000 0.00000 0.00000 0.00000 0.00009 Cardiff, Encinitas Elementary 0.24870 0.24870 0.24870 0.24870 0.26240 Children's Institutions Tuition 0.00107 0.00107 0.00107 0.00107 0.00146 County General 0.08020 0.08020 0.08020 0.08020 0.07570 County Library 0.01969 0.01969 0.01969 0.01969 0.01995 County School Service 0.00643 0.00643 0.00643 0.00643 0.00687 County School Service-Capital Outlay 0.00161 0.00161 0.00161 0.00161 0.00173 County Service Area No. 17 0.00251 0.00251 0.00251 0.00251 0.00291 CWA San Dieguito Water District,OMWD 0.02510 0.02510 0.02510 0.02510 0.00344 Development Centers for Handicapped Elementary 0.00000 0.00000 0.00000 0.00000 0.00043 Development Centers for Handicapped High 0.00000 0.00000 0.00000 0.00000 0.00044 Educable Mentally Retarded Minors 0.00161 0.00161 0.00161 0.00161 0.00196 Educational Revenue Augmentation Fund 0.08620 0.08620 0.08620 0.08620 0.08570 Mira Costa Community College 0.08150 0.08150 0.08150 0.08150 0.08590 Physically Handicapped Minors Elementary 0.00268 0.00268 0.00268 0.00268 0.00303 Physically Handicapped Minors High 0.00268 0.00268 0.00268 0.00268 0.00304 Regional Occupational Centers 0.00375 0.00375 0.00375 0.00375 0.00438 San Dieguito Union High 0.13610 0.13610 0.13610 0.13610 0.14400 San Dieguito Water District 0.03590 0.03590 0.03590 0.03590 0.00992 Trainable Mentally Retarded Minors Elementary 0.00161 0.00161 0.00161 0.00161 0.00197 Trainable Mentally Retarded Minors High 0.00161 0.00161 0.00161 0.00161 0.00198 Oceanside(19/8500 1),Vista(19/85701)Projects 0.00000 0.00000 0.00000 0.00000 0.00017 Total Prop 13 Rate(3) 1.00000 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) General Fund tax rates are representative and based upon the direct and overlapping rates for the largest General Fund tax 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 one percent 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 two percent). With few exceptions, property is only reassessed at the time that it was 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. 169 City of Encinitas Direct and Overlapping Property Tax Rates (Continued) Last Ten Fiscal Years Fiscal Years 2020 2019 2018 2017 2016 Gen Bond Cardiff 2000A 0.03727 0.03737 0.03028 - - Gen Bond Cardiff 2000 Election,2010 Ref. Bonds - - - 0.03192 0.03324 MW D D/S Remainder of SDCWA 1501999 0.00350 0.00350 0.00350 0.00350 0.00350 Total Voter Approved Rate 0.04077 0.04087 0.03378 0.03542 0.03674 Total Tax Rate 1.04077 1.04087 1.03378 1.03542 1.03674 Source: HdL Companies;County of San Diego Office of Property Tax Services 170 City of Encinitas Direct and Overlapping Property Tax Rates (Continued) Last Ten Fiscal Years Fiscal Years 2015 2014 2013 2012 2011 Gen Bond Cardiff 2000A - - - - - Gen Bond Cardiff 2000 Election,2010 Ref. Bonds 0.03554 0.03386 0.03458 0.03489 0.03715 MWD D/S Remainder of SDCWA 1501999 0.00350 0.00350 0.00350 0.00370 0.00370 Total Voter Approved Rate 0.03904 0.03736 0.03808 0.03859 0.04085 Total Tax Rate 1.03904 1.03736 1.03808 1.03859 0.04085 Source: HdL Companies;County of San Diego Office of Property Tax Services 171 City of Encinitas Ratios of Outstanding Debt by Type Last Ten Fiscal Years Governmental Activities Fiscal Year Ended Total Governmental June 30 Bonded Debt Capital Leases Activities 2020 $ 42,897,904 $ 890,053 $ 43,787,957 2019 44,899,354 1,220,867 46,120,221 2018 46,830,807 1,633,559 48,464,366 2017 48,953,813 2,205,282 51,159,095 2016 52,933,882 2,050,840 54,984,722 2015 55,431,687 2,513,713 57,945,400 2014 44,546,848 2,964,400 47,511,248 2013 46,736,383 3,446,376 50,182,759 2012 40,645,759 3,281,606 43,927,365 2011 42,641,535 3,036,899 45,678,434 (1)Debt per Capita is calculated by dividing the total primary government amount by the City population shown on the Demographic and Economic statistical page. Source:Comprehensive Annual Financial Report Fiscal Year Ended June 30,2020 172 City of Encinitas Ratios of Outstanding Debt by Type (Continued) Last Ten Fiscal Years Business-type Activities Fiscal Year Ended Water Bonds CSD Note EHA Note Total Business- Total Primary Debt Per June 30 and Notes Payable Payable type Activities Government Capita(1) 2020 $ 5,992,487 $ 11,882,425 $ 1,008,914 $ 18,883,826 $ 62,671,783 1,008 2019 7,201,858 12,226,938 1,091,629 20,520,425 66,640,646 1,051 2018 8,376,231 12,960,295 1,173,058 22,509,584 70,973,950 1,124 2017 9,510,602 1,559,300 1,253,177 12,323,079 63,482,174 1,019 2016 10,609,973 2,205,893 1,331,410 14,147,276 69,131,998 1,117 2015 11,669,345 2,833,824 1,391,715 15,894,884 73,840,284 1,200 2014 13,645,000 3,447,591 1,444,731 18,537,322 66,048,570 1,079 2013 14,670,000 4,045,028 1,495,415 20,210,443 70,393,202 1,162 2012 15,660,000 4,625,969 1,544,434 21,830,403 65,757,768 1,090 2011 16,620,000 5,300,000 1,591,681 23,511,681 69,190,115 1,147 (1)Debt per Capita is calculated by dividing the total primary government amount by the City population shown on the Demographic and Economic statistical page. Source:Comprehensive Annual Financial Report Fiscal Year Ended June 30,2020 173 City of Encinitas Ratios of General Bonded Debt Outstanding Last Ten Fiscal Years Outstanding General Bonded Debt Fiscal Certificates of Participation Percentage Year Ended and Assessed of Assessed Per June 30 Lease Revenue Bonds Valuation(1) Value Capita 2020 $ 42,897,904 $ 17,159,943,000 0.25% 690 2019 44,899,354 16,372,917,000 0.27% 708 2018 46,830,807 15,366,779,000 0.30% 741 2017 48,953,813 14,472,213,000 0.34% 786 2016 52,933,882 13,702,972,000 0.39% 855 2015 55,431,687 12,870,004,000 0.43% 901 2014 44,546,848 12,147,361,000 0.37% 728 2013 46,736,383 11,723,928,000 0.40% 772 2012 40,645,759 11,497,856,000 0.35% 674 2011 42,641,535 11,342,197,000 0.38% 712 Notes: Details regarding the City's outstanding debt can be found in the Notes to the Basic 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 property 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 of the Statistical Section. Source: Comprehensive Annual Financial Report Fiscal Year Ended June 30,2020 174 City of Encinitas Schedule of Direct and Overlapping Bonded Debt June 30, 2020 FY 2019-20 Assessed Valuation: $17,161,621,182 City's Share of Total Debt Applicable Overlapping Debt June 30,2020 % (1) June 30,2020 OVERLAPPING TAX AND ASSESSMENT DEBT: Metropolitan Water District $ 37,300,000 0.555% $ 207,015 Mira Costa Community College District 71,270,000 15.044% 10,721,859 Cardiff School District 23,899,573 100.000% 23,899,573 Encinitas Union School District 46,395,383 68.135% 31,611,494 San Dieguito Union High School 347,365,000 24.779% 86,073,573 San Dieguito Union High School District Community Facilities Districts 37,230,000 31.492% 11,724,628 City of Encinitas Community Facilities District No. 1 22,300,000 100.000% 22,300,000 Olivenhain Municipal Water District,Assessment District No.96-1 7,130,000 26.062% 1,858,221 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $ 188,396,363 DIRECT AND OVERLAPPING GENERAL FUND DEBT San Diego County General Fund Obligations $231,350,000 3.085% $ 7,137,148 San Diego County Pension Obligations 456,040,000 3.085% 14,068,834 San Diego County Superintendent of Schools Obligations 9,350,000 3.085% 288,448 San Dieguito Union High School District General Fund Obligations 12,730,000 24.779% 3,154,367 City of Encinitas Bonded Debt 41,290,000 100.000% 41,290,000 City of Encinitas Bond Premiums and Discounts 1,607,904 100.000% 1,607,904 City of Encinitas Capital Leases 890,053 100.000% 890,053 TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $ 68,436,754 TOTAL DIRECT DEBT $ 43,787,957 TOTAL OVERLAPPING DEBT $ 213,045,160 COMBINED TOTAL DEBT $ 256,833,117 (2) (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 districts'assessed value that is within the City divided by the districts'total taxable assessed value. (2) Excludes tax and revenue anticipation notes,enterprise revenue, mortgage revenue,and non-bonded capital lease oblig Ratios to FY 2019-20 Assessed Valuation: Total Overlapping Tax and Assessment Debt.................................1.10% Total Direct Debt ($43,787,957)................................................ 0.26% Combined Total Debt.................................................................. 1.50% Source:County of San Diego Assessor 175 City of Encinitas Legal Debt Margin Information Last Ten Fiscal years (In thousands) Fiscal Years 2020 2019 2018 2017 2016 Assessed valuation $ 17,159,943 $ 16,372,917 $ 15,366,779 $ 14,472,213 $ 13,702,972 Conversion percentage equal 25% 25% 25% 25% 25% to 25%of assessed valuation Adjusted assessed valuation 4,289,986 4,093,229 3,841,695 3,618,053 3,425,743 Debt limit percentage 15% 15% 15% 15% 15% Debt limit 643,498 613,984 576,254 542,708 513,861 Total net debt applicable to limit: 42,898 44,899 46,831 48,954 52,934 Legal debt margin $ 600,600 $ 569,085 $ 529,423 $ 493,754 $ 460,927 Total debt applicable to the limit as a percentage of debt limit 6.67% 7.31% 8.13% 9.02% 10.30% The Government Code of the State of California provides for a legal debt limit of 15 percent of gross assessed valuation. However,this provision was enacted when assessed valuation was based upon 25 percent of market value. Effective with Fiscal Year 1981-82,each parcel is assessed at 100 percent of 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 percent 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 section. Source: HdL Companies 176 City of Encinitas Legal Debt Margin Information (Continued) Last Ten Fiscal years (In thousands) Fiscal Years 2015 2014 2013 2012 2011 Assessed valuation $ 12,870,004 $ 12,147,361 $ 11,723,928 $ 11,497,856 $ 11,342,197 Conversion percentage equal 25% 25% 25% 25% 25% to 25%of assessed valuation Adjusted assessed valuation 3,217,501 3,036,840 2,930,982 2,874,464 2,835,549 Debt limit percentage 15% 15% 15% 15% 15% Debt limit 482,625 455,526 439,647 431,170 425,332 Total net debt applicable to limit: 55,432 44,547 46,736 40,646 42,641 Legal debt margin $ 427,193 $ 410,979 $ 392,911 $ 390,524 $ 382,691 Total debt applicable to the limit as a percentage of debt limit 11.49% 9.78% 10.63% 9.43% 10.03% The Government Code of the State of California provides for a legal debt limit of 15 percent of gross assessed valuation. However,this provision was enacted when assessed valuation was based upon 25 percent of market value. Effective with Fiscal Year 1981-82,each parcel is assessed at 100 percent of 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 percent 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 section. Source: HdL Companies 177 City of Encinitas Historical Debt Service Coverage Last Ten Fiscal Years San Diequito Water District 2020 2019 2018 2017 2016 Revenues: Operating revenues-including connection fees $17,121,649 $15,961,300 $17,219,494 $15,142,544 $14,852,061 Non-operating revenues 1,902,231 2,307,498 1,092,337 1,048,764 1,013,297 Gross Revenues 19,023,880 18,268,798 18,311,831 16,191,308 15,865,358 Total Operating&Non-Operating Expenses 16,429,284 16,541,314 15,198,929 14,263,288 13,800,671 Net Income 2,594,596 1,727,484 3,112,902 1,928,020 2,064,687 Add: Interest expense 247,063 292,354 328,050 366,740 412,108 Depreciation and amortization expense 1,830,492 2,208,775 1,848,913 978,627 1,514,716 Net Revenues Available for Debt Service 4,672,151 4,228,613 5,289,865 3,273,387 3,991,511 Less:Debt Service Paid 2004 Water Revenue Refunding Bonds-Interest Charges - - - - - 2004 Water Revenue Refunding Bonds-Principal Payments - - - - - 2007 Note Payable to Financing Authority-Interest Charges 133,619 152,919 171,619 191,244 211,144 2007 Note Payable to Financing Authority-Principal Payments 490,000 475,000 455,000 440,000 415,000 2014 Water Revenue Refunding Bonds-Interest Charges 126,500 148,775 167,225 185,075 202,400 2014 Water Revenue Refunding Bonds-Principal Payments 645,000 625,000 605,000 585,000 570,000 Total Debt Service $ 1,395,119 $ 1,401,694 $ 1,398,844 $ 1,401,319 $ 1,398,544 Coverage by Net Revenues Available for Debt Service 335% 302% 378% 234% 285% Debt service coverage requirement is a minimum 115 percent of net revenue including connection fees. The above schedules include connection fees in operating revenues. Cardiff Sanitary Division 2020 2019 2018 2017 2016 Revenues: Operating revenues-including connection fees(1) $ 5,335,578 $ 5,013,316 $ 5,081,021 $ 5,006,574 $ 4,862,274 Non-operating revenues 581,284 496,059 162,951 140,095 149,151 Gross Revenues 5,916,862 5,509,375 5,243,972 5,146,669 5,011,425 Total Operating&Non-Operating Expenses 3,797,174 3,548,203 3,578,417 3,380,180 3,949,288 Net Income 2,119,688 1,961,172 1,665,555 1,766,489 1,062,137 Add: Interest expense 451,938 472,324 491,983 71,727 91,757 Depreciation and amortization expense 443,689 389,390 386,019 754,400 1,303,272 Net Revenues Available for Debt Service 3,015,315 2,822,886 2,543,557 2,592,616 2,457,166 Less:Debt Service 2003 Note Payable to SEJPA-Interest Charges - - - - - 2003 Note Payable to SEJPA-Principal Payments - - - - - 2011 Note Payable to SEJPA-Interest Charges 3,234 29,788 55,402 79,889 91,757 2011 Note Payable to SEJPA-Principal Payments 57,500 663,846 640,352 612,192 593,530 2017 Note Payable to SEJPA-Interest Charges 451,388 451,388 294,656 - - 2017 Note Payable to SEJPA-Principal Payments 217,500 - - - - TotalDebtService $ 729,622 $ 1,145,021 $ 990,410 $ 692,081 $ 685,287 Coverage by Net Revenues Available for Debt Service 413% 247% 257% 375% 359% Debt service coverage requirement is a minimum 110 percent of net revenue including connection fees. The above schedules include connection fees in operating revenues. Source:City of Encinitas Finance Department 178 City of Encinitas Historical Debt Service Coverage (Continued) Last Ten Fiscal years San Dieguito Water District 2015 2014 2013 2012 2011 Revenues: Operating revenues-including connection fees $ 15,152,433 $15,715,575 $13,789,636 $ 13,170,422 $12,574,450 Non-operating revenues 927,526 827,676 869,568 813,610 817,872 Gross Revenues 16,079,959 16,543,251 14,659,204 13,984,032 13,392,322 Total Operating&Non-Operating Expenses 15,481,543 14,066,485 12,198,228 12,448,911 11,614,631 Net Income 598,416 2,476,766 2,460,976 1,535,121 1,777,691 Add: Interest expense 475,775 622,075 657,963 698,908 725,936 Depreciation and amortization expense 2,271,907 1,490,806 1,476,044 1,294,904 1,196,007 Net Revenues Available for Debt Service 3,346,098 4,589,647 4,594,983 3,528,933 3,699,634 Less:Debt Service Paid 2004 Water Revenue Refunding Bonds-Interest Charges 144,720 380,731 408,906 433,950 452,244 2004 Water Revenue Refunding Bonds-Principal Payments 665,000 640,000 615,000 595,000 575,000 2007 Note Payable to Financing Authority-Interest Charges 224,994 241,344 256,744 270,352 281,494 2007 Note Payable to Financing Authority-Principal Payments 405,000 385,000 375,000 365,000 350,000 2014 Water Revenue Refunding Bonds-Interest Charges 106,061 - - - - 2014 Water Revenue Refunding Bonds-Principal Payments - - - - - TotalDebtService $ 1,545,775 $ 1,647,075 $ 1,655,650 $ 1,664,302 $ 1,658,738 Coverage by Net Revenues Available for Debt Service 216% 279% 278% 212% 223% Debt service coverage requirement is a minimum 115 percent of net revenue including connection fees. The above schedules include connection fees in operating revenues. Cardiff Sanitary Division 2015 2014 2013 2012 2011 Revenues: Operating revenues-including connection fees(1) $ 4,615,399 $ 4,758,606 $ 4,755,573 $ 5,087,182 $ 5,337,717 Non-operating revenues 120,668 1,216,941 39,015 79,347 355,974 Gross Revenues 4,736,067 5,975,547 4,794,588 5,166,529 5,693,691 Total Operating&Non-Operating Expenses 4,371,847 3,189,268 3,310,986 3,385,439 3,746,748 Net Income 364,220 2,786,279 1,483,602 1,781,090 1,946,943 Add: Interest expense 109,282 266,822 142,898 248,400 267,533 Depreciation and amortization expense 1,555,955 200,459 800,000 404,640 932,273 Net Revenues Available for Debt Service 2,029,457 3,253,560 2,426,500 2,434,130 3,146,749 Less:Debt Service 2003 Note Payable to SEJPA-Interest Charges - - - 255,000 273,800 2003 Note Payable to SEJPA-Principal Payments - - - 490,000 470,000 2011 Note Payable to SEJPA-Interest Charges 109,282 131,967 142,898 28,945 - 2011 Note Payable to SEJPA-Principal Payments 579,366 563,037 546,540 25,000 2017 Note Payable to SEJPA-Interest Charges - - - - 2017 Note Payable to SEJPA-Principal Payments - - - - - Total Debt Service $ 688,648 $ 695,004 $ 689,438 $ 798,945 $ 743,800 Coverage by Net Revenues Available for Debt Service 295°% 468% 352% 305% 423% Debt service coverage requirement is a minimum 110 percent of net revenue including connection fees. The above schedules include connection fees in operating revenues. Source:City of Encinitas Finance Department 179 City of Encinitas Demographic and Economic Statistics Last Ten Fiscal years %of San Diego %Change Average Fiscal Year County from Previous Median Household Unemployment Ended June 30 City Population Population Year Age Size Rate 2020 62,183 2.2% (1.90%) 43.1 2.60 9.6% 2019 63,390 1.9% 0.37% 42.9 2.56 2.6% 2018 63,158 1.9% 1.40% 41.5 2.45 2.8% 2017 62,288 1.9% 0.64% 41.5 2.50 3.8% 2016 61,893 1.9% 0.61% 41.5 2.50 4.5% 2015 61,518 2.0% 0.51% 41.5 2.50 4.2% 2014 61,204 2.1% 1.05% 41.5 2.49 5.2% 2013 60,568 2.0% 0.37% 41.5 2.50 5.5% 2012 60,346 2.0% 0.73% 42.2 2.45 9.2% 2011 59,910 2.0% 0.47% 42.0 2.50 7.3% NOTE: City population figures have been revised to match updated population from the California State Department of Finance as of January 1,2020. Sources:California Department of Finance; US Census Bureau QuickFacts; Employment Development Department 180 City of Encinitas General Governmental Tax Revenue by Source Last Ten Fiscal Years Fiscal Year Property and Ended Documentary Transient June 30 Transfer Tax Sales and Use Tax Occupancy Tax Franchise Tax Total Tax Revenue 2020 $ 51,251,719 $ 13,744,880 $ 2,383,060 $ 2,539,090 $ 69,918,749 2019 49,237,265 13,694,647 2,775,771 2,571,367 68,279,050 2018 46,311,814 13,252,053 2,562,484 2,587,443 64,713,794 2017 43,494,220 12,549,609 2,216,145 2,545,854 60,805,828 2016 41,210,486 14,166,771 1,616,171 2,358,567 59,351,995 2015 38,508,558 12,569,119 1,828,116 2,761,335 55,667,128 2014 36,414,507 12,067,360 1,570,459 2,614,844 52,667,170 2013 34,974,578 11,585,145 1,491,998 2,323,616 50,375,337 2012 32,788,129 10,613,188 1,413,926 2,144,162 46,959,405 2011 32,292,988 10,244,506 1,276,980 2,108,420 45,922,894 Property Tax Levies and Collections Total General Governmental Tax Revenues $60,000,000 $50,000,000 $40,000,000 MPrope"Tax $30,000,000 saieaTax $20,000,000 ■Tran,ientO—panryTax ■Franchise Tax $10,000,000 - - PMFM $0 M 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Fiscal Years Source: City of Encinitas Finance Department 181 City of Encinitas Taxable Sales by Business Type Last Ten Fiscal Years 2020 2019 2018 2017 2016 Autos and Transportation $ 1,703,500 $ 1,806,753 $ 1,744,199 $ 1,627,531 $ 1,684,618 Building and Construction 959,367 1,133,022 924,933 1,021,600 980,140 Business and Industry 730,647 629,112 567,665 623,641 738,490 Food and Drugs 1,109,984 1,110,862 1,010,551 931,650 1,005,870 Fuel and Service Stations 1,099,387 1,630,124 1,025,386 1,191,164 1,382,946 General Consumer Goods 3,181,523 3,812,472 3,400,696 3,492,330 3,535,734 Restaurants and Hotels 2,140,574 2,560,108 2,274,664 2,264,487 2,113,116 Total $ 10,924,982 $ 12,682,453 $ 10,948,094 $ 11,152,403 $ 11,440,914 2015 2014 2013 2012 2011 Autos and Transportation $ 1,638,839 $ 1,519,006 $ 1,446,737 $ 1,427,132 $ 1,330,270 Building and Construction 944,334 887,182 820,467 868,790 774,109 Business and Industry 556,835 573,032 560,723 518,699 537,840 Food and Drugs 1,028,085 1,001,942 1,003,491 995,511 945,542 Fuel and Service Stations 1,500,416 1,559,342 1,577,783 1,569,265 1,351,288 General Consumer Goods 3,476,481 3,355,540 3,165,746 3,117,547 2,818,809 Restaurants and Hotels 1,978,072 1,825,971 1,699,705 1,624,007 1,442,976 Total $ 11,123,062 $ 10,722,015 $ 10,274,652 $ 10,120,951 $ 9,200,834 Note: Due to the confidentiality of this information,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. Source: HdL Companies 182 City of Encinitas Principal Employers Current Fiscal Year and Nine Years Ago 2020 2011 %of Total City %of Total City Employer Industry Employees Rank Employment Employees Rank Employment Scripps Memorial Hospital Health Care&Social Assistance 1,017 1 3.22% 650 1 2.34% Paul Ecke Ranch Agriculture 453 2 1.43% 250 5 0.90% Walmart Supercenter Retail 335 3 1.06% - - Home Depot Retail 303 4 0.96% 250 3 0.90% Encinitas Union School Dist Education 300 5 0.95% - - YMCA Recreation Facilities 300 6 0.95% 300 2 1.08% Scripps Rehabilitation Services Health Care&Social Assistance 265 7 0.84% - - Target Retail 250 8 0.79% 250 4 0.90% San Diego Hebrew Homes Health Care&Social Assistance 220 9 0.70% 220 6 0.79% Objectiva Software Solutions Technology 201 10 0.64% - - Quality Children's Services Child Care Services - - 205 7 0.74% California Bank&Trust Financial Services 200 10 0.72% Encinitas City Hall Government Office 200 9 0.72% Seacrest Village Retire Community Health Care&Social Assistance 200 8 0.72% Subtotal Employees 3,644 9.00% 2,725 8.37% Total Employees 31,600 27,772 Note:Total Employees number is historical data from zip codes 92007,92023 and 92024. Source:Data Axle 183 City of Encinitas Full-Time and Part-Time Employees by Function Last Ten Fiscal Years Fiscal Years Function 2020 2019 2018 2017 2016 General government 50.05 49.55 44.60 46.75 46.75 Public safety 70.00 69.00 69.00 69.00 69.00 Public works 34.00 34.00 27.55 28.55 28.55 Engineering services* - - - 27.17 27.17 Parks and recreation 21.25 21.25 22.25 20.18 20.18 Planning and building* - - - 27.25 27.25 Development services* 48.00 48.00 53.00 - - Subtotal 223.30 221.80 216.40 218.90 218.90 San Dieguito Water District 24.00 24.00 24.00 24.00 24.00 Fiscal Years Function 2015 2014 2013 2012 2011 General government 46.75 44.75 44.75 44.55 44.25 Public safety 66.00 66.00 63.00 63.00 63.00 Public works 28.55 29.55 29.25 28.85 28.85 Engineering services* 27.17 27.17 26.42 27.42 27.47 Parks and recreation 20.18 21.18 21.18 21.18 21.18 Planning and building* 27.25 27.25 26.75 26.75 26.75 Development services* - - - - - Subtotal 215.90 215.90 211.35 211.75 211.50 San Dieguito Water District 24.00 23.00 25.00 25.40 25.40 *Engineering and Planning/Building merged into Development Services during FY 2017-18. Source:City of Encinitas Human Resources Department 184 UNII This page intentionally left blank. 185 City of Encinitas Operating Indicators by Function Last Ten Fiscal years 2020 2019 2018 2017 2016 San Diego County Sheriff's Department Criminal arrests 1,061 1,161 1,130 1,612 1,997 Traffic arrests 202 355 213 201 263 Traffic accidents 221 281 307 289 274 Traffic citations 7,009 9,635 5,501 4,891 14,873 Calls for service 19,406 19,190 20,019 19,372 22,518 Deputy initiated action 21,106 25,725 22,612 24,625 27,481 Fire: Number of emergency fire calls 476 934 532 283 328 Number of EMS/rescue 4,031 6,270 4,775 4,717 4,098 Other 1,532 1,711 2,382 1,035 1,517 Inspections 1,532 2,198 3,145 2,122 2,133 Engineering: Number of permits issued 360 399 424 440 436 Parks and recreation: Number of recreation class registrations 10,310 17,812 15,444 16,338 15,500 Number of facility rentals 491 550 537 492 538 Planning and building: Number of planning permits issued 242 194 222 276 263 Number of new dwelling units issued 76 71 160 94 117 Environmental review 4 6 3 7 4 Appeals 7 5 6 6 11 Plan checks 2,464 2,409 2,147 1,807 2,339 Code enforcement complaints 1,341 1,090 878 1,282 1,199 Water: New connections 225 114 50 39 77 Average daily consumption (millions of gallons) 4.71 4.82 5.21 4.85 4.56 Sewer: New connections 16 14 62 65 33 Average daily sewage treatment(millions of gallons) 1.26 1.21 2.20 2.27 2.20 The City of Encinitas contracts with the County of San Diego Sheriff's Department to provide law enforcement services. Source:City of Encinitas Fire, Parks, Recreation and Cultural Arts, Development Services,and San Dieguito Water District 186 City of Encinitas Operating Indicators by Function (Continued) Last Ten Fiscal years 2015 2014 2013 2012 2011 San Diego County Sheriffs Department Criminal arrests 1,743 1,595 1,548 1,231 1,047 Traffic arrests 551 331 383 485 535 Traffic accidents 297 323 372 441 472 Traffic citations 13,650 10,357 11,381 11,349 12,024 Calls for service 21,335 19,394 20,559 20,150 20,602 Deputy initiated action 27,339 29,849 31,281 29,862 29,224 Fire: Number of emergency fire calls 300 383 102 124 96 Number of EMS/rescue 3,844 3,806 3,697 3,495 3,498 Other 1,265 1,458 1,932 1,737 1,520 Inspections 2,072 2,143 2,163 2,252 2,263 Engineering: Number of permits issued 383 351 269 392 397 Parks and recreation: Number of recreation class registrations 16,289 16,236 11,175 11,119 10,697 Number of facility rentals 557 578 421 749 377 Planning and building: Number of planning permits issued 335 298 207 202 177 Number of new dwelling units issued 135 161 63 121 51 Environmental review 10 9 6 7 4 Appeals 6 7 5 3 3 Plan checks 1,737 1,391 990 948 882 Code enforcement complaints 1,063 1,153 1,199 1,270 1,645 Water: New connections 69 131 64 79 9 Average daily consumption (millions of gallons) 5.49 5.71 5.61 5.32 5.21 Sewer: New connections 53 22 50 44 14 Average daily sewage treatment(millions of gallons) 2.22 2.36 2.40 2.38 2.43 The City of Encinitas contracts with the County of San Diego Sheriff's Department to provide law enforcement services. Source:City of Encinitas Fire, Parks,Recreation and Cultural Arts, Development Services,and San Dieguito Water District 187 City of Encinitas Capital Asset Statistics by Function Last Ten Fiscal Years 2020 2019 2018 2017 2016 Law enforcement: Number of sub-stations 1 1 1 1 1 Fire department: Fire stations 7 7 6 6 6 Public works: Streets (miles) ** 168 168 168 201 201 Engineering: Signalized intersections 63 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 325 325 382 382 382 Habitat/open space acreage 90 90 87 87 87 Marine life refuge 1 1 1 1 1 Trails/streetscapes (miles) 41/10 41/10 41/10 41/10 41/10 Lifeguard towers 9 9 9 7 7 Water: Water mains (miles) 174 174 175 170 168 Maximum daily capacity(millions of gallons) 15 15 15 15 15 *The City of Encinitas contracts with the County of San Diego Sheriff's Department to provide law enforcement services. ** Prior to FY 2017-18 data included both City and privately maintained streets. In FY 2017-18, data includes only City maintained streets. Source: City of Encinitas Fire, Parks, Recreation and Cultural Arts, Development Services, and San Dieguito Water District 188 City of Encinitas Capital Asset Statistics by Function (Continued) Last Ten Fiscal Years 2015 2014 2013 2012 2011 Law enforcement: Number of sub-stations 1 1 1 1 1 Fire department: Fire stations 6 6 6 5 5 Public works: Streets (miles)** 201 201 201 201 201 Engineering: Signalized intersections 63 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/streetscapes (miles) 41/10 41/10 41/10 41/10 41/10 Lifeguard towers 7 7 7 7 7 Water: Water mains (miles) 168 168 168 168 168 Maximum daily capacity(millions of gallons) 15 15 15 15 15 *The City of Encinitas contracts with the County of San Diego Sheriff's Department to provide law enforcement services. ** Prior to FY 2017-18 data included both City and privately maintained streets. In FY 2017-18, data includes only City maintained streets. Source: City of Encinitas Fire, Parks, Recreation and Cultural Arts, Development Services, and San Dieguito Water District 189 UNII This page intentionally left blank. 190 Cardiff Sanitary Division Summary of Operational Data The following tables are being presented as supplementary information based on requirements for bonds issued to CSD for continuing bond disclosure certificate. 191 Table 1 Cardiff Sanitary Division Rate Schedule for Annual Service Charges As of June 30, 2020 Sub Fixed Meter Median Annual Users/Class Category Charge HCF Rate HCF Median Charge New Connections(no prior water consumption Group I Residential history) Single Family SF $47.13 $ 5.51 87.20 $ 527.60 Multi Family MF See below 5.51 - $373.12/unit Trailer Park TP See below 5.51 - $373.12/unit New Connections(no prior water consumption Non-Residential history) Commercial Group 11 See below See below $ 5.79 See below See below Commercial Group III See below See below 7.53 See below See below Commercial Group IV See below See below 11.31 See below See below Multi Family/Trailer Park*and Non-Residential Fixed Meter Charge Meter Size Annual Charge Meter Size Annual Charge 5/8" $ 47.13 1-1/2" $ 235.67 3/4" $ 70.70 2" $ 377.06 1" $ 117.83 3" $ 706.99 *Multi Family/Trailer Park=Fixed Meter Charge x 2 Water Consumption Periods To Be Used Residential=2 Lowest Periods of Water Consumption For Meter Readings Occurring Between Dec.-May(most recent available 5-year period) Non-Residential(Commercial)=Water Consumption For Meter Readings Occurring Between July-June of Preceding Year Median Annual Sub Unit Cost HCF(New Median Usage Charge Users/Class Category (perHCF) Connections) (New Connections) Group 11 Commercial Softwater Service SW $ 5.79 - $ - Car Wash CW 5.79 1,520 8,800.80 Office Building OF 5.79 200 1,158.00 Fire Station FS 5.79 110 636.90 Professional Building(Doctor) PB 5.79 160 926.40 Veterinary Clinic VC 5.79 - - Athletic Gymnasium G 5.79 1,340 7,758.60 Laundromat L 5.79 990 5,732.10 Department and Retail Store DRS 5.79 120 694.80 Warehouse W 5.79 1,050 6,079.50 Hospital,Convalescent Home HCH 5.79 3,240 18,759.60 Parks PB 5.79 510 2,952.90 Church-Membership Organization C 5.79 440 2,547.60 Membership Organization(Non-Church) MO 5.79 240 1,389.60 Social Services SS 5.79 160 926.40 Group III Commercial Hotels-Motels(without restaurant) HM $ 7.53 890 $6,701.70 Repair and Service Station RSS 7.53 70 527.10 Shopping Center Sc 7.53 1,030 7,755.90 Kennel K 7.53 900 6,777.00 Coffee Shop CS 7.53 - - Amusement Park AP 7.53 - - Nightclub/Bar NC 7.53 320 2,409.60 Commercial Laundry CL 7.53 - - Manufacturing M 7.53 180 1,355.40 Lumber Yard LY 7.53 - - Group IV Commercial Hotels-Motel(with restaurant) HM $ 11.31 3,130 $35,400.30 Bakery(wholesale)/Food Processor BW 11.31 - - Supermarket SM 11.31 1,030 11,649.30 Mortuary MT 11.31 300 3,393.00 Restaurant R 11.31 600 6,786.00 (1) Sewer rates are based on water consumption(fixed charge based on meter size and consumption component). The consumption is based on HCF(hundred cubic feet-748 gallons). 192 Table 2 Cardiff Sanitary Division Historical Service Charges Billed Last Ten Fiscal Years Single Residential Commercial Commercial Family Fiscal Year (Tax Roll) (Tax Roll) (Manual) Total Billed Average 2020 $ 4,083,220 $ 645,501 $ 130,882 $ 4,859,603 665 2019 4,048,063 633,674 126,925 4,808,662 662 2018 4,065,382 595,450 118,660 4,779,492 665 2017 3,958,853 597,392 135,581 4,691,826 648 2016 3,873,157 610,169 135,107 4,618,432 634 2015 4,033,393 623,032 135,587 4,792,012 610 2014 3,812,338 599,324 134,910 4,546,572 622 2013 3,935,414 666,099 126,677 4,728,190 652 2012 4,058,990 645,560 123,822 4,828,372 676 2011 3,984,339 628,165 127,210 4,739,715 664 Cardiff Sanitary Division bills most customers through the San Diego County property tax billing service. Delinquency rates have been between 1.8 -3.0 percent during the period presented. Delinquencies do not apply to direct billings. 193 Table 3 Cardiff Sanitary Division Ten Largest Customers Fiscal Year 2019-20 Parcel Sewer Service Percentage of Property Owner Count Charges Sewer Charges Scripps Health 1 $ 101,311.78 2.08% Collwood Pines Apartments LP 3 78,715.02 1.62% State of California Parks & Rec. 2 49,488.55 1.02% San Dieguito Union High School District 2 47,979.64 0.99% Georges Restaurant Inc. 1 36,326.80 0.75% 944 Regal Road LLC 1 34,661.68 0.71% K&K Lumber Co. 2 30,258.52 0.62% Newport Taft, Inc. 1 29,606.26 0.61% Cardiff Town Center LLC 1 28,237.86 0.58% Belmont Village LLC 1 27,972.24 0.58% Subtotal 15 $ 464,558.35 9.56% Total Billed $ 4,859,603 Source: Cardiff Sanitary Division Table 4 Cardiff Sanitary Division Historical Service Connections Last Ten Fiscal Years Commercial Total Connections Residential Industrial Total Year (Billed Parcels) EDU's EDU's EDU's 2020 6,457 7,262 1,207 8,469 2019 6,456 7,247 1,205 8,452 2018 6,442 7,223 1,202 8,425 2017 6,435 7,186 1,187 8,373 2016 6,416 7,157 1,187 8,344 2015 6,394 7,132 1,187 8,319 2014 6,375 7,126 1,176 8,302 2013 6,365 7,083 1,174 8,257 2012 6,334 7,067 1,154 8,221 2011 6,329 7,033 1,124 8,187 Source: Cardiff Sanitary Division 194 San Dieguito Dater District 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. 195 Table 1 San Dieguito Water District Schedule of Water Rates As of June 30, 2020 Rate (1) Customer Class Residential Rate Tier Potable Recycled Single-family residential 0-12 units $ 3.19 $ 13-20 units 5.06 21-40 units 6.25 41+ units 7.12 Multi-family residential (per dwelling) 0-8 units 3.19 9-12 units 5.06 13-16 units 6.25 - 17+ units 7.12 - Agriculture Uniform 5.42 4.34 Commercial Uniform 5.42 4.34 Government Uniform 5.93 4.74 Public Uniform 5.93 4.74 Landscaping Uniform 6.25 5.00 Construction Uniform 6.36 5.09 (1) Per Unit (one hundred cubic feet or 748 gallons) Source: San Dieguito Water District Table 2 San Dieguito Water District Bi-Monthly Meter Service Availability Charges (2) As of June 30, 2020 Water Meter Service Infrastructure Fire Meter Service Availability Access Availability Meter Size Charge Charge Charge 5/8" & 3/4" $ 45.16 $ 7.32 $ 9.61 lit 66.50 11.72 9.61 1-1/2" 119.37 21.96 10.83 2" 183.06 38.06 18.88 3" 331.78 70.28 47.77 4" 544.21 120.04 97.59 6" 1,074.78 219.60 276.40 8" 1,711.73 380.64 584.82 (2) San Dieguito Water District 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 available 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. Source: San Dieguito Water District 196 Table 3 San Dieguito Water District Historic Potable Water System Revenues Last Ten Fiscal Years Meter Fiscal Potable Percentage Availability Percent Year Water Sales Change (3) Charge Change (3) 2020 $ 10,944,746 7.3% $ 4,162,249 8.4% 2019 10,203,984 (9.1%) 3,839,847 1.8% 2018 11,222,736 18.5% 3,772,759 6.4% 2017 9,467,085 (0.4%) 3,544,758 1.2% 2016 9,503,108 (2.3%) 3,503,933 2.6% 2015 9,728,434 (8.6%) 3,415,227 5.8% 2014 10,649,157 15.3% 3,227,823 4.5% 2013 9,236,462 8.3% 3,087,794 (3.4%) 2012 8,528,418 3.9% 3,196,605 6.3% 2011 8,205,876 14.8% 3,007,127 20.2% (3) Due to the varying number of billing cycles in a fiscal year, changes year-over-year may not be comparable. Source: San Dieguito Water District 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 (4) Change 2020 $ 644,436 9.7% $ 97,431 12.2% 2019 587,272 (31.2%) 86,801 0.8% 2018 853,052 19.0% 86,098 9.4% 2017 716,826 2.1% 78,732 (7.5%) 2016 702,301 8.3% 85,149 5.7% 2015 648,398 40.8% 80,585 34.2% 2014 460,383 15.0% 60,048 N/A 2013 400,244 (5.4%) - N/A 2012 422,925 (19.2%) - N/A 2011 523,397 (2.7%) - N/A (4) The District first implemented a meter availability charge for recycled customers on September 1, 2013. Source: San Dieguito Water District 197 Table 5 San Dieguito Water District Summary of Water Production by Source Last Ten Fiscal Years Potable Production (in acre-feet)(5) Fiscal Local Imported Total Recycled Total Year Water Water Potable Water Production 2020 2,555 3,127 5,682 587 6,269 2019 2,173 3,407 5,580 550 6,130 2018 3,450 2,660 6,110 714 6,824 2017 1,446 3,984 5,430 654 6,084 2016 1,400 3,839 5,239 628 5,867 2015 603 5,726 6,329 736 7,065 2014 1,136 5,598 6,734 692 7,426 2013 4,200 2,395 6,595 678 (6) 7,273 2012 3,719 2,663 6,382 578 (6) 6,960 2011 4,434 1,901 6,335 511 6,846 (5) Potable water production is defined as water either produced locally or purchased from imported sources. Table 6 San Dieguito Water District Summary of Water Deliveries by Source Last Ten Fiscal Years Fiscal Percent Percent Year Potable Change Recycled Change 2020 5,277 (2.2%) 587 6.7% 2019 5,397 (7.6%) 550 (23.0%) 2018 5,838 10.4% 714 9.2% 2017 5,287 3.4% 654 4.1% 2016 5,112 (16.7%) 628 (14.7%) 2015 6,134 (4.9%) 736 6.4% 2014 6,449 2.6% 692 2.1% 2013 6,284 5.5% 678 (6) 17.3% 2012 5,957 9.8% 578 (6) 13.1% 2011 5,425 (4.0%) 511 2.6% (6) Since FY 2011-12, Recycled Water Production and Delivery figures are revised to include water provided to the Encinitas Ranch Golf Authority (ERGA). Beginning in FY 2011-12, the San Elijo Joint Powers Authority (SEJPA) began directly providing recycled water to ERGA. The recycled water provided to ERGA credits towards the District's production and delivery water to ERGA and the District ceased selling recycled water as ERGA falls within the District's sphere of influence. Note: The differences between potable water production and deliveries represents water loss in distribution system and/or water pumped or used through the fire distribution system. Source: San Dieguito Water District 198 Table 7 San Dieguito Water District Sales by Customer Class As of June 30, 2020 Acre-Feet Percent of Customer Description Sold Water Sold Agriculture 186 3.5% Commercial 501 9.5% Construction 40 0.8% Government 21 0.4% Landscaping 328 6.2% Multi-Family Residential 1,102 20.9% Public 106 2.0% Single-Family Residential 2,993 56.7% Total Sales 5,277 100.0% Source: San Dieguito Water District Table 8 San Dieguito Water District Total Service Connections by Category Last Ten Fiscal Years Fiscal Percent Percent Years Potable Increase Recycled Increase 2020 12,086 1.9% 98 5.4% 2019 11,861 0.6% 93 9.4% 2018 11,790 0.4% 85 (2.3%) 2017 11,740 0.2% 87 6.1% 2016 11,721 0.7% 82 1.2% 2015 11,644 0.3% 81 5.2% 2014 11,610 0.9% 77 0.0% 2013 11,502 0.2% 77 4.1% 2012 11,476 0.7% 74 2.8% 2011 11,397 0.1% 72 (1.4%) Source: San Dieguito Water District 199 This page intentionally left blank. 200 low" .ay INK f -- I w 7- c I 505 S. Vulcan Avenue Encinitas, CA 92024 Phone: (76o) 633-2600 Fax: (76o) 633-2879 vciww.EncinitasCA,Gov [THIS PAGE INTENTIONALLY LEFT BLANK] C-1 APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The following is a summary of certain provisions of the Indenture of Trust and the First Amended and Supplemental Lease Agreement which are not described elsewhere. This summary does not purport to be comprehensive and reference should be made to the respective agreement for a full and complete statement of the provisions thereof. DEFINITIONS; RULES OF INTERPRETATION Definitions Unless the context otherwise requires, the terms defined in the Indenture shall, for all purposes of the Indenture and of any indenture supplemental hereto and of any certificate, opinion or other document mentioned in the Indenture, have the meanings specified therein, to be equally applicable to both the singular and plural forms of any of the terms defined. In addition, all capitalized terms used in the Indenture and not otherwise defined in the Indenture shall have the respective meanings given such terms in the Lease Agreement. “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, Deputy Mayor, City Manager, City Clerk, Finance Director or any other person designated as an Authorized Representative of the City by a Written Certificate of the City signed by its Mayor, Deputy Mayor, City Manager or Finance Director 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 of municipalities. “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 Proceeds Fund” means the fund by that name established and held by the Trustee pursuant to the Indenture. “Bond Year” means each twelve-month period extending from October 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, 2021. “Bonds” means the $9,505,000 aggregate principal amount of Encinitas Public Financing Authority 2021 Federally Taxable Lease Revenue Refunding Bonds, Series A (Pacific View Property) authorized by and at any time Outstanding pursuant to the Indenture. “Book-Entry Depository” means DTC or any successor as Book-Entry Depository for the Bonds, appointed pursuant to the Indenture. C-2 “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 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. “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. “Escrow Agreement” means the Escrow Deposit and Trust Agreement, dated as of July 1, 2021, among the City, the Authority and the Escrow Bank. “Escrow Bank” means U.S. Bank National Association, or its successor in interest, pursuant to the Escrow Agreement. “Escrow Fund” means the account of that name established under the Escrow Agreement. “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 C-3 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 the Indenture 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. “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 of the Indenture. “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 October 1, 2021. “Lease Agreement” means that certain First Amended and Supplemental Lease Agreement, dated as of July 1, 2021, by and between the Authority, as lessor, and the City, as lessee. “Moody’s” 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 C-4 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 Los Angeles, or at such other or additional offices as may be specified in writing to the Authority and the City. “Original Purchaser” means Hilltop Securities Inc., 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) described in the Indenture; 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 in the Indenture 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: 1. 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) Project 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): C-5 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 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, Aa1 or Aa2 including funds for which the Trustee or an affiliate advises or services, but excluding such funds with a floating net asset value. 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. 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, including BIF and SAIF or collateralized by Permitted Investments described in clause (1) for amounts in excess of insured amounts. 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; provided, that, 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 for the Reserve Account, applied as directed in the Indenture (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; C-6 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 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; and 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 “Prime-1” by Moody’s and “A-1+” 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+” or better by S&P. C-7 11. Repurchase agreements that provide for the transfer of securities from a dealer bank or securities firm (seller/borrower) to the Trustee (buyer/lender), and the transfer of cash from the Trustee to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the Trustee in exchange for the securities at a specified date. Repurchase Agreements must satisfy the following criteria: a. Repos must be between the municipal entity and a dealer bank or securities firm. (1) Primary dealers on the Federal Reserve reporting dealer list which fall under the jurisdiction of the SIPC and which are rated A or better by Standard & Poor’s Ratings Group and Moody’, or (2) Banks rated “A” or above by Standard & Poor’s Ratings Group and Moody’s Investor Services. b. The written repo contract must include the following: (1) Securities which are acceptable for transfer are: (a) Direct U.S. governments. (b) Federal agencies backed by the full faith and credit of the U.S. Government (and FNMA & FHLMC) (2) The term of the repo may be up to 30 years. (3) The collateral must be delivered to the municipal entity, trustee (if trustee is not supplying the collateral) or third party acting as agent for the trustee (if the trustee is supplying the collateral) before/simultaneous with payment (perfection by possession of certificated securities). (4) The trustee has perfected first priority security interest in the collateral. (5) Collateral is free and clear of third-party liens and in the case of SIPC broker was not acquired pursuant to a repo or reverse repo. (6) Failure to maintain the requisite collateral percentage, after a two day restoration period, will require the trustee to liquidate collateral. (7) Valuation of Collateral (a) The securities must be valued weekly, marked-to-market at a current market price plus interest. (b) The value of collateral must be equal to 104% of the amount of cash transferred by the municipal entity to the dealer bank or security firm under the repo plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by municipality, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%. C-8 c. Legal opinion which must be delivered to the municipal entity: Repo meets guidelines under state law for legal investment of public funds. 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. “Record Date” means, with respect to any Interest Payment Date, the fifteenth (15th) calendar day of the month preceding such Interest Payment Date. “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 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 Global Ratings Services, a Standard & Poor’s Financial Services LLC, its successors and assigns. “Securities Depositories” means The Depository Trust Company, 55 Water Street, 50th Floor, New York, New York 10041-0099 Atn. 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 securities depositories as the Authority may designate in a Written Certificate of the Authority delivered to the Trustee. “Serial Bonds” means the Bonds maturing on October 1 in each of the years 2021 through 2036, inclusive. “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. “Term Bonds” means the Bonds maturing on October 1, 2040 and on October 2044. C-9 “Trustee” means U.S. Bank National Association, a national banking association organized and existing under the laws of the United States of America, or its successor, as Trustee under 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. “2014 Bonds” means the $10,365,000 original principal amount of Encinitas Public Financing Authority 2014 Lease Revenue Bonds (Pacific View School and Moonlight Beach Lifeguard Tower), Series B (Taxable). “2014 Indenture” means the Indenture of Trust, dated as of November 1, 2014, among the Authority, the City and the 2014 Trustee and relating to the 2014 Bonds. “2014 Trustee” means U.S. Bank National Association, as successor in interest to MUFG Union Bank, N.A., as Trustee under the 2014 Indenture. Interpretation (a) Unless the context otherwise indicates, words expressed in the singular shall include the plural and vice versa and the use of the neuter, masculine, or feminine gender is for convenience only and shall be deemed to include the neuter, masculine or feminine gender, as appropriate. (b) Headings of articles and sections in the Indenture and the table of contents thereof are solely for convenience of reference, do not constitute a part thereof and shall not affect the meaning, construction or effect thereof. (c) All references in the Indenture to “Articles”, “Sections” and other subdivisions are to the corresponding Articles, Sections or subdivisions of the Indenture; the words “herein”, “hereof”, “hereby”, “hereunder” and other words of similar import refer to the Indenture as a whole and not to any particular Article, Section or subdivision thereof. ISSUANCE OF BONDS; APPLICATION OF PROCEEDS 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 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. Six months from the Closing Date, 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 Interest Account and the Costs of Issuance Fund shall be closed. Refunding Fund The Trustee shall establish, maintain and hold in trust a separate fund to be known as the “Refunding Fund”. The Trustee shall disburse moneys in the Refunding Fund immediately on the Closing Date to the Escrow Bank and the Refunding Fund shall be closed. C-10 Validity of Bonds The validity of the authorization and issuance of the Bonds is not dependent on and shall not be affected in any way by any proceedings taken by the Authority or the Trustee with respect to or in connection with the Lease Agreement. The recital contained in the Bonds that the same are issued pursuant to the Constitution and laws of the State shall be conclusive evidence of their validity and of compliance with the provisions of law in their issuance. 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 therein, 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 hereby 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 (other than the rights of the Authority under the Indenture). The Trustee shall be entitled to and 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. The Trustee shall deposit all Revenues so received in the Bond Fund which the Trustee shall establish, maintain and hold in trust as a separate fund. 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 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. C-11 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 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 set forth in the Indenture. (b) Application of Insurance Proceeds. Any proceeds of insurance against accident to or destruction of the Facilities 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 Facilities, 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 Facilities in full, the proceeds of such insurance shall be used by the City to rebuild or replace the Facilities if such proceeds are not sufficient, together 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. The C-12 Trustee may conclusively rely on any such Written Requisitions. 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 therefrom 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 which mature not later than the date such moneys are estimated by the Authority to be required. 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; provided, however, that any such investment shall be made by the Trustee only if, prior to the date on which such investment is to be made, the Trustee shall have received a written direction specifying a specific money market fund and, if no such written direction is so received, the Trustee shall hold such moneys uninvested. 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 under the Indenture shall be deposited in the Bond Fund. For purposes of acquiring any investments under the Indenture, the Trustee may commingle funds held by it under the Indenture. 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. 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 C-13 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 investment directions of the Authority. 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 under the Indenture, to the benefits of the Indenture, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest thereon which shall not have been so extended. Nothing in the Indenture shall be deemed to limit the right of the 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 the Indenture 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, upon reasonable notice, and under reasonable circumstances. The Trustee shall furnish the Authority a monthly cash transaction statements which include detail for all investment transactions effected by the Trustee or brokers selected by the Authority, provided that the Trustee shall not be obligated to deliver any 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. Upon the Authority’s election, such statements will be delivered via the Trustee’s online service and upon electing such service, paper statements will be provided only upon request. The Authority waives the right to receive brokerage confirmations of security transactions effected by the C-14 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. Additional Obligations The Authority may issue additional bonds, notes or other indebtedness which are payable out of the Revenues in whole or in part pursuant to the Indenture, for the purpose of financing any construction of a new city hall or for any other municipal purpose, so long as no Event of Default under the Indenture has occurred and is continuing and provided that the conditions of the Lease Agreement have been satisfied. Lease Agreement Subject to the provisions of 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 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 under the Indenture: (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-15 (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 under the Indenture 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 in the Indenture, 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 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 hereby 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 in its discretion may, C-16 and 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 in the Indenture, or in aid of the execution of any power granted therein, 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. Notwithstanding any other provision of the Indenture in determining whether the rights of the Bondholders will be adversely affected by any action taken pursuant to the terms and provisions of the Indenture, the Trustee shall consider the effect on the Bondholders as if there were no Insurance Policy. 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 under the Indenture, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Indenture, and that the Trustee shall have the right to decline to follow any such direction which in the opinion of the Trustee would 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 granted in the Indenture 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 under the Indenture 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 applicable law with respect to the Bonds, except in the manner provided in the Indenture, 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. C-17 Absolute Obligation of Authority Nothing in the Indenture or 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 provided in the Indenture, but only out of the Revenues and other assets therein 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 under the Indenture, 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 conferred upon or reserved in the Indenture to the Trustee or to the Owners of the Bonds is intended to be exclusive of any other remedy or remedies, and each and every such remedy, to the extent permitted by law, shall be cumulative and in addition to any other remedy given under the Indenture or now or hereafter existing at law or in equity or otherwise. 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 C-18 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, to the City, and by giving the Bond Owners notice of such resignation by mail at the addresses shown on the 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 in the Indenture; 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 set forth therein. 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 the Indenture, the Authority shall mail or cause the successor Trustee to mail a notice of the succession of such Trustee to the trusts under the Indenture 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 the Indenture, 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 the Indenture, the Trustee shall resign immediately in the manner and with the effect specified in the Indenture. Merger or Consolidation Any bank or trust company into which the Trustee may be merged or converted or with which it may be consolidated or any bank or trust company resulting from any merger, conversion or consolidation to which it shall be a party or any bank or trust company to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided such bank 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 in the Indenture to the contrary notwithstanding. C-19 Liability of Trustee (a) The recitals of facts in the Indenture 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 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 in the Indenture in connection with the respective duties or obligations therein 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 under the Indenture, 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 under the Indenture, or any other event which, with the passage of time, the giving of notice, or both, would constitute an Event of Default under the Indenture unless and until it shall have actual knowledge thereof, or shall have received written notice thereof, at its Office. Except as otherwise expressly provided in the Indenture, 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 in the Indenture, 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 under the Indenture, 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 under the Indenture or perform any duties thereunder 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 under the Indenture. (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 C-20 incurred by it in compliance with such request or direction. No permissive power, right or remedy conferred upon the Trustee under the Indenture 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. (j) 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. (l) The Trustee may establish such funds and accounts under the Indenture as it deems necessary or appropriate to perform its obligations under the Indenture. 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 under the Indenture 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 the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may deem reasonable. If the Trustee acts on any communication (including, but not limited to, communication with respect to the delivery of securities or the wire transfer of funds) sent by electronic transmission, the Trustee, absent negligence or willful misconduct, will not be responsible or liable in the event such communication is not an authorized or authentic communication of the party involved or is not in the form the party involved, sent or intended to send (whether due to fraud, distortion or otherwise). The Trustee will not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such instructions notwithstanding such instructions conflict or are inconsistent with a subsequent written instruction. The Authority agrees to assume all risks arising out of the use of such electronic transmission to submit instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk of interception and misuse by third parties. C-21 The Trustee shall not be considered in breach of or in default in its obligations under the Indenture and will not incur any liability for not performing any act or fulfilling any duty, obligation or responsibility 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, natural catastrophes, civil or military disturbances, loss or malfunctions of utilities, any act of God or war, terrorism or the unavailability of the Federal Reserve Bank or other wire or communication facility, epidemics, quarantine restrictions, strikes, riot, or any similar event and/or occurrences beyond the control of the Trustee. Preservation and Inspection of Documents All documents received by the Trustee under the provisions of the Indenture shall be retained in its respective possession pursuant to its records retention policies 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 the 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 under the Indenture. As security for the performance of the obligations of the Authority under the Indenture and the obligation of the City to pay Miscellaneous Rent 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. MODIFICATION OR AMENDMENT OF THE INDENTURE 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 consents 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 therein, 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, C-22 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 in the Indenture contained other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved in the Indenture to or conferred upon the Authority; (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 of the Indenture 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 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 under the Indenture, 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 pursuant to the 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 under the Indenture 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 the Indenture 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 C-23 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 under the Indenture by the Authority: (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 under the Indenture 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. C-24 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; 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 upon receipt of a Written Request of the Authority, 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. MISCELLANEOUS Liability of Authority Limited to Revenues Notwithstanding anything in the Indenture or in the Bonds contained, the Authority shall not be required to advance any moneys derived from any source other than the Revenues and other assets pledged under the Indenture for any of the purposes in the Indenture mentioned, whether for the payment of the principal of or interest on the Bonds or for any other purpose of the Indenture. Nevertheless, the Authority may, but shall not be required to, advance for any of the purposes of the Indenture any funds of the Authority which may be made available to it for such purposes. C-25 Limitation of Rights to Parties and Bond Owners Nothing in the Indenture or in the Bonds expressed or implied is intended or shall be construed to give to any person other than the Authority, the Trustee, the City and the Owners of the Bonds, any legal or equitable right, remedy or claim under or in respect of the Indenture or any covenant, condition or provision contained therein; and all such covenants, conditions and provisions are and shall be held to be for the sole and exclusive benefit of the Authority, the Trustee, the City and the Owners of the Bonds. Funds and Accounts Any fund or account required by the Indenture to be established and maintained by the Trustee may be established and maintained in the accounting records of the Trustee, either as a fund or an account, and may, for the purposes of such records, any audits thereof and any reports or statements with respect thereto, be treated either as a fund or as an account; but all such records with respect to all such funds and accounts shall at all times be maintained in accordance with corporate trust industry standards to the extent practicable, and with due regard for the requirements of the Indenture and for the protection of the security of the Bonds and the rights of every Owner thereof. Waiver of Notice; Requirement of Mailed Notice Whenever in the Indenture the giving of notice by mail or otherwise is required, the giving of such notice may be waived in writing by the person entitled to receive such notice and in any such case the giving or receipt of such notice shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. Whenever in the Indenture any notice shall be required to be given by mail, such requirement shall be satisfied by the deposit of such notice in the United States mail, postage prepaid, by first class mail. Destruction of Bonds Whenever in the Indenture provision is made for the cancellation by the Trustee and the delivery to the Authority of any Bonds, the Trustee shall, in lieu of such cancellation and delivery, destroy such Bonds and deliver a certificate of such destruction to the Authority. Severability of Invalid Provisions If any one or more of the provisions contained in the Indenture or in the Bonds shall for any reason be held to be invalid, illegal or unenforceable in any respect, then such provision or provisions shall be deemed severable from the remaining provisions contained in the Indenture and such invalidity, illegality or unenforceability shall not affect any other provision of the Indenture, and the Indenture shall be construed as if such invalid or illegal or unenforceable provision had never been contained in the Indenture. The Authority hereby declares that it would have entered into the Indenture and each and every other Section, paragraph, sentence, clause or phrase of the Indenture and authorized the issuance of the Bonds pursuant thereto irrespective of the fact that any one or more Sections, paragraphs, sentences, clauses or phrases of the Indenture may be held illegal, invalid or unenforceable. Evidence of Rights of Bond Owners Any request, consent or other instrument required or permitted by the Indenture to be signed and executed by Bond Owners may be in any number of concurrent instruments of substantially similar tenor and shall be signed or executed by such Bond Owners in person or by an agent or agents duly appointed in writing. Proof of the execution of any such request, consent or other instrument or of a writing appointing any such agent, or of the holding by any person of Bonds transferable by delivery, shall be sufficient for any purpose of the Indenture and shall be conclusive in favor of the Trustee and the Authority if made in the manner provided in the Indenture. C-26 The fact and date of the execution by any person of any such request, consent or other instrument or writing may be proved by the certificate of any notary public or other officer of any jurisdiction, authorized by the laws thereof to take acknowledgments of deeds, certifying that the person signing such request, consent or other instrument acknowledged to him the execution thereof, or by an affidavit of a witness of such execution duly sworn to before such notary public or other officer. The ownership of Bonds shall be proved by the Registration Books. Any request, consent, or other instrument or writing of the Owner of any Bond shall bind every future Owner of the same Bond and the Owner of every Bond issued in exchange therefor or in lieu thereof, in respect of anything done or suffered to be done by the Trustee or the Authority in accordance therewith or reliance thereon. Disqualified Bonds In determining whether the Owners of the requisite aggregate principal amount of Bonds have concurred in any demand, request, direction, consent or waiver under the Indenture, Bonds which are known by the Trustee to be owned or held by or for the account of the Authority or the City, or by any other obligor on the Bonds, or by any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Authority or the City or any other obligor on the Bonds, shall be disregarded and deemed not to be Outstanding for the purpose of any such determination. Bonds so owned which have been pledged in good faith may be regarded as Outstanding for the purposes of the Indenture if the pledgee shall establish to the satisfaction of the Trustee the pledgee’s right to vote such Bonds and that the pledgee is not a person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Authority or the City or any other obligor on the Bonds. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Money Held for Particular Bonds The money held by the Trustee for the payment of the interest or principal due on any date with respect to particular Bonds (or portions of Bonds in the case of Bonds redeemed in part only) shall, on and after such date and pending such payment, be set aside on its books and held in trust by it for the Owners of the Bonds entitled thereto, subject, however, to the provisions of the Indenture but without any liability for interest thereon. Waiver of Personal Liability No member, officer, agent or employee of the Authority shall be individually or personally liable for the payment of the principal of or interest or premium (if any) on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof; but nothing contained in the Indenture shall relieve any such member, officer, agent or employee from the performance of any official duty provided by law or by the Indenture. Benefit of Parties Nothing in the Indenture expressed or implied is intended or shall be construed to confer upon, or to give or grant to, any person or entity, other than the Authority, the Trustee, and the registered Owners of the Bonds, any right, remedy or claim under or by reason of the Indenture or any covenant, condition or stipulation of the Indenture, and all covenants, stipulations, promises and agreements in the Indenture contained by and on behalf of the Authority shall be for the sole and exclusive benefit of the Authority, the Trustee and the registered Owners of the Bonds. Successor Is Deemed Included in All References to Predecessor Whenever in the Indenture either the Authority and the Trustee are named or referred to, such reference shall be deemed to include the successors or assigns thereof, and all the covenants and agreements in the Indenture C-27 contained by or on behalf of the Authority and the Trustee shall bind and inure to the benefit of the respective successors and assigns thereof whether so expressed or not. Execution in Several Counterparts The Indenture may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original; and all such counterparts, or as many of them as the Authority and the Trustee shall preserve undestroyed, shall together constitute but one and the same instrument. Governing Law The Indenture shall be governed by and construed in accordance with the laws of the State. FIRST AMENDED AND SUPPLEMENTAL LEASE AGREEMENT DEFINITIONS Unless the context clearly otherwise requires or unless otherwise defined in the Lease Agreement, the capitalized terms in the Lease Agreement shall have the respective meanings specified in the Indenture. In addition, the following terms heretofore defined in the Lease Agreement and the following terms defined in the Lease Agreement shall, for all purposes of the Lease Agreement, have the respective meanings specified in the Lease Agreement. “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 any amendment to the Lease Agreement thereto and by reference incorporated therein. “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. “Indenture” means the Indenture of Trust dated as of July 1, 2021, by and between the Authority and the Trustee, together with any duly authorized and executed amendments thereto. “Lease Payment Date” means any Interest Payment Date. “Lease Payments” means the amounts payable by the City pursuant to the Lease Agreement, including any prepayment thereof pursuant hereto and including any amounts payable upon a delinquency in the payment thereof. “Leased Premises” means the Site subject to the provisions of the Lease Agreement, described in Exhibit A attached thereto and by reference incorporated therein. “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 the Lease Agreement; C-28 (b) the 2014 Lease and the Lease Agreement, the Indenture and any other agreement or other document contemplated under the Lease Agreement to be recorded against the Leased Premises; (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 on record and which the City certifies in writing will not materially impair the use of the Leased Premises for their intended purposes. “Site” means all of the land described in Exhibit A attached to the Lease Agreement and by reference incorporated therein. “Term of the Lease Agreement” means the time during which the Lease Agreement is in effect, as provided in the Lease Agreement. “Trustee” means U.S. Bank National Association or any successor thereto acting as Trustee pursuant to the Indenture. REPRESENTATIONS, COVENANTS AND WARRANTIES Representations, Covenants and Warranties of the City The City makes the following covenants, representations and warranties to the Authority as of the date of the execution and delivery of the Lease Agreement: (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 of the Indenture. (d) No Conflicts. The execution and delivery of the Lease Agreement, the consummation of the transactions contemplated therein and the fulfillment of or compliance with the terms and conditions 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 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 contemplated therein, except as have been obtained or made and as are in full force and effect. C-29 (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 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) Essentiality. The Leased Premises constitute property that is essential to carrying out the governmental functions of the City. Representations, Covenants and Warranties of Authority 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 with their respective terms. (d) No Conflicts. The execution and delivery of the Lease Agreement and the Indenture, the consummation of the transactions in the Lease Agreement and contemplated therein and the fulfillment of or compliance with the terms and conditions 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 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 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 in the Lease Agreement or contemplated therein, except as have been obtained or made and as are in full force and effect. C-30 (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, 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. LEASE; TERM OF THE LEASE AGREEMENT; RENTAL PAYMENTS Lease by Authority and Lease Back to City (a) The Lease Agreement amends the 2014 Lease with respect to certain Lease Payments thereunder relating to the 2014 Bonds. In consideration of the payment of $9,505,000 by the Authority less the Underwriter’s Bond discount, plus original issue premium, and less the payment of Costs of Issuance, and in consideration of the execution of the Lease Agreement by the City, and other good and valuable consideration, the City hereby leases to the Authority, and the Authority hereby 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 hereby leases the Leased Premises to the City, and the City hereby leases the Leased Premises from the Authority, upon the terms and conditions set forth in the Lease Agreement. (c) The City hereby 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 provided in the Lease Agreement 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 under the Lease Agreement 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, 2054, 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 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 acquiring the Site, 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 to the Lease Agreement, to be due and payable each respective Lease Payment Date specified in Exhibit B thereto. Any amount held in the Bond Fund (but not including any amounts on deposit in the Reserve Account), 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 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 C-31 Year. For purposes of making payments on the Bonds, the City shall deliver the Lease Payments to the Trustee no later than one Business Day prior to the Lease Payment Date. (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 Exhibit B to 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 average interest rate on the Bonds. Such interest, if received, shall be deposited in the Bond Fund. (d) Fair Rental Value. The Lease Payments and Miscellaneous Rent coming due and payable under the Lease Agreement 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 each Fiscal Year. The parties hereto have agreed and determined that the total amount of such Lease Payments and 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 under the Lease Agreement in each of its budgets 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 contained in the Lease Agreement 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 and other payments under the Lease Agreement 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 in the Lease Agreement constitute a pledge of the general tax revenues, funds or moneys of the City. Lease Payments due under the Lease Agreement shall be payable only from current funds which are budgeted and appropriated, or otherwise legally available, for the purpose of paying Lease Payments or other payments due under the Lease Agreement 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 under the Lease Agreement. 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 under the Lease Agreement, the Bonds or the interest thereon. C-32 (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 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 (a) sufficient to pay such Lease Payments, including the principal and interest components thereof, in accordance with the related Lease Payment schedule set forth in Exhibit B to the Lease Agreement, or (b) 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 under the Lease Agreement 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 the 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 October 1, 2031, 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 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 redemption of Bonds pursuant to the Indenture. The Authority shall give the Trustee written notice of the City’s intention to exercise its option not less than sixty (60) days in advance of the date of exercise or such shorter period acceptable to the Trustee. 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 under the Lease Agreement 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 C-33 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 or prepays the Lease Payments pursuant to the Lease Agreement 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. 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 compensation and indemnification 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, 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 “Former Leased Premises”) or to release a portion of the Leased Premises (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 Trustee and 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 of an amended Exhibit A which adds thereto a description of the Substitute Leased Premises and deletes therefrom the description of the Former Leased Premises or the Released 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 remaining C-34 Lease Payments after such substitution 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 to the Authority and the Trustee that the fair rental value of the remaining Leased Premises after removal of the Released 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 serve the public purposes 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 under the Lease Agreement; (f) 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; (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 under the Lease Agreement. 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 Former Leased Premises or Released Premises, as applicable, and shall be continued with respect to the Substitute Leased Premises and the remaining Leased Premises and all references in the Lease Agreement to the Former Leased 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 provided in the Lease Agreement, 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 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. C-35 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 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 a certificate which states that the Leased Premises, upon completion of any additions, modifications and improvements made thereto pursuant to the Lease Agreement, shall be of a value that 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 $150,000 of 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 $150,000) 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 have been met. The proceeds of such liability insurance shall be applied by the City toward extinguishment or satisfaction of the liability with respect to which the insurance proceeds shall have been paid. C-36 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 allocable to the Facilities. 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 any Facilities to be constructed on 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 allocable to the Facilities 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 the Indenture. Recordation of the Lease Agreement; Title Insurance On or before the Closing Date the City shall, at its expense, (a) cause the Lease Agreement, or a memorandum thereof 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 City’s leasehold estate under the Lease Agreement, 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 and shall name the Authority, the City and the Trustee as insureds. 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 required in the Lease Agreement and shall be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss. The City shall cause to be delivered to the Trustee annually, no later than July 1 in each year, beginning on July 1, 2022, a certificate stating that all of C-37 the insurance policies required by the Lease Agreement are in full force and effect and identifying whether any such insurance is then maintained in the form of self-insurance. (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 required in the Lease Agreement 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. 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. 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 in the Lease Agreement 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. 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 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. C-38 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 Owner 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 Eminent Domain If all of the Leased Premises shall be taken permanently under the power of eminent domain or sold to a government threatening to exercise the power of eminent domain, the Term of the Lease Agreement shall cease as of the day possession shall be so taken. If less than all of the Leased Premises shall be taken permanently, or if all of the Leased Premises or any part thereof shall be taken temporarily under the power of eminent domain, (a) the Lease Agreement shall continue in full force and effect and shall not be terminated by virtue of such taking and the parties waive the benefit of any law to the contrary, and (b) there shall be a partial abatement of Lease Payments in an amount to be agreed upon by the City and the Authority such that the resulting Lease Payments for the Leased Premises, represent fair consideration for the use and occupancy of the remaining usable portion of the Leased Premises. Application of Net Proceeds (a) From Insurance Award. The Net Proceeds of any insurance award resulting from any damage to or destruction of the Leased Premises by fire or other casualty shall be deposited in its Insurance and Condemnation Fund or the Redemption Fund, as applicable, by the Trustee and applied in accordance with the Indenture. (b) From Eminent Domain Award. The Net Proceeds of any eminent domain award resulting from any event described in the Lease Agreement shall be deposited in the Insurance and Condemnation Fund or the Redemption Fund, as applicable, by the Trustee and applied in accordance with 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 provided for in the Lease Agreement) there is substantial interference with the use and occupancy by the City 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 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 City 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. C-39 DISCLAIMER OF WARRANTIES; ACCESS Disclaimer of Warranties Neither the Authority nor the Trustee makes any warranty or representation, either express or implied, as to the value, design, condition, merchantability or fitness for any particular purpose or fitness for the use contemplated by the City of the Leased Premises, or any other representation or warranty with respect to the Leased Premises. In no event shall the Authority, the Trustee, and their respective assigns be liable for incidental, indirect, special or consequential damages in connection with or arising out of the Lease Agreement or the Indenture for the existence, furnishing, functioning or the City’s use of the Leased Premises. Rights of Access The City agrees that the Authority and any Authorized Representative of the Authority, and the Authority’s successors or assigns, shall have the right at all reasonable times to enter upon and to examine and inspect the Leased Premises. The City further agrees that the Authority, any Authorized Representative of the Authority, and the Authority’s successors or assigns shall have such rights of access to the Leased Premises as may be reasonably necessary to cause the proper maintenance of the Leased Premises in the event of failure by the City to perform its obligations under the Lease Agreement. Release and Indemnification Covenants The City shall and hereby agrees to indemnify and save the Authority, the Trustee, and their respective officers, agents, successors and assigns, harmless from and against all claims, losses and damages, including legal fees and expenses, arising out of (a) the use, maintenance, condition or management of, or from any work or thing done on the Leased Premises by the City, (b) any breach or default on the part of the City in the performance of any of its obligations under the Lease Agreement, (c) any act or negligence of the City or of any of its agents, contractors, servants, employees or licensees with respect to the Leased Premises, (d) the use, presence, storage, disposal of any Hazardous Substances, Substance on or about the Leased Premises, or (e) any act or negligence of any sublessee of the City with respect to the Leased Premises. No indemnification is made under the Lease Agreement or elsewhere in the Lease Agreement for willful misconduct, negligence under the Lease Agreement by the Authority or the Trustee or any of their respective officers, agents, employees, successors or assigns. 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 under the Lease Agreement shall be subject to the provisions of the Indenture, including, without limitation, the provisions of the Indenture. 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 under the Lease Agreement shall remain obligations of the City; C-40 (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. 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 reserved to or conferred upon the City in the Lease Agreement; (b) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained in the Lease Agreement, 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 the description of the Leased Premises set forth in Exhibit A to the Lease Agreement to add property acquired by the City and the Authority from proceeds on deposit in the Project Fund or 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 under the Lease Agreement 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 under the Lease Agreement 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. 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 under the Lease Agreement at the time specified therein. C-41 (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 in the Lease Agreement 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 of the Lease Agreement 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 re-entry by the Authority, the City shall, as expressly provided in the Lease Agreement, 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 conditions contained in the Lease Agreement, and in any event such rent and damages shall be payable to the Authority at the time and in the manner as therein 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 contained in the Lease Agreement and shall 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 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 provided in the Lease Agreement for the payment of Lease Payments under the Lease Agreement, notwithstanding such entry or re-entry 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 hereby 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 contained in the Lease Agreement 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 C-42 and the removal and storage of such property by the Authority or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. (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 provided in the Lease Agreement 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 conferred upon or reserved to the Authority in the Lease Agreement is intended to be exclusive and every such remedy shall be cumulative and shall, except as therein 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 thereof 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 contained in the Lease Agreement, 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. No Additional Waiver Implied 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 under the Lease Agreement. 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-43 MISCELLANEOUS Binding Effect The Lease Agreement shall inure to the benefit of and shall be binding upon the Authority and the City and their respective successors and assigns. Severability In the event any provision of the Lease Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision thereof. Net-net-net Lease The Lease Agreement shall be deemed and construed to be a “net-net-net lease” and the City hereby agrees that the Lease Payments shall be an absolute net return to the Authority, free and clear of any expenses, charges or set-offs whatsoever. Further Assurances and Corrective Instruments The Authority and the City agree that they will, from time to time, execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such supplements hereto and such further instruments as may reasonably be required for correcting any inadequate or incorrect description of the Leased Premises hereby leased or intended so to be or for carrying out the expressed intention of the Lease Agreement. Execution in Counterparts The Lease 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. Applicable Law The Lease Agreement shall be governed by and constructed in accordance with the laws of the State. Authorized Representatives Whenever under the provisions of the Lease Agreement the approval of the Authority or the City is required, or the Authority or the City is required to take some action at the request of the other, such approval or such request shall be given for the Authority by an Authorized Representative of the Authority and for the City by an Authorized Representative of the City, and any party hereto shall be authorized to rely upon any such approval or request. Captions The captions or headings in the Lease Agreement are for convenience only and in no way define, limit or describe the scope or intent of any provisions or Section of the Lease Agreement. [THIS PAGE INTENTIONALLY LEFT BLANK] D-1 APPENDIX D FORM OF OPINION OF BOND COUNSEL [Closing Date] Encinitas Public Financing Authority 505 South Vulcan Avenue Encinitas, CA 92024 Re: $9,505,000 Encinitas Public Financing Authority 2021 Federally Taxable Lease Revenue Refunding Bonds Series, A (Pacific View Property) 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 2021 Lease Revenue Refunding Bonds, Series A (Pacific View Property) (the “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 July 1, 2021 (the “Indenture of Trust”), by and between U.S. Bank National Association, as trustee (the “Trustee”), and the Authority. The proceeds of the Bonds will be applied by the Authority to refinance improvements to the City’s public library (the “City”). The Authority and the City have entered into a First Amended and Supplemental Lease Agreement, dated as of July 1, 2021 (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-2 Interest received by the owners of the Bonds is not excluded from gross income for purposes of federal income taxation. 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, E-1 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 $9,505,000 aggregate principal amount 2021 Federally Taxable Lease Revenue Refunding Bonds, Series A (Pacific View Property)(the “Bonds”). The Bonds have been issued pursuant to an Indenture of Trust dated as of July 1, 2021, between the Authority and U.S. Bank National Association, 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, LLC, 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 Hilltop Securities Inc., 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 July 13, 2021, 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. (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, 2022, 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-2 (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 in a timely manner 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 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-3 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) Non-payment related defaults, if material. (3) Unscheduled draws on debt service reserves reflecting financial difficulties. (4) Unscheduled draws on credit enhancements reflecting financial difficulties. (5) Substitution of credit or liquidity providers, or their failure to perform. (6) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security. (7) Modifications to rights of security holders, if material. (8) Bond calls, if material, and tender offers. (9) Defeasances. (10) Release, substitution, or sale of property securing repayment of the securities, if material. (11) Rating changes. (12) Bankruptcy, insolvency, receivership or similar event of the City and Authority. (13) The consummation of a merger, consolidation, or acquisition involving the City and Authority, or the sale of all or substantially all of the assets of the City and 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, if material. (14) Appointment of a successor or additional trustee or the change of name of a trustee, if material. (15) Incurrence of a financial obligation of the City and Authority, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the City and Authority, any of which affect security holders, if material. (16) default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the City and Authority, any of which reflect financial difficulties. (b) The City and Authority shall, or shall cause the Dissemination Agent (if not the City and Authority) to, file a notice of such occurrence with the MSRB, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of 10 business days after the occurrence of the Listed Event. Notwithstanding the foregoing, notice of Listed Events described in subsection (a)(8) above need not be given under this subsection E-4 any earlier than the notice (if any) of the underlying event is given to holders of affected Bonds under the Indenture. (c) The City and Authority acknowledge that the events described in subparagraphs (a)(2), (a)(7), (a)(8) (if the event is a bond call), (a)(10), (a)(13), (a)(14) and (a)(15) of this Section 5 contain the qualifier “if material” and that subparagraph (a)(6) also contains the qualifier “material” with respect to certain notices, determinations or other events affecting the tax status of the Bonds. The City and Authority shall cause a notice to be filed as set forth in paragraph (b) above with respect to any such event only to the extent that it determines the event’s occurrence is material for purposes of U.S. federal securities law. Whenever the City and Authority obtains knowledge of the occurrence of any of these Listed Events, the City and Authority will as soon as possible determine if such event would be material under applicable federal securities law. If such event is determined to be material, the City and Authority will cause a notice to be filed as set forth in paragraph (b) above. (d) For purposes of this Agreement, any event described in paragraph (a)(12) above is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the City and Authority in a proceeding under the United States 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 and Authority, or if such jurisdiction has been assumed by leaving the existing governing 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 and Authority. (e) For purposes of Section 5(a)(15) and (16), “financial obligation” means a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term financial obligation shall not include municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board consistent with Rule 15c2-12. 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. E-5 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 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-6 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: July 28, 2021 CITY OF ENCINITAS By: Authorized Signature ENCINITAS PUBLIC FINANCING AUTHORITY By: Authorized Signature ACCEPTED BY: APPLIED BEST PRACTICES,LLC as Dissemination Agent By: Authorized Signature E-7 EXHIBIT A NOTICE TO REPOSITORY OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Encinitas Public Financing Authority (the “Issuer”) Issue: 2021 Federally Taxable Lease Revenue Refunding Bonds, Series A (Pacific View Property) Date of Delivery: July 28, 2021 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 July 28, 2021 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 [THIS PAGE INTENTIONALLY LEFT BLANK] F-1 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 F-2 Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to 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 F-3 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. [THIS PAGE INTENTIONALLY LEFT BLANK] z A z y ro r n ro z �Z z x 0 y ►C 0 LV C r r ►c y r r z 0.0 0.0 0.0 z to 0 z d x ro A A C t� •'* Mixed Sources Pmau t,iedwu, m,rW <] - forests. trolled k, aml m�raea w.a or rt��. � Fyb Printed by:ImageMaster,LLC y w Jmagemaster.—