HomeMy WebLinkAboutStaff Report 328-09TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER
DATE: JULY 27, 2009
REPORT TYPE: Reports of Offieials
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 328:09
SUBJECT: Adoption of a Resolution Authorizing the Issuanee and Sale of Water
Revenue Bonds, Approving Indenture of Trust, Official Notice of Sale, Notice
of Intention to Sell, and Official Statement, Approving the Form and
Authorizing Execution of Documents Related to Bond Issuance; and
Authorizing Official Actions Related Thereto
EXECTIVE SUMMARY
The City of Palo Alto does not have enough water to meet normal and emergeney demands if the
Heteh Hetehy aqueduct system shuts down. Therefore, as part of the neeessary water system
improvements identified in a report prepared for the City in 1999, the City needs to eonstruct a
2.5 million gallon underground water reservoir and pump station in Palo Alto to meet emergency
water supply and storage needs. In addition to this water reservoir, the project includes the
construction of several emergeney supply wells and the upgrade of five existing wells and the
existing Mayfield Pump Station. On March 5, 2007, staff requested conceptual approval f!'Om
the Council to move forward with financing of this project through a combination of reserves
and bonds. Financing the capital costs over a twenty five year period is recommended to
alleviate pressure on ratepayers.
Staff is returning to Council for authorization to issue and sell Water Utility Revenue bonds. It is
estimated that if bonds are sold as tax-exempt, such issuance will not exceed $35,500,000, or
$37,500,000 if sold as taxable "Direct Pay Build America Bonds" (BABs). The bonds may be
sold as a combination of tax-exempt and taxable BABs, whichever receives the lowest interest
cost bid. Staff also needs Council to approve the required financial documents, and to take all
necessary actions related to the bond sale. Proceeds from these bonds will be used over the next
three years for extensions and improvements to the City's Water System.
RECOMMENDATION:
Staffrecommends that the City Council approve the attached resolution (Attachment A), to:
I) Authorize staff to issue and sell tax exempt and/or taxable "Direct Pay Build America
Bonds" (under the American Recovery and Reinvestment Act of 2009) Water
Revenue Bonds, in a total amount not to exeeed $37,500,000, to finance City water
system capital improvements.
2) Approve the Indenture of Trust, Official Notice of Sale, Notice of Intention To Sell,
and Preliminary Official Statement; and authorize official actions related thereto.
BACKGROUND
The 1999 Water Wells Regional Storage and Distribution System Study (1999 study) analyzed
the impact of a severe emergency on Palo Alto's water distribution system. A large earthquake,
for instance, could result in a shutdown of the City's main water supply, the San Francisco Public
Utilities Commission (SFPUC) Retch Retchy water system, for as long as 60 days. Coupled with
the need to extinguish multiple fires in the hours immediately following such an earthquake, the
City's water system would not be able to supply sufficient water to meet demands, even if
extensive water conservation measures were implemented during the disaster. The study
concluded that the best approach to providing basic water needs would be multifaceted,
including the augmentation of the City's emergency water supply by constructing: an
underground 2.5 million gallon reservoir with pump station; the rehabilitation of up to 5 existing
water wells; construction of3 new wells; and the upgrade of the existing Mayfield Pump Station.
Subsequent to the 1999 study, the Utilities Advisory Commission (UAC) and City staff
undertook a series of steps to validate the recommendations of the study, including a 2-year
review of the projeet, and additional study of alternative emergeney water supply
recommendations and reservoir and well loeations. On December 13, 2004, the City Council
held a study session on emergency preparedness issues, including the Emergency Water Supply
and Storage Project. In February and March 200S, focus group meetings were held with
participants from community and neighborhood groups, environmental groups and busin~sses.
Ibc purpose of the public meetings was to elicit feedback from the community about the project
and the location of potentiall'eservoirand well sites.
On January 30, 2006, Council authorized preparation of an Environmental Impact Report (EIR)
for the Project. A Notice of Preparation (NOP) and draft Project Description were issued in
February of 2006. The UAC held a project scoping puhlic meeting 011 March 8, 2006 in
compliance with the California Environmental QUality Act. On November 2, 2006, the City
mailed a Notice of Availability (NOA) and advertised the NOA in local papers. The Draft ErR
was circulated on November 8, 2006 for public review and comment. The Final Environmental
Impact Report (FEIR) with responses to the public comments was circulated on February 8,
2007. Ibe Planning Commission held a public hearing for the FEIR 011 February 14, 2007 and
recommended that Council certify the FErR. The Commission also recommended that the
Council approve the staff-recommended reservoir and well site locations, the upgrade to the
Mayfield pump station and the rehabilitation of up to five existing well sites.
On March 5, 2007 (CMR 161:07), Council held a public hearing for the Emergency Water
Supply Storage Project at which Council: I) adoptcd a resolution certifying the adequacy of the
Environmental Impact Report (EIR); 2) adopted a resolution approving the project and
designating the project sites, including El Camino Park as the preferred site for the new
underground reservoir, pump station and well; 3) approved Park Improvement Ordinances for El
Camino, Eleanor Pardee, Timothy Hopkins, Rinconada and Peers Park; and 4) directed staff to
take appropriate steps to place an advisory measure on the ballot for November 6, 2007 for
approval of placement of thc reservoir underneath EI Camino Parle Staff also requested
conccptual approval from the Council to move forward with financing through a combination of
reserves and bonds. Financing the capital costs over a twenty five year period is recommended
to alleviate pressure on ratepayers by spreading the cost of these projects over a longer period.
On July 9, 2007 (CMR 297:07), Council approved a resolution authorizing staff to place an
advisory ballot measure on the November 6, 2007 ballot. The advisory measure asked voters
whether an area under EI Camino Park should be used for an undergrotmd water storage
reservoir and well to supply the City with water during an emergency, with the existing pump
station replaced and all existing park facilities fully restored upon completion of constlUction. On
November 7, 2008, the advisory ballot measure was approved by 91.84% of Palo Alto voters.
On January 12, 2009, a key project milestone occurred when Council approved (CMR: 104:09)
the Agreement to Grant Easements between the City and The Board of Trustees of Leland
Stanford Junior University ("the Agreement") for five permanent easements required to move the
proposed EI Camino Park Emergency Water Supply Storage Project forward. Owned by
Stanford, EI Camino Park is under long-term lease to the City until 2033. The five easements,
which will permit the construction, maintenance and operation in El Camino Park, are for: 1) a
2.5 million gallon underground reservoir; 2) a pump station and well; 3) a pipeline connecting
the reservGir to the pump station; 4) an overflow pipeline; and 5) a water supply line. The
purchase price of the easements under the Agreement is $3 million, which is the appraised fair
market value, determined fi'om an appraisal completed by Hulberg and Associates.
DISCUSSION
Staff is l'etmning to Council for authorization to issue and sell Water Revenue bonds in an
amount up to $37,500,000 of tax-exempt and/of taxable BABs, under the pfovisions of the
American Recovery and Reinvestment Act of 2009, to approve the required financial documents,
and to authorize all necessary actions related to the sale. Proceeds from these bonds will be used
over the next three years for capital improvements discussed above, such as building an
underground reservoir at EI Camino Park, rehabilitating existing water wells, constructing new
wells, and upgrading the existing Mayfield Pump Station. The City expects to reccive bond
proceeds in October 2009.
The bonds may be issued as traditional tax-exempt bonds and/or as taxable BABs, under the
federal provisions of the American Recovery and Reinvestment Act of 2009. Under the federal
law which authorizes local agencies to issue BABs, a governmental purpose project that is
eligible for tax-exempt financing can also be financed with taxable BABs. In return for issuing
taxable bonds with higher interest rates, the City will receive a semi-annual cash subsidy
payment from the United States Treasury equal to 35% of the interest payable on the BABs. The
City's Financial Advisor recommends the City retain the option to request that bond bidders
specify if their bid is for tax-exempt bonds, BABs, or a combination of both types of bonds.
After considering the 35 percent federal cash subsidy for BABs, the bidder with the lowest
interest cost on the bonds would be awarded the bonds. BABs require minimal paperwork twice
a year with the U.S. Treasury for the receipt of the 35 percent of interest payment subsidy.
To maximize the quality of the City's bond issuance, and to minimize interest expense, staff will
deliver a ratings presentation to Standard and Poor's (S&P) and Moody's on August 31, 2009.
The City Manager and staff from the Administrative Services and the Utilities Departments, as
well as the City's bond counsel and financial advisor, will participate in the presentation.
Information such as the financial condition of the City's water operations, the ability of this
enterprise fund to repay debt, the status of the City's water operations contracts and
commitments, and the pledges the City makes in its bond covenants will be presented to the
ratings agencies. These agencies will be especially interested in the overall strength of the water
reserves and the low amount of the City'S existing debt secured by the water enterprise. This
information is factored into each agency's credit rating, which investors use in determining
whether or not to buy the bonds and the interest rate on the bonds. A high credit rating results in
lower interest costs and vice versa. On the 1995, 1999, and 2002 Utility Revenue and Refunding
Bonds, the City received an underlying rating from Standard and Poor's (S&P) of AA+, AA-,
and AA-, respectively. In April 2009, these bonds received a ratings upgrade from S&P to the
highest possible rating (AAA). The utility markets have changed dramatically since the last
bond issue, and while the City of Palo Alto's bond issues are looked upon favorably by the
investment community, the rating agencies will re-examine the City's financial condition and
potential risks. As soon as the ratings are received, staff will relay the results to Council.
The covenants in the attached Indenture for the proposed bonds are similar in structure to those
used for the 2002 Utility Revenue Bonds issued for water and gas capital improvements
(CMR:456:01). The attached (Attachment A, Exhibit A) Indenture of Trust (Section 5.12 and
5.13) outlines the City's financial covenants. III general, the first and foremost guarantee the
City is making is that the water system will generate sufficient charges/revenues, combincd with
its available Rate Stabilization Reserve, to cover all of its eosts. To further enhance
creditworthiness, there is a second assurance in the attached Indenture. It specifies that, in
addition to having sufficient net revenue from the water system to pay principal and interest
obligations, specific utility reserves (water, electric, and gas systems) will be maintained at a
level at least five times the maximum annual debt device on all bonded debt secured by revenues
of the City's water, gas, and electric systems.
As a result of issuing the proposed 2009 bonds, the water utility will ineur estimated annual debt
service of $2.4 million. When combined with current water debt service of $0.77 million, the
water fund will have a total of annual debt service $3.17 million.
Council approval is required to sell tax-exempt and/or taxablc BABs in an amount not to exceed
$37,500,000 million, to finance City water system capital improvements. The City should
receive proceeds from that sale in October 2009. The City's financial advisor (Stone &
Youngberg) will assist staff in receiving and evaluating bids received from underwriters for thc
CMR:328:Q9
bonds and in selecting thc optimal bid. The City utilizes a competitive sale process in which
multiple bidders or underwriters submit bond purchase proposals. The underwriter with a bid
resulting in the lowest interest cost to the City will be selected.
Documents Submitted for Council Approval
The Council must approve the attached Resolution before the 2009 Water Revenue bonds can be
sold by a competitive sale. By approving this resolution, the City Council authorizes various
City officials to sign and execute documents related to the bond sale. The Resolution also
approves the following documents:
• Preliminary Oflicial Statement containing and discussing information material to the
offering and sale of bonds is in nearly final fOlm, but will be subject to changes deemed
advisable by the City's financial advisor, disclosure counsel, bond counsel and the City
Attorney, and to incorporate fiscal year 2009 financial and statistical information.
• Indenture of Trust, between the City and U.S. Bank National Association, as uustee,
under which the bonds will be issued, containing the terms of the bond issue, such as
interest rates, maturity amounts, redemption features, and the creation of various funds
and accounts.
• An official Notice of Sale to the investment community seeking bids to be received at the
offices of Stone & Youngberg in October 2009
• Notice ofIntention to Sell Bonds
RESOURCE IMPACT
No additional budget appropriation will be needed. Capital projects utilizing bond proceeds have
been approved and incorporated in the 2009-10 Adopted Budget. In addition, Council approved,
in concept, proj ects in 20 I 0-11 that will be bond funded. Issuance costs including bond and
disclosure cO\ulsel, financial advisor, and rating agency fees will be paid through the sale of the
bonds. A detailed cost breakdown is shown in Attachment B.
Actual interest rate and precise debt serviee payments will not be known until competitive bids
are received from the underwriting firms and a winning bid is determined. As stated above, it is
estimated that the total annual debt service will be approximately $2.4 million and the true
interest cost will not exceed 6.0 percent. At this time, the current interest rate enviro\U11ent is
favorable fol' issuing debt.
POLICY IMPLICATIONS
This report is consistent with prior policy direction received from Council.
TIME LINE
August 31,2009
September 2009
CMR:328:09
Ratings presentations to Moody's and Standard and Poor's
Ratings commitments received
Page 5 of7
September 2009
October 2009
October 2009
November 2009
Bond sale notices published
Bids received and bonds priced. Bonds awarded to winning bidder
Pre-close and close bond issue. Deliver bond proeeeds
Engineering design begins
ENVIRONMENTAL REVIEW
The issuanee of bonds does not meet the definition of a projeet pursuant to Public Resources
Code § 21065, thus California Environmental Quality Act review is not required. On March 5,
2007 (CMR 161:07), Council held a public hearing for the Emergency Water Supply Storage
Project at which Council adopted a resolution certifying the adequacy of the Environmental
Impact Report (ErR).
ATTACHMENTS
Attachment A:
Exhibit A:
Exhibit B:
Exhibit C:
Exhibit D:
Attachment B:
CMR:328:09
Resolution of the Council of the City of Palo Alto Authorizing the
Issuancc and Sale of Water Revenue Bonds, Approving Indenture of
Trust; Official Notice of Sale, Notice of Intention to Sell, and Official
Statement, and Authorizing Official Actions Related Thereto
Indenture of Trust by and Between the City of Palo Alto and U.S.
BanIe National Association as Tmstee
Official Notice of Sale
Notice ofIntention to Sell
Preliminary Official Statement (POS) Containing and Discussing
InfOlmation Material to the Offering and Sale of Bonds
Sources and Uses.ofFunds
Page 6 of7
PREPARED BY:
TARUN NARAYAN
Senior Financial Analyst
g~~ -liOMJC·ANf(JfO'· ~
Senior Project Engineer
DEPARTMENT HEAD APPROVAL;
CITY MANAGER APPROVAL:
CMR:328;09
JAMES KEENE
City Manager
Page 7 of7
ATTACHMENT A
NOT YET APPROVED
Resolution No. -=--Resolution of the Council of the City of Palo Alto
Authorizing the Issuance and Sale of Water Revenue Bonds,
Approving Indenture of Trust, Official Notice of Sale, Notice
of Intention to Sell and Official Statement, and Authorizing
Official Actions Related Thereto
The Council ofthc City of Palo Alto does RESOLVE as follows:
SECTION 1. Authority. The City is a chartered city and municipal corporation
organized and existing under the constitution and laws of the State of California, and is duly
empowered as a chartered city to exercise the powers reserved to it under said constitution with
respect to municipal affairs.
SECTION 2. Utility Systems. As an exercise of such powe1'8,the City has
heretofore adopted the provisions of Chapter 12.28 (commencing with Section 12.28.010) of the
Palo Alto Municipal Code (the "Law") which authorize the City, when the public interest and
necessity require, by resolution, to issue its revenue bonds for the purpose of fmancing or
refinancing the acquisition, construction, extension or improvement of any utility enterprise
system or facility of the City.
SECTION 3. Bonds Proposed. The City, after due investigation and deliberation,
has determined that it is in the public interest of the City at this time to authorize the issuance of
its revenue bonds (the "Bonds") under the Law, to (i) finance certain improvements to the City's
water system (the "Water System"), (ii) establish a debt service reserve fund for the Bonds, and
(iii) pay ecrtain costs of issuing the Bonds.
SECTION 4. Bond Sale Documents. Quint & Thimmig, LLP, as disclosure
counsel to the City ("Disclosure Counsel") has prepared and submitted to the City a preliminary
Official Statement relating to the Bonds, a copy of which is on file with the City Clerk, for
distribution to municipal bond broker-dealers, banking institutions and members of the general
public who may be interested in purchasing the Bonds, and Jones Hall, A Professional Law
Corporation, as bond counsel to the City ("Bond Counsel"), has prepared an official notice of
sale of the Bonds (the "Official Notice of Sale") a copy of which is on file with the City Clerk,
and a notice of intention to sell the Bonds (the "Notice of Intention"), a copy of which is on file
with the City Clerk, for publication as herein provided.
SECTION 5. Authorization of Sale. The Bonds may be issued as tax-exempt bonds
("Tax-Exempt Bonds"), as taxable Qualified Direct Payment Build America Bonds under the
provisions of the American Recovery and Reinvestment Act of 2009 ("Taxable Build America
Bonds") or as a combination of Tax-Exempt Bonds and Taxable Build Americi\ Bonds, if
recommended by Stone & Youngberg LLC, the City's financial advisor (the "Financial
1
09()72I,yn605091Z
NOT YET APPROVED
Advisor"), as being the most cost-effective method of issuing the Bonds, so long as such
recommendation is agreed to by the Administrative Services Director of the City.
The Director of Administrative Services is hereby authorized to select a time and
date at whieh bids will be received for the purchase of the Bonds as described in and subject to
the terms and conditions of the Official Notice of Sale. The Director of Administrative Services
is hereby authorized to award the sale of the Bonds to the bidder whose responsive bid for the
Bonds results in the lowest true interest cost to the City, to be determined in accordance with the
Official Notice of Sale; provided that the term of the Bonds shall not exceed 30 years, the true
interest eost of the Tax-Exempt Bonds shall not exceed 6%, the true interest cost of the Taxable
Build America Bonds (after taking into account any refundable eredits received by the City as a
result of issuance of the Taxable Build America Bonds) shall not exceed 6%, and the discount on
the Bonds shall not exceed 1.5% .. '111e principal amOlmt of the Tax-Exempt Bonds shall not
exceed $35;500,000 and the principal amount of the Taxable Build America Bonds shall not
exceed $37,500,000, which principal amounts may be decreased before the giving of notice of
the sale of the Bonds as herein provided and the documents referenced in Section 4 hereof shall
be revised accordingly.
SECTION 6. Notice of Intention. The Director of Administrative Services of the
City is authorized and directed to cause to be published the Notice of Intention in substantially
the form on file with the City Clerk once in The Bond Buyer, in accordance with Section 53692
ofthe California Government Code.
SECTION 7. Indenture of Trust. The Bonds shall be issued pursuant to an
Indenture of Trust dated as of October 1, 2009 (the "Indenture"), by and between the City and
U.S. Bank National Association, as trnstee (the "Trustee"). As provided in the Indenture, the
Bonds shall be secured by the Net Revenues (as that term is defined in the Indenture) of the
Water System. The Indenture, in substantially the form on file with the City Clerk, is hereby
approved, and the Mayor, the City Manager and the Director of Administrative Services (each, an
"Authorized Official") are hereby separately authorized to execute the Indenture when finalized,
following the sale of the Bonds, and the City Clerk is hereby authorized and directed to attest
said Authorized Official's signature.
SECTION 8. Official Statement. The preliminary Official Statement describing the
Bonds, in substantially the form submitted to the Council, is hereby approved, subject to
whatever additions, deletions and corrections may be deemed advisable by the Authorized
Official upon consultation with Disclosure Counsel, the Financial Advisor, Bond Counsel and
the City Attorney. The Authorized Official is hereby separately authorized and directed, upon
consultation with the Financial Advisor, Disclosure Counsel, Bond Counsel and the City
Attomey, to approve such changes to the preliminary Official Statement as shall be necessary to
cause such preliminary Official Statement to be brought into the form of a final Official
Statement, and the Authorized Official is hereby authorized and direeted to execute and deliver
copies of the final Official Statement to the purchaser ofthe Bonds, at the time of delivery of the
Bonds. .
2
090121 syn 6050912
NOT YET APPROVED
The Council hereby approves, and hereby deems nearly final within the meaning of
Rule 15c2-12 of the Securities Exchange Act of 1934 (the "Rule"), the preliminary Official
Statement. The Authorized Official is hereby authorized to execute an appropriate certificate
stating the Couneil's determination that the preliminary Official Statement has been deemed
nearly final within the meaning of the Rule.
SECTION 9. Distribution of Official Statement and Official Notice of Sale. The
Financial Advisor is hereby authorized and directed to cause copies of the preliminary Official
Statement to be printed and mailed to prospective bidders for the Bonds, together with copies of
the Official Notice of Sale, which Official Notice of Sale, in substantially the form on file with
the City Clerk, is hereby approved.
SECTION 10, Preparation of Bonds. The Director of Administrative Services is
directed to cause the Bonds to be prepared in accordance with the provisions of the Indenture of
Trust approved in Section 7 and to cause their execution by the proper officers of the City and
authentication by the Trustee and to cause the Bonds to be delivered when so executed and
authenticated to or on behalf of the purchaser or purchasers thereof, upon the receipt of the
purchase price therefor.
SECTION II. Execution of Documents. The Mayor, Vice Mayor, City Manager,
City Clerk, DireCtor of Administrative Services, Director of Utilities, Director of Public Works,
City Attorney and any and all other officers of the City are each authorized and directed in the
name and on behalf of the City to execute and deliver any and all certificates, requisitions,
agreements, notices, consents, warrants and other documents, which they or any of them might
deem necessary or appropriate in order to consummate the lawful issuance, sale and delivery of
the Bonds to the original purchaser thereof.
II
II
II
II
II
II
II
II
II
II
090721 syn 6050912
3
NOT YET APPROVED
SECTION 12. Effective Date. This resolntion shall be effeetive upon the date of its
adoption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
City Clerk
APPROVED AS TO FORM:
Deputy City Attorney
JONES HALL,
A Professional Law Corporation
William H. Madison
Bond Counsel
090721 ,y.6050912
APPROVED:
Mayor
City Manager
Direetor of Utilities
Direetor of Administrative Services
4
26(l05-62 jHWHM
EXHIBIT A
INDENTURE OF TRUST
by and between the ,
CITY OF PALO ALTO
and
U.S. BANK NATIONAL ASSOCIATION,
as Trustee
Dated as of October 1, 2009
Relating to
City of Palo Alto
$[Principal Amount]
Water Revenue Bonds
2009 Series A
5/5/09
6/10/09
7/6/09
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS; AUTHORIZATION AND PURPOSE OF SERIES
A BONDS; EQUAL SECURITY
SECTION 1.01. Definitions ............................................................................................................................. 3
SECTION 1.02. Rules of Construction ............................................ .. . ....................................... 12
SECTION 1.03. Auihorization and Purpose of Series A Bonds .. .. .. ....... 13
SECTI9N 1.04. Equal Security ........................................................ . ......... 13
ARTICLE II
ISSUANCE OF SERIES A BONDS
SECTION 2.01. Terms of Series A Bonds ...................................................................................................... 14
SECTION 2.02. Redemption of Series A Bonds ............................................................................................ 16
SECTION 2.03. FOTm of Series A Bonds ........................................................................................................ 18
SECTION 2.04. Executiou of SeTies A Bonds ................................................................................................ 19
SECTION 2.05. Transfer of Series A Bonds ................................................................................................... 19
SECTION 2.06. Exchange of Series A Bonds ................................................................................................. 19
SECTION 2.07. Temporary Bonds .................................................................................................................. 19
SECTION 2.08. Bond Regish'ation Books ...................................................................................................... 20
SECTION 2.09. Series A Bopds Mutilated, Lost, Destroyed or Stolen ....................................................... 20
SECTION 2.10. Book Entry System .............................................................................................................. 20
ARTICLE III
ISSUE OF SERIES A BONDS; PARITY BONDS
SECTION 3.01. Issuance of Series A Bonds ................................................................................................... 23
SECTION 3.02. Application of Proceeds of Sale of Series A Bonds ........................................................... 23
SECTION 3.03. Reserve Account .................................................................................................................... 23
SECTION 3.04. 2009 Water Project Fund ....................................................................................................... 23
SECTION 3.05. Cost of Issuance Fund ........................................................................................................... 24
SECTION 3.06. Issuance of Parity Bonds ....................................................................................................... 24
SECTION 3.07. No Additional Prior Lien Bonds ......................................................................................... 26
SECTION 3.08. Subordinate Debt ................................................................................................................... 26
SECTION 3.09. Validity of Series A Bonds .................................................................................................... 26
ARTICLE IV
PLEDGE OF NET REVENUES; FUNDS AND ACCOUNTS
SECTION 4.01. Pledge of Net Revenues, Water Revenue Fund ................................................................ 27
SECTION 4.02. Receipt and Deposit of Revenues ........................................................................................ 27
SECTION 4.03. Establishment of Funds and Accounts and Allocation of Revenues Thereto ............... 27
SECTION 4.04. Application of Debt Service Fund ....................................................................................... 28
SECTION 4.05. Application of Reserve Account. ......................................................................................... 29
SECTION 4.06. Application of Redemption Account. ................................................................................. 29
SECTION 4.07. Surplus .................................................................................................................................... 29
SECTION 4.08. Investments ............................................................................................................................ 29
SECTION 4.09. Valuation; Replenishment of Reserve Account; Investments ......................................... 30
• ARTICLE V
COVENANTS OF THE CITY; SPECIAL TAX COVENANTS
SECTION 5.01. Punctual Payment; Compliance With Documents ........................................................... 32
- i -
SECTION 5,02. Against Encumbrances, ... , .............. , ...... , .......... , .............. " .. ," .. " .. ,', .. " .. ,' ... " .. ," '" , .. " .. " .. " .. ,32
SECTION 5,03. Discharge of Claims, ........ , .............. , ...... , .......... ', ................ , .. , ........ ,', ...... , .. , ........ , ................ 32
SECTION 5,04, Acquisition, Construction or Financing of any Improvement to the Water System ... ,32
SECTION 5,05, Maintenance and Operation of Water System in Efficient and Economical
Manner.", .. " .. " ............ , ......... , ................... , ............................................................................. 32
SECTION 5.06, Against Sale, Eminent Domain, ........................................................................................... 32
SECTION 5.07. Insurance ..... ,., .......... , .......... ', ............................... , ...................................... , .......................... 33
SECTION 5.08. Records and Accounts. , ..... , .................................................................................... , ............. 34
SECTION 5.09. Protection of Security and Rights of Owners ..................................................................... 34
SECTION 5.10. Against Competitive Facilities ................ ,., .......... ,., ... , ..................... , ........ , ............ ,.,., ......... 34
SECI'ION 5.11. Payment of Taxes, Etc ........................................................................................................... 34
SECTION 5.12, Rates and Charges ..... " ........ , ............ , .................... " ..................................... , .......... ,', ........... 34
SECTION 5.13. Maintenance of Available Reserves; Transfers Thereirom .............................................. 35
SECTION 5.14. No Priority for Additional Obligations .............................................................................. 35
SECTION 5.15. No Arbitrage .. " ........... , ........ , ..................... , ............ , .................. '., ............... , ............ ,., .......... 36
SECTION 5.16. Information Report. .... , ........ , ............ , ........ , .......... ,.,., ................ , ................................ , .......... 36
SECTION 5.17. Private Activity Bond Limitation ........................................................................................ 36
SECTION 5.18. Federal Guarantee Prohibition ............................................................................................ 36
SECTION 5.19. Further Assurances ............................................................................................................... 36
SECTION 5.20. Continuing Disclosure ......................................... , ...................... ' ............... , .............. , .......... 36
SECTION 5.21. Rebate Requirement. ................................. , ............ , .................. , .................. , .................... , ... 36
SECTION 5.22. Maintenance of Tax Exemption ................................................................. , ......................... 36
ARTICLE VI
THE TRUSTEE
SECTION 6,01. Appointment of Trustee ...................................................................................................... 37
SECTION 6.02. Acceptance of Trusts .......... , .................................................................................................. 37
SECTION 6.03. Fees, Charges and Expenses of Trustee .............................................................................. 39
SECTION 6.04. Notice to Bond Owners of Default ...................................................................................... 39
SECTION 6.05. Intervention by Trustee ....................................................................................................... .40
SECTION 6.06. Removal of Trustee ............................................................................................................. 40
SECTION 6.07. Resignation by Trustee .................................................................................. , ..................... .40
SECTION 6.08. Appointment of Successor Trustee ............................................ , ................. , ..................... .40
SECTION 6.09. Merger or Consolidation, ................................................................................................. , ... 40
SECTION 6.10. Concerning any Successor Trustee ...................................................................................... 41
SECTION 6.11. Appointment of Co-Trustee, ............................................................................................... .41
SECTION 6.12, Indemnification; Limited Liability of Trustee .................................................................. .41
ARTICLE VII
MODIFICATION AND AMENDMENT OF THE INDENTURE
SECTION 7.01. Amendment by Consent of Bond Owners ......................................................................... 43
SECTION 7.02. Amendment Without Consent of Bondholders ............................................................... ,.43
SECTION 7.03, Disqualified Bonds .............. " ........................................................ , ...................................... .43
SECTION 7.04, Endorsement or Replacement of Series A Bonds After Amendment ............................ ,44
SECTION 7.05, Amendment by Mutual Consent ......................................................................................... 44
ARTICLE VIII
EVENTS OF DEFAULT AND REMEDIES OF BOND OWNERS
SECTION 8.01. Events of Default and Acceleration of Maturities ............................................................. 45
SECTION 8.02. Application of Funds Upon Acceleration .......................................................................... 46
SECTION 8.03. Other Remedies; Rights of Bond Owners ........................................................................... 46
SEC!ION 8.04. Power of Trustee to Control Proo,edings ............................... , .......................................... 47
-ii-
SEcnON 8.05. Appointment of Receivers .. " .. " .. " .. "" .. , ... , ... " .... ,.,." .. " .. " ..... ,"""""""""',." .... ,.,',., ..... , ... , .. 47
SECTION 8.06, Non-Waiver .. ".,., ... , ...... ,',., .. ,', .. ,"""""'",.,., ... "."."""""""""", .. """",.",., .. ,.,.,."".,.,.,.,.,,,,, . .47
SECnON 8.07. Rights and Remedies of Bond Owners ............................. " .................. "".""" ....... ",, ....... .48
SECTION 8,08, Termination of Proceedings. """''''',.""., .. " .. ", .. " .. ", .. " .. " .. """,,,,,,,,,,,,, ...... ,', .. ,""" .. " .. "" .. 48
ARTICLE IX
MISCELLANEOUS
SECTION 9.01, Limited Liability of City, .. "" ........ ,,, .. ,," , ...... " """ " " ''' ............... " ........ , .. " .. ", ...... "" .... , ....... 49
SECTION 9.02, Benefits of Indenture Limited to Parties .. " " .......... " .. " .................................... " .. ,,,,,,, .. ,, .. .,49
SECTION 9.03, Discharge of Indenture ........... ,,, ..... ,, .. ,.,"" "'" " .. " .. , "" ................ , .. " .. " ...... , .. "" .. ," "" ", , .. "..49
SECTION 9,04, Successor Is Deemed Included in All References to Pt'edecessor. ............. " .... " ... "" ... , .. 50
SECTION 9,05, Content of Certificates, , .. ,: .. "''',, ......... ,'' " ...... , ........ , " " " " ............. ,," .... ,,",,",. , .. ,' ,,,,,,,,,,.,, .. ,,50
SECTION 9,06. Execution of Documents by Bond Owners ... """."" ..... , ..... ,,, .. ,,", ...... ,,,, ... ,, .. ,,,, ........ ,, ...... 51
SECTION 9,07. Waiver of Personal Liability, , .. " ................. """ .. " .......... ,,, .. ,,,,,,,, ................ ,,,, .. ,, .. ,,, .. ,, .. ,,,..5'1
SECTION 9.08. Partial Invalidity, ..... , ............. ", .. " .. ", ... , ... " .. ,., .. " .. ", .. " .. """",.",.""""" .. " .. ", .. "",., .. " ... , .. ",51
SECTION 9,09, Desh'uction of Cancelled Series A Bond8 .. " .................... , ................. " .. " .. " ....................... 52
SECTION 9,10. Funds and Accounts, "',""""""', .. ,., ..... "', .. ,', .. " .. " .. ,', .. ,, .. ,, ... , ... """" .. " .. " .. ", .. " ... " ...... , ..... ,52
SECTION 9,11, Notices, ... , ... , .... , .. ", .. ,"", .. " .. ,""', .. " ... " .. ", .. " .. " ... , ... , .. """"""".,,,,,,,,,,,,,,,,,,,,.,,,,,, .. ,,,,,,,,,, ... ,,.52
SECTION 9,12, Unclaimed Moneys, ''',,'''',,'''' '''''''":,,.,,'''''''' ... "",,., '"''''''''''''" ... ,''''''''''''''''' '''"."" ............ .52
SECTION 9,}3, Execution in Several COllnterpalis ... ,., ........ , ............ , ................. ,"''''''''''''''''" ... ,' ........ , .. , .. .52
SECrrON 9.14. Governing Law, ................ ",,,, '''"."',.,,, ......... , ............ , .... ,,, .... ,, .... ,"""""""''''''''',.,, ...... , ..... .53
SECTION 9,15. Payment on Business Days ... """"",,,, ...... ,,,,, ...... , ...................... ,,, .... ,, .. ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.53
EXHIBIT A:
EXHIBITB:
FORM OF SERIES A BOND
DESCRIPTION OF 2009 WATER PROJECT
~ iii -
INDENTURE OF TRUST
THIS INDENTURE OF TRUST, dated as of October 1, 2009, by and between the CITY
OF PALO ALTO, a chartered city and municipal corporation organized and existing under the
constitution and laws of the State of California (the "City"), and U.s, Bank National Association,
a national banking association organized and existing under the laws of the United States of
America, with a co.rporate nust office in San Francisco, California, and being qualified to accept
and administer the trusts hereby created, as trustee (the "Trustee");
WITNESSETH:
WHEREAS, the City is authorized pm-suant to the proVISIons of Chapter 12.28
(commencing with Section 12.28.010) of the Palo Alto Municipal Code, enacted pursuant to the
charter of the City, to issue its revenue bonds for the pm-poses of financing improvements to an
enterprise of the City;
WHEREAS, the City has heretofore authorized, issued and sold $8,640,000 principal
amount of its City of Palo Alto Utility Revenue Bonds, 1995 Series A (the "1995 Bonds"),
currently outstanding in the principal amount of $5,320,000 pm-suant to an Indenture of Trust,
dated as of August 1, 1990, between the City and the Trustee, as successor trustee to Sccmity
Pacific National Bank (the "1990 Indenture"), and a Second Supplemental Indenture of Trust,
dated as of February 1, 1995 (the "Second Supplemental Indenture"), between the City and the
Trustee, which supplements the 1990 Indenture;
WHEREAS, as provided in the 1990 Indenture and Second Supplemental Indenture, the
1995 Bonds are secm-ed by a pledge of the City's Enterprise (the "Enterprise") as that term is
defined in the 1990 Indenture, consisting generally of the City's water, gas, electric, wastewater
and storm water systems;
WHEREAS, the City has heretofore authorized, issued and sold $26,055,000 principal
amount of its City of Palo Alto Utility Revenue Bonds, 2002 Series A (the "2002 Bonds"),
cU1'l'entiy outstanding in the principal amount of $19,690,000 pursuant to an Indenture of Trust,
dated as of January 1, 2002, between the City and the Trustee (the "2002 indenture");
WHEREAS, the proceeds of the 2002 Bonds were expended for improvements to the
City's Gas System and WateI'System (as those terms are defined in the 2002 Indenture), and
were secured by a pledge of the Net Revenues of the Gas System and Net Revenues of the
Water System (as those terms are defined in the 2002 Indenture), subordinate to the pledge of
the Net Revenues of the Enterprise to pay debt service on the 1995 Bonds; and
WHEREAS, the Sel'ies A Bonds (as herein defined) will be issued on a parity with those
2002 Bonds, the proceeds of which were applied to finance the 2002 Water Project (the "2002
Water Revenue Bonds"); and
WHEREAS, the City, after due investigation and deliberation, has determined that it is
in the interests of the City at this time to provide for the issuance of its revenue bonds under
this Indenture for the purpose of financing certain improvements to the Water System, and to
that end the City Council has heretofore adopted its Resolution No. approving and
1
authorizing the issuance of its City of Palo Alto Water Revenue Bonds, 2009 Series A (the
"Series A Bonds") for such purposes;
WHEREAS, in order to provide for the authentication and delivery of the Series A
Bonds, to establish and declare the tel'ms and conditions upon which the Series A Bonds are to
be issued and secured and to secure the payment of the principal thereof and of the interest and
premium, if any, thereon, the City Council has authorized the execution and delivery of this
Indenture;
WHEREAS, subject to the prior lien of the 1995 Bonds, all of the Series A Bonds will be
secured by a pledge of the Net Revenues, as defined herein, on a parity with the 2002 Water
Revenue Bonds, and certain other moneys and securities held by the City and the Trustee
hereunder; and
WHEREAS, all acts and proceedings required by law necessary to make the Series A
Bonds, when executed by the City, authenticated and delivered by the Tmstee and duly issued,
the valid, binding and legal special obligations of the City, and to constitute this Indenture a
valid and binding agreement for the uses and purposes herein set forth, in accordance with its
terms, have been done and taken; and the execution and delivery of this Indenture have been in
all respects duly authorized;
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that in order to secure the
payment of the principal of and the interest and premium (if any) on all Series A Bonds at any
time issued and Outstanding under this Indenture, according to their tenor, and to secure the
performance and observance of all the covenants and conditions therein and herein set forth,
and to declare the terms and conditions upon and subject to which the Series A Bonds are to be
issued and received, and in consideration of the premises and of the mutual covenant~ herein
contained and of the purchase and acceptsnce of the Series A Bonds by the Owners thereof, and
fol' other valuable considerations, the receipt whereof is hereby acknowledged, the City does
hereby covenant and agree with the Trustee, for the benefit of the respective Owners from time.
to time of the Series A Bonds, as follows:
2
ARTICLE I
DEFINITIONS; AUTHORIZATION AND PURPOSE OF SERIES A
BONDS; EQUAL SECURITY
SECTION 1.01. Definitions. Unless the context otherwise reqnires, the terms defined
in this Section shall for all purposes of this Indenture and of any Parity Bonds Instrument and
of the Series A Bonds and of any certificate, opinion, request or other documents herein
mentioned have the meanings herein specified.
H A<:iclitiQ!I<iI Allowance" means an allowance for earnings arising from any increase in
the Charges which has become effective prior to the incuning of such additional indebtedness
but which, during all or any part of such Fiscal Year or such twelve (12) month period, was not
in effect, in an amount equal to the amount by which the Net Revenues would have been
increased if such increase in Charges had been in effect during the whole of such Fiscal Year 01'
such twelve (12) month period, all as shown in the written report of an Independent Consultant
engaged by the City
"Authorized Investments" means any of the following, but only to the extent that the
same are acquired at Fair Market Value, which at the time of investment are legal investments
under the laws of the State of California and permitted under the City's investment policy for
the moneys proposed to be invested therein:
(a) direct obligations of (including obligations issued or held in book entry form
on the books of) the Department of the Treasury of the United States of America;
(b) obligations of any of the following federal agencies which obligations
represent full faith and credit of the United States of America, including: (i) Export-
Import Bank; (il) Farm Credit System Financial Assistance Corporation, (iii) Farmers
Home Administration; (iv) General Services Administration; (v) U.S. Maritime
Administration; (vi) Small Business Administration; (vii) Government National
Mortgage Association (GNMA); (viii) U.S. Department of Housing & Urban
Development (PHA's); (ix) Federal Housing Administration and (x) Federal Financing
Bank;
(c) senior debt obligations rated "Aaa" by Moody's and "AAA" by S&P issued by
the Federal National MOl,tgage Association or the Federal Home Loan Mortgage
Corporation, and obligations of the Resolution Funding Corporation (REFCORP);
(d) U.S. dollar denominated deposit accounts, federal funds and banker's
acceptances with domestic commercial banks (including the Trustee and its affiliates)
which have a rating on their short term certificates of deposit on the date of purchase of
"P_I" by Moody's and "A-1" or "A-l+" by S&P and maturing no more than 360 days after
the date of purchase, provided that ratings on holding companies are not considered as
the rating of the bank;
3
(e) commercial paper which is rated at the time of pmchase in the single highest
classification, "P-1" by Moody's and "A-l+" by S&P, and which matures not more than
270 days after the date of purchase;
(f) investments in a money market fund rated "AAAm" 01' "AAAm-G" or better
by S&P, including any such money market fund from which the Trustee or its affiliates
receive fees for services to such fund;
(g) 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,
inshumentality or local govemmental 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 upon an irrevocable escrow account or fund (the "escrow"), in the highest
rating category of Moody's and S&P or any successors thereto; or (ii)(A) which are fully
secmed as to principal and interest and redemption premium, if any, by an escrow
consisting only of cash or obligations described in paragraph (a) above, which escrow
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 (E) which escrow is sufficient, as verified by a
nationally recognized independent ceI'tified public accountant, to pay principal of and
interest and redemption premium, if any, on the bonds or other obligations described in
this paragraph on the maturity date or dates thereof or on the redemption date or dates
speCified in the irrevocable instructions referred to above, as appropriate;
(h) general obligations of states with a rating of at least "A2j A" 01' higher by
both Moody's and S&P;
(i) inveshnent agreements: (1) with financial institutions whose long term rating
is at least ; or (2) which are fully collateralized with securities described in
paragraphs (a) or (b) of this definition;
(j) the Local Agency lnveshnent Fund maintained by the State of California, to
the extent any inveshnents of moneys held by the Trustee may be made and withdrawn
directly by, and in the name of, the Trustee; and
(k) the California Asset Management Program (CAMP).
u Authorized Official" means the City Manager, Director of Administrative Services or
Assistant City Manager of the City, or any other officer of the City duly authorized by the
Council for that purpose.
u Available Reserves" means funds held in the City'S:
4
(i) Rate Stabilization Reserve for the Water System,
(ii) Distribution Rate Stabilization Reserve for the Electric System,
(iii) Distribution Rate Stabilization Reserve for the Gas System,
(iv) Supply Rate Stabilization Reserve for the Electric System,
(v) Supply Rate Stabilization Reserve for the Gas System, and
vi) the Electric System's Calaveras-Stranded Costs I{eserve;
and includes the above numerated funds, even though given a different name by the
City Council of the City, as well as newly created funds of the City which create reserves for the
Systems listed above, and into which monies have been transferred from the above Funds.
"Average Annual Debt Service" means the total aggregate Debt Service for the entire
period during which the Bonds are Outstanding, divided by the number of Fiscal Years or
portions thereof during which the Bonds are Outstanding.
"Bond COli.!}!!.!!.!" means any attorney at law or firm of attorneys, of nationally
recognized standing in matters pertaining to the federal tax exemption of interest on bonds
issued by states and political subdivisions, and duly admitted to practice law before the highest
court of any state of the United States of America.
"Bond Law" means the charter of the City and the proVISIons of Chapter 12.28
(commencing with Section 12.28.010), of the Palo Alto Municipal Code, all as in effect on the
Closing Date.
"~.Qnd Registration Books" means the books maintained by the Trustee pursuant to
Section 2.08 for the registration and transfer of ownership of the Series A Bonds.
"13(}nds" means, collectively, the 2002 Water Revenue Bonds, the Series A Bonds, and
any Parity Bonds issued and at any time Outstanding hereunder and under a Parity Bonds
lnsh'ument.
"Bond Year" means the twelve-month period beginning on the anniversary of the
Closing Date in each year and ending on the day prior to the anniversary date of the Closing
Date in the following year except that (i) the first Bond Year shall begin on the Closing Date,
and (ii) the last Bond Year may end on a redemption date prior to maturity of the Series A
Bonds.
"Business Day" means any day other than a Saturday, Sunday or a day on which the
Tmstee is authorized by law to remain closed.
"Certificate of the City" means a certificate in writing Signed by the City Manager,
Director of Administrative Services or Assistant City Manager of the City, or by any other
officer of the City duly authorized by the Council for that purpose.
"Char~es" means fees, tolls, assessments, rates and rentals prescribed under the Bond
Law or any other law of the State by the Council for the services and facilities of the Water
System furnished by the City.
5
\
"City" means the City of Palo Alto, a chartered city and municipal corporation
organized and existing under the Constitution and laws of the State, and any successor thereto.
"Closing Date" means the date upon which there is an exchange of the Series A Bonds
for the pTOceeds representing the purchase of such Series by the Original Purchaser thereof.
"!:()st of Issuance Fund" means the Fund by that name established pursuant to Section
3.05.
"Costs of Issuance" means all expenses incurred in connection with the authorization,
issuance, sale and delivery of the Series A Bonds, including but not limited to compensation,
fees and expenses of the City and the Trustee and their respective counsel, compensation to any
finandal consultants and underwriters, legal fees and expenses, filing and recording costs,
rating agency fees, costs of preparation and reproduction of documents and costs of printing.
"<::ouncil" means the Council of the City or any other legislative body of the City
hereafter provided for pursuant to law.
"pebt 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 Bonds payable by their terms in
such period, including scheduled sinking fund installments; and
(b) The interest which would be due during such period on the aggregate
principal amount of Bonds which would be Outstanding in such period if the Bonds are
paid or redeemed as scheduled.
"Debt Service Fund" means the fund by that name established and held by the Trustee
for the Series A Bonds pursuant to Section 4.03.
"Defeasance Obligations" means (a) cash, (b) non-callable direct obligations of the
United States of America ("Treasuries"), (c) evidences of ownership of pTOportionate interests in
future interest and principal payments on Treasuries held by a bank or trust company as
custodian, under which the owner of the investment is the real party in interest and has the
right to proceed directly and individually against the obligor and the underlying Treasuries are
not available to any person claiming through the custodian or to whom the custodian may be
obligated or (d) pre-refunded municipal obligations rated "AAA" and "Aaa" by S&P and
Moody'S, respectively (or any combination thereof).
"Depository" means (a) initially, DTC, and (b) any other Securities Depositories acting
as Depository pursuant to Section 2.10.
"Depository System Pa~ti<;ipill1t" means any participant in the Depository's book-entry
system.
"RI(;" means The Depository Trust Company, New York, New York, and its successors
and assigns.
6
"Electric Syst~!!1" means the existing electrical system of the City, comprising all
facilities for the transmission and distribution of electric energy,
"Event of Default" means any of the events described in Section 8,01,
"Fair Market Value" means the price at which a willing buyer would purchase the
investment from a willing seller in a bona fide, arm's length transaction (determined as of the
date the contract to purchase 01' 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 uFair Market Value" means the acquisition price in a bona fide arm's
length h'ansaction (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 01' other investment agreement) that is acquired in accordance with applicable
regulations under the Tax Code, (iii) the investment is a United States Treasury Security--State
and Local Govel'11ment Series that is acquired in accordance with applicable regulations of the
United States Bureau of Public Debt, or (iv) any commingled investment fund in which the City
and I'elated parties do not own more than a ten percent (10%) beneficial interest therein if the
return paid by the fund is without regard to the source of the investment.
"Federal Securities" 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:
(a) 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); and
(b) obligations of any department, agency 01' instrumentality of the United
States of America the timely payment of principal of and interest on which are
unconditionally and fully guaranteed by the United States of America.
"Federal Tax Credit Payments" means all payments received from the u.s. Department
of Treasury of the tax credit for those Series A Bonds issued as Direct Payment Build America
Bonds provided for in Sections 5 4AA(b) and 6431 of the Tax Code.
"Fiscal Year" means the period commencing on July 1 of each year and terminating on
the next succeeding June 30.
HQJIS System" means the existing gas system of the City, comprising all facilities for the
storage, transmission and distribution of gas for public or private uses.
"Gross Revenues" means, for any period of computation, all gross charges l'eceived for,
and all other gross income and revenues derived by the City from, the ownership 01' operation
of the Water System or otherwise arising from the Water System during such period, including
but not limited to (a) all Charges received by the City for use of the Water System, (b) all
receipts derived from the inveshnent of funds held by the City or the Trustee under this
Indenture, (c) transfers from any stabilization reserve funds into the Water Revenue Fund, and
7
(d) all moneys received by the City from other public entities whose inhabitants are served
pursuant to contracts with the City.
"!mp!()Y~ll1ent" means any addition, extension, improvement, equipment, machinery or
other facilities to 01' for any System.
"Indenture" means this Indenture of Trust, as originally executed or as it may from time
to time be supplemented, modified or amended by any Parity Bonds Instrument pursuant to
the provisions hereof.
"Independent Certified Public Accountaf\!" means any certified public accountant or
firm of such accountants appointed and paid by the City, and who, or each of whom-
(a) is in fact independent and not under dOlnination of the City;
(b) does not have any substantial identity of interest, direct Or indirect, with the
City; and
(e) is not and no member of which is connected with the City as an officer or
employee of the City, but who may be regularly retained to make annual Or other audits
of the books of or reports to the City.
"Independent Consultant" means any financial or engineering consultant (including
without limitation any Independent Certified Public Accountant) with an established
reputation in the field of municipal finance or firm of such consultants appointed and paid by
the City, and who, or each of whom-
(a) is in fact independent and not under domination of the City;
(b) does not have any substantial identity of interest, direct or indirect, with the
City; and
(c) is not and no member of which is connected with the City as an officer or
employee of the City, but who may be regularly retained to make annual or other audits
of the books of or reports to the City.
"Information Services" means Financial Information, Inc.'s "Daily Called Bond Service",
30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny
Information Services' "Called Bond Service",55 Broad Street, 28th Floor, New York, New York
10004; Moody's Investors Service "Municipal and Government," 99 Church Street, 8th Floor,
New York, New York 10007, Attention: Municipal News Reports; Standard & Poor's
Corporation "Called Bond Record," 25 Broadway, 3rd Floor, New York, New York 10004; and,
in accordance with then current guidelines of the Securities and Exchange Commission, such
other addresses and! or such other services providing information with respect to called bonds
as the City may designate in a Request of the City delivered to the Trustee,
"Interest Payment Date" means, with respect to the Series A Bonds, June 1 and
December 1 in each year, beginning June 1, 2010, and with respect to any Parity Bonds, any
8
date on which interest is due and payable theTeon, and continuing so long as any Bonds or
Parity Bonds remain Outstanding.
"Interest Reguirement" means, as of any particular date of calculation, the amount
equal to any unpaid interest then due and payable, plus an amount which w.ill on the next
succeeding Interest Payment Date be equal to the interest to become due and payable on the
Bonds on such next succeeding Interest Payment Date.
"Mllintenance and Operation Costs" means the reasonable and necessary costs spent or
incurred by the City for maintaining and operating the Water System, calculated in accordance
with sound accounting p"inciples, including the cost of supply of water, gas and electric energy
under contracts or otherwise, the funding of reasonable operating reserves, and all reasonable
and necessary expenses of management and repair and other expenses to maintain and
preserve the Water System in good repair and working order, and including all reasonable and
necessary administrative costs of the City ath'ibutable to the Water System and the Bonds, such
as salaries and wages and the necessary contribution to retirement of employees, overhead,
insurance, taxes (if any), expenses, compensation and indemnification of the Trustee, and fees
of auditors, accountants, attorneys or engineel's, and including all other reasonable and
necessary costs of the City or charges required to be paid by it to comply with the terms of the
Bonds or of the 1990 Indenture, the Second Supplement to 1990 hldenture or this Indenture, but
excluding depreciation, replacement and obsolescence charges or reserves therefor and
amortization of intangibles or other bookkeeping enh'ies of a similar nature.
"Maximum Annual Debt Service" means, as of the date of calculation, the maximum
amount of Debt Service for the current or any future FIscal Year.
"MoQ.dy·s" means Moody's hlvestors Service, a corporation duly organized and existing
under and by virtue of the laws of the State of Delaware, and its successors or assigns, except
that'iI such corporation shall be dissolved or liquidated or shan no longer perform the functions
of a securities rating agency, then the term "Moody's" shall be deemed to refer to any other
nationally recognized securities rating agency selected by the City.
"Net Proceeds" means the gross proceeds from the sale of property or insurance or
condemnation award with respect to which that term is used remaining after payment of all
expenses (induding attomeys' fees and any extraordinaI-Y expenses of the Trustee) incurred in
the collection of such gross proceeds.
"Net Revenues" means, with respect to the Water System, for any period of
computation, the amount of the Gross Revenues received from the Water System during such
period, less the amount of Maintenance and Operation Costs of the Water System becoming
payable during such period.
"1990 Indenture" means that hldenture of Trust dated as of August 1, 1990, by and
between the City and the Prior Trustee.
"1995 Bonds" means the $8,640,000 original principal amount of the City of Palo Alto
Utility Revenue Bonds, 1995 Series A issued by the City pursuant to the Second Supplement to
1990 Indenture.
9
"Original Purchaser" means the first purchaser of the Series A Bonds from the City.
"Outstanding", when used as of any particular time with reference to Series A Bonds,
means (subject to the provisions of Section 7.03) all Series A Bonds theretofore executed, issued
and delivered by the City under this Indenture except -
(a) Series A Bonds theretofore cancelled by the Trustee or surrendered to the
Trustee for cancellation;
(b) Series A Bonds paid or deemed to have been paid within the meaning of
Section 9.03; and
(c) Series A Bonds in lieu of or in substitution for which other Series A Bonds
shall have been executed, issued and delivered by the City pursuant to this Indenture or
any Parity Bonds Instrument.
"Owner" or "Bond Owner" or "Bondowner", when used with respect to any Series A
Bond, means the person in whose name the ownership of such Bond shall be registered on the
Bond Registration Books.
"Parity Bonds" means the 2002 Water Revenue Bonds, and all bonds, notes or other
obligations (including without limitation long-term conh'acts, loans, sub-leases or other legal
financing arrangements) of the City payable from and secured by a pledge of and lien upon any
of the Net Revenues, issued or incurred pursuant to Section 3.06.
"Parity Bonds Instrument" means the resolution, h'ust indenture or installment sale
agreement adopted, entered into or executed and delivered by the City, and under which Parity
Bonds are issued.
"Principal Installment" means with respect to any particular Principal Installment Date,
an amount equal to the sum of (i) the aggregate principal amount of Outstanding Serial Bonds
payable on such Principal Installment Date as determined by the applicable Parity Bonds
Instrument (but not including Sinking Fund Installments) and (ii) the aggregate of Sinking
Fund Installments with respect to all Outstanding Term Bonds payable on such Principal
Installment Date as determined hereby and by the applicable Parity Bonds Instrument.
"Ptincipal InstaIlment Date" means the date on which Principal Installments are
required to be made pursuant to Section 2.01.
"Rating Agency" means, as of any date, each of the following rating agencies which
then maintains a rating on any of the Series A Bonds: (a) Moody's and (b) S&P.
"Record Date" means, with respect to the Series A Bonds, the fifteenth (15th) calendar
day of the month immediately preceding an Interest Payment Date or, with respect to any
Parity Bonds, any other date established in the applicable Parity Bonds Instrument.
"Redemption Account" means the Account by that name established and held by the
Trustee pursuant to Section 4.03.
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"Re£l'~mption Price" means, with respect to any Series A Bond, the principal amount
thereof, plus the applicable premium, if any, payable upon redemption thereof pursuant to this
Indenture and the Parity Bonds Instrument pursuant to which the same was issued.
"Reguest of the City" means a request in writing signed by the City Manager, Director
of Administrative Services or Assistant City ManageI' of the City, or by any other officer of the
City duly authorized by the Council for that purpose.
"Reserve Account" means the Account by that name established and held by the
Trustee pursuant to Section 4.03.
"Reserve Requirement" means, when used with respect to a Series of Bonds, an amount
equal to the lesser of: (i) Maximum Annual Debt Service on such Series of Bonds; (ii) ten
percent (10%) of the Outstanding principal amount of the particular Series of Bonds; or (iii)
125% of Avel'age Alillual Debt Service on such Series of Bonds, as may be set forth in a Parity
Bonds Instrument pursuant to Section 3.06.
"S&P" means Standard & Poor's Corporation, a corporation duly organized and existing
under and by virtue of the laws of the State of New York, and its successors or assigns, except
that if such corporation shall be dissolved or liquidated or shall no longer perform the functions
of a securities rating agency, then the term "S&P" shall be deemed to refCl' to any other
nationally recognized securities rating agency selected by the City.
"~...!;!cond Supplement to 1990 Indenture" means the Second Supplemental Indenture of
Trust, between the City and the Prior Trustee, dated as of February 1, 1995.
"l1<!riaI Bonds" means all Series A Bonds other than Term Bonds.
"Series" when used with respect to less than all of the Bonds, means and refers to all of
the Bonds delivered on original issuance in a simultaneous transaction, regardless of variations
in maturity, interest rate or other provisions, and any Bond thereafter delivered in lieu of or
substitntion for any of such Bonds pursuant to Sections 2.02{i), 2.05, 2.06, 2.07, 2.09 and 7.04.
"Series A Bonds" means the City of Palo Alto Water Revenue Bonds, 2009 Series A,
issued and at any time Outstanding hereunder.
".sinking Fund Installment" means, with respect to any particular date, the amount of
money required hereby or by or pursuant to a Parity Bonds Instrument to be paid by the City
on such date toward the retirement of any particular Term Bonds prior to their respective stated
matnrities.
"State" means the State of California.
"System" means any of the Electric System, the Gas System or the Water System.
"IilX Code" means the Internal Revenue Code of 1986 as in effect on the date of issuance
of the Series A Bonds or (except as otherwise referenced herein) as it may be amended to apply
to obligations issued on the date of issuance of the Series A Bonds, togethCl' with applicable
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proposed, temporalT and final regulations promulgated, and applicable official public
guidance published, under the.Tax Code.
"Tax Regulations" means temporary and permanent regulations promulgated under the
Tax Code.
"Term Bonds" means, with respect to any Series A Bonds or any Parity Bonds, such
Series A Bonds or Parity Bonds which are payable prior to their stated maturity by operation of
Sinking Fund Installments.
"Trust Office" means the corporate trust office of the Trustee at St. Paul, MN, or such
other or additional offices as may be specified to the City by the Tmstee in writing.
"Trustee" means U.S. Bank National Association, appointed by the City to act as tmstee
hereunder pursuant to Section 6.01, and its assigns or any other corporation or association
which may at any time be substituted in its place, as provided in Section 6.01.
"2002 Water Revenue Bonds" means those 2002 Bonds issued to finance improvements
to the Water System and secured by a pledge of Net Revenues Attributable to the Water System
(as defined in the 2002 Indenture). On the Closing Date, 2002 Water Revenue Bonds were
outstanding in the principal amount of $ _____ _
"2009 Water Project" means certain extensions and improvements to the City's Water
System, more particularly described in Exhibit B, or any other capital improvement to the
Water System.
"2009 Water Proj ect Fund" means the fund by that name established and held by the
City pursuant to Section 3.04 of this Indenture.
"Water Revenue Fund" means the Fund by that name established and held by the City
and referred to in Section 4.02.
"Water System" means the existing water system of the City, comprising all facilities for
the obtaining, conserving, treating, dish'ibuting, storing and supplying of water for domestic
use, irrigation, sanitation, industrial use, fire protection, recreation, or any other public or
private uses.
SECTION 1.02. Rules of Construction. All references in this Indenture to "Articles,"
"Sections," and other subdivisions are to the corresponding Articles, Sections or subdivisions of
this Indenture; and the words "herein," "hereof," "hereunder," and other words of similar
import refer to this Indenture as a whole and not to any particular Article, Section or
subdivision hereof.
Words of the masculine gender shall be deemed and constmed to include correlative
words of the feminine and neuter genders. Unless the context shall otherwise indicate, words
importing the singular number shall include the plural number and vice versa, and words
importing persons shall include corporations and associations, including public bodies, as well
as natural persons.
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SECTION 1.03. Authorization and Purpose of Series A Bonds. The City has reviewed
all proceedings heretofore taken relative to the authorization of the Series A Bonds and has
found, as a result of such review, and hereby finds and determines that all things, conditions,
and acts required by law to exist, happen and/ or be performed precedent to and in the issuance
of the Series A Bonds do exist, have happened and have been performed in due time, form and
manner as required by law, and the City is now authorized, as an exercise of the municipal
affairs power of the City as a chartered city under the constitution and laws of the State and
pursuant to the Bond Law and each and every requirement of law, to issue the Series A Bonds
in the manner and form provided in this Indenture. Accordingly, the City hereby authorizes
the issuance of the Series A Bonds pursuant to the Bond Law and this Indenture for the purpose
of providing funds to acquire and construct the 2009 Project and to pay Costs of Issuance of the
Series A Bonds.
SECTION 1.04. Equal Security. In consideration of the acceptance of the Series A
Bonds by the Owners thereof, this Indenture shall be deemed to be and shall constitute a
conti'act among the City, the Trustee and the Owners from time to time of the Series A Bonds;
and the covenants and agreements herein set forth to be performed on behalf of the City shall
be for the equal and proportionate benefit, security and protection of all Owners of the Series A
Bonds without preference, priority or distinction as to security 01' otherwise of any of the Series
A Bonds over any of the others by reason of the number or date thereof 01' the time of sale,
execution 01' delivery thereof, or otherwise for any cause whatsoever, except as expressly
provided therein or herein.
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ARTICLE II
ISSUANCE OF SERIES A BONDS
SECTION 2.01. Terms of Series ABonds. The Series A Bonds authorized to be issued
by the City under and subject to the Bond Law and the terms of this Indenture shall be
designated the "City of Palo Alto Water Revenue Bonds, 2009 Series A", and shall be issued in
the original principal amount of Dollars ($[Principal Amount]).
The Series A Bonds shall be issued in fully registered form without coupons in
denominations of $5,000 or any integral multiple thereof, so long as no Series A Bond shall have
more than one maturity date. The Series A Bonds shall mature on June 1 in each of the years
and in the amounts, and shall bear interest at the rates, as follows:
Maturity Date
(funel)
Principal
Amount
Interest Rate
Per Annum
Interest on the Series A Bonds shall be payable on each Interest Payment Date to the
person whose name appears on the Bond Registration Books as the Owner thereof as of the
Record Date inunediately preceding each such Interest Payment Date, such interest to be paid
by check or draft of the Trustee mailed by first class mail to the Owner or, at the option of any
Owner of at least $1,000,000 aggregate principal amount of the Series A Bonds with r<'.sped to
which written instructions have been filed with the Trustee prior to the Record Date, by wire
transfer, at the address of such Owner as it appears On the Bond Registration Books. Principal
of and premium (if. any) on any Series A Bond shall be paid upon presentation and surrender
thereof at the Trust Office of the Trustee in St. Paul, Minnesota. Both the principal of and
interest and premium (if any) on the Series A Bonds shall be payable in lawful money of the
United States of America.
The Series A Bonds shall be dated the Closing Date and bear interest based on a 360-day
year comprised of twelve 3D-day months from the Interest Payment Date next preceding the
date of authentication thereof, unless said date of authentication is an Interest Payment Date, in
which event such interest is payable from such date of authentication, and unless said date of
authentication is on or before May 15, 2010, in which event such interest is payable from the
Closing Date; pn;>vided, however, that if, as of the date of authentication of any Series A Bond,
I
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inteTest thereon is in default, such Series A Bond shall bear interest from the date to which
interest has previously been paid 01' made available for payment thereon in full.
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SECTION 2.02. Redemption of S!!.ri.~.~ .. AJ:l.9nds.
(al Optional Redemption. The Series A Bonds maturing on or before June 1, 20_ are
not subject to optional redemption prior to maturity, The Series A Bonds maturing on or after
June 1, 20_ are subject to redemption prior to their respective maturity dates, at the option of
the City, as a whole on any date, or in part in inverse order of maturities and by lot within a
maturity on any Interest Payment Date on or after June 1, 20_, from any source of available
funds, at the following respective Redemption Prices (expressed as percentages of the principal
amount of U,e Series A Bonds to be redeemed), plus accrued interest thereon to the date of
redemption:
Redemption Periods Redemption Prices
The City shaU be required to give the Trustee written notice of its intention to redeem
Series A Bonds undel' this subsection (a) at least forty-five (45) days prior to the date fixed for
redemption, and shall deposit aU amounts reqUired for such redemption with the Trustee on or
prior to the date fixed for such redemption,
(b) Mandatory Redemption,
(i) M;:tp.datory Sinking Fund Redemption. Series A Bonds maturing on June
1, 20_ are subject to mandatory redemption in part from Sinking Fund Installments to
be made by the City on June 1, 20_ and on each June 1 thereafter up to and including
June 1, 20--, at a redemption price equal to 100 percent of the principal amount thereof
plus accrued interest, if any, to the redemption date without premium, as foUows:
Principal Amount
(ii) Special Mandatory Redemption From Insurance or Condemnation Proceeds,
The Series A Bonds shall also be subject to redemption as a whole on any date, or in part on any
Interest Payment Date in inverse order of maturity and by lot within a maturity, to the extent of
the Net Proceeds of hazard insurance not used to repair or rebuild the Water System or the Net
Proceeds of condemnation awards received with respect to the Water System to be used for
such purpose pursuant to Sections 5.06 or 5.07, at a Redemption Price equal to the principal
amount of the Series A Bonds plus interest accrued thereon to the date fixed for redemption,
without premium,
(c) Additional Bonds. Any Parity BondS issued pursuant to Section 3.06 of this
Indentme tnay be made subject to redemption prior to maturity, as a whole or in part, at such
time or times, and upon payment of the principal amount thereof and accrued interest thereon
plus such premium or premiums, if any, as tnay be determined by the City in the applicable
Parity Bonds Instrument.
(d) Notice of Redemption. Unless waived by any Owner of Series A Bonds to be
redeemed, notice of any redemption of Series A Bonds shall be given, at the expense of the City,
by the Trustee by mailing a copy of a redemption notice by first class mail at least 30 days and
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not more than 60 days prior to the date fixed for redemption to the Owner of the Series A Bond
or Series A Bonds to be redeemed at the address shown On the Bond Registration Books;
provided, that neither the failure to receive such notice nor any immaterial defect in any notice
shall affect the sufficiency of the proceedings for the redemption of the Series A Bonds.
(e) <;::9!:ltents of Notice. All notices of redemption shall be dated and shall state:
(i) the redemption date,
(il) the Redemption Price,
(iii) if fewer than all Outstanding Series A Bonds are to be redeemed, the
identification (and, in the case of partial redemption, the respective princJpaJ amounts)
of the Series A Bonds to be redeemed,
(iv) that on the redemption date the Redemption Price will become due and
payable with respect to each such Series A Bond or portion thereof called fol'
redemption, and that interest with respect thereto shall cease to aCCl'ue from and after
said date, and
(v) the place or places where such Series A Bonds are to be sUl'1'endered for
payment of the Redemption Price, which places of payment may include the Trust
Office of the Trustee.
(f) Deposit of Money. On 01' pl'ior to any redemption date, the aty shall deposit with
the Trustee an amount of money sufficient to pay the Redemption Price ·of all the Series A
Bonds or portions of Series A Bonds which are to be redeemed on that date.
(g) Consequences of Notice. Notice of redemption having been given as aforesaid, the
Series A Bonds or portions of Series A Bonds so to be redeemed shall, on the redemption date,
become due and payable at the Redemption P"ice therein specified, and from and after such
date (unless the City shall default in the payment of the Redemption Price) such Series A Bonds
or portions of Series A Bonds shall cease to have interest accrue thereon. Upon surrender of
such Series A Bonds for redemption in accordance with said notice, such Series A Bonds shall
be paid by the Tmstee at the Redemption Price. Installments of interest due on or prior to the
redemption date shall be payable as herein pl'Ovided for payment of interest. Upon surrender
for any partial redemption of any Series A Bond, there shall be prepared for the Owner a new
Series A Bond or Series A Bonds of the same maturity in the amount of the unredeemed
principal. All Series A Bonds which have been redeemed shall be cancelled and destroyed by
the Trustee and shall not be redelivered. Neither the failure of any Bond Owner to receive any
notice so mailed nor any defect therein shall affect the sufficiency of the proceedings for
redemption of any Series A Bonds nor the cessation of accmal of interest thereon.
(h) Additional Notice. In addition to the foregoing notice, further notice shall be given
by the Tmstee as set out below, but no defect in said further notice no1' any failure to give all or
any portion of such further notice shall in any manner defeat the effectiveness of a call for
redemption if notice thereof is given as above prescribed:
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(1) Each further notice of redemption given hereunder shall contain the
inf01'mation required above fm an official notice of redemption plus (A) the CUSIP
numbers of all Series A Bonds being redeemed; (B) the stated interest rate with respect
to each Series A Bond being redeemed; (C) the maturity date of each Series A Bond
being redeemed; and (D) any other descriptive information needed to identify
accurately the Series A Bonds being redeemed.
(2) Each further notice of redemption shall be sent on the date notice is mailed to
Bond Owners by registered 01' certified mail or ovemight delivery service to all
registered securities depositories then in the business of holding substantial amounts of
insbuments of types comprising the Series A Bonds, and, on the date notice is mailed to
Bond Owners, to one 01' more Inf01'mation Services.
(3) Upon the payment of the Redemption Price of the Series A Bonds being
redeemed, each check 01' other transfer of funds issued for such purpose shall bear the
CUSIP number identifying, by issue and maturity, the Series A Bonds being redeemed
with the proceeds of such check 01' other b·ansfel'.
(i) Partial Redemption of Series .. A.. Bonds. In the event only a portion of any Series A
Bond is called for redemption, then upon surrender of such Series A Bond redeemed in part
only, the City shall execute and the Trustee shall authenticate and deliver to the Owner, at the
expense of the City, a new Series A Bond or Series A Bonds, of the same series and maturity, of
authorized denominations in aggregate principal amount equal to the unredeemed portion of
the SeI'ies ABond 01' Series A Bonds.
G) Manner of Redemption. Whenever any Series A Bonds are to be selected for
redemption, the Trustee shall determine, by lot, the numbers of the Series A Bonds to be
redeemed, and shall notify the City thereof. '
(k) Purchase of Series A Bondsjn lieu of Redemption. In lieu of redemption of Series A
Bonds as provided in subsection (a) above, amounts in the Redemption Account of the Debt
Service Fund may also be used and withdrawn by the Trustee at any time, upon the Request of
the City filed with the Trustee no later than April 15 in any year, fm the purchase of Series A
Bonds at public 01' private sale as and when and at such prices (including brokerage and other
charges, but excluding accrued interest, which is payable from the Debt Service Fund) as the
City may in its discretion determine, but not to exceed the principal amount of such Series A
Bonds plus the redemption premium applicable on the next ensuing optional redemption date.
The City shall, at the time of any such purchase, pay to the Trustee £01' deposit in the Debt
Service Fund the amount of any deficiency in such Fund which may be caused by such
purchase. All Sel'ies A Bonds pUl'chased pursuant to this Section shall be cancelled.
All Series A Bonds redeemed pursuant to this Section and all Series A Bonds purchased
by the City pursuant to this subsection (k) shall be cancelled and destroyed pursuant to Section
9.09.
SECTION 2.03. Form of Series A Bonds. The Series A Bonds, the Trustee's certificate
of authentication, and the assignment to appear thereon, shall be substantially in the respective
forms set forth in Exhibit A attached hereto and by this reference incorporated herein, with
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necessary or appropriate variations, omissions and insertions, as permitted or required by this
Indenture.
SECTION 2.04.I\:><&£1,lJion of Series A Bonds. The Series A Bonds shall be signed in
the name and on behalf of the City with the manual or facsimile signatures of its Mayor and its
Director of Administrative Services and attested by the manual 01' facsimile signature of its City
Clerk under the seal of the City. Such seal may be in the form of a facsimile of the City's seal
and shall be imprinted or impressed upon the Series A Bonds. 111e Series A Bonds shall then be
delivered to the Tl'Ustee for authentication by it. In case any officer who shall have signed any
of the Series A Bonds shall cease to be such officer before the Series A Bonds so signed shall
have been authenticated or delivered by the Tl'Ustee 01' issued by the City, such Series A Bonds
may nevertheless be authenticated, delivered and issued and, upon such authentication,
delivery and issue, shall be as binding upon the City as though the individual who signed the
same had continued to be such officer of the City. Also, any Series A Bond may be signed on
behalf of the City by any individual who on the actual date of the execution of such Series A
Bond shall be the proper officer although on the nominal date of such Series A Bond such
individual shall not have been such officeI'.
Only such of the Series A Bonds as shall bear thereon a certificate of authentication in
substantially the form set forth in Exhibit A, manually executed by the Trustee, shall be valid or
obligatory for any purpose or entitled to the benefits of this Indenture, and such certificate of
the Tl'Ustee shall be conclusive evidence that the Series A Bonds so authenticated have been
du Iy authenticated and delivered hereunder and are entitled to the benefits of this Indenture.
SECTION 2.05. Transfer of Series A Bonds. Any Series A Bond may, in accordance
with its terms, be transferred upon the Bond Registration Books by the person in whose name it
is registered, in person or by his duly authorized attorney, upon surrender of such Series A
Bond for cancellation, accompanied by delivery of a written instrument of transfer in a form
approved by the Trustee, fully executed. Whenever any Series A Bond shall be surrendered for
transfer, the City shall execute and the Trustee shall thereupon authenticate and deliver to the
transferee a new Series A Bond or Series A Bonds of like tenor, maturity and aggregate
principal amount. No Sel'ies A Bonds the notice of redemption of which has been mailed
pursuant to Section 2.02( d) shall be subject to transfer pursuant to this Section.
SECTION 2.06. Exchange of Series A Bonds. Series A Bonds may be exchanged at the
Trust Office of the Trustee, for Series A Bonds of the same tenor and maturity and of other
authorized denominations. No Series A Bonds the notice of redemption of which has been
mailed pursuant to Section 2.02(d) shall be subject to exchange pursuant to this Section.
SECTION 2.07. Temporary Bonds. The Sel'ies A Bonds may be issued initially in
temporary form exchangeable for definitive Series A Bonds when ready for delivery. The
temporary Series A Bonds may be printed, lithographed or typewritten, shall be of such
denominations as may be determined by the City and may contain such reference to any of the
provisions of this Indenture as may be appropriate. Every temporary Series A Bond shall be
executed by the City and be registered and authenticated by the Trustee upon the same
conditions and in substantially the same manner as the definitive Series A Bonds. If the City
issues temporary Series A Bonds, it will execute and furnish definitive Series A Bonds without
delay, and thereupon the temporary Series A Bonds may be surrendered, foI' cancella.tion, in
exchange therefor at the Trust Office of the Trustee, and the Trustee shall authenticate and
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deliver in exchange for such temporary Series A Bonds an equal aggregate principal amount of
definitive Series A Bonds of authorized denominations. Until so exchanged, the tempOl"ary
Series A Bonds shall be entitled to the same benefits under this Indenture as definitive Series A
Bonds authenticated and delivered hereunder.
SECTION 2.08. Bond Regii>tl"ation~Qoks. The Trustee will keep or cause to be kept at
its Trust Office sufficient Bond Registration Books for the registration and transfer of the Series
A Bonds, which shall at all times during regular business hours be open to inspection by the
City; and, upon presentation for such purpose, the Trustee shall, under such reasonable
regulations as it may prescribe, register or transfer 01' cause to be registered 01' transferred, on
said books, Series A Bonds as hereinbefore provided.
SECTION 2.09. Series A Bonds Mutilated, Lost, De§troyed or Stolen. If any Series A
Bond shall become mutilated, the City, at the expense of the Owner of said Series A Bond, shall
execute, and the Trustee shall thereupon authenticate and deliver, a new Series A Bond of like
maturity and principal amount in exchange and substitution for the Sel'ies A Bond so
mutilated, but only upon surrender to the Trustee of the Series A Bond so mutilated. Every
mutilated Series A Bond so surrendered to the Trustee shall be cancelled by it and delivered to,
or upern the order of, the City. If any Series A Bond issued hereunder shall be lost, destroyed or
stolen, evidence of such loss, destruction or theft may be submitted to the City and the Trustee
and, if such evidence be satisfactory to them and indenmity satisfacterry to them shall be given,
the City, at the expense of the Bond Owner, shall execute, and the Trustee shan thereupon
,authenticate and deliver, a new Series A Bond of like maturity and principal amount in lieu erf
.and in substitution for the Series A Bond so lost, desh'oyed err sterlen (or if any such Series A
Bond shall have matured 01' shall have been called for redemption, instead erf issuing a
substitute Series A Bond the Trustee may pay the same without surrender thereof upon receipt
of indemnity satisfactory to the Trustee): The City may require payment erf a reasonable fee for
each new Series A Bernd issued under this Section and of the expenses which may be incurred
by the City and the Trustee. Any Series A Bernd issued under the provisions erf this Sectiern in
lieu erf any Series A Bernd alleged to be lost, destreryed or stolen shall constitute an original
contractual obligation on the part of the City whether or not the Series A Bond alleged to be
lost, destroyed or stolen be at any time enforceable by anyone, and shan be equally and
proportionately entitled to the benefits of this Indenture with all other Series A Bonds secured
by this Indenture.
SECTION 2.10. Book Entry System.
(a) Q!:!g!nal Delivery. The Series A Bonds shall be initially delivered in the form of a
separate single fully registered Bond (which may be lypewritten) for each.maturity of the Series
A Bonds. Upon initial delivery, the ownership of each such Series A Bond shall be registered
on the Bond Registration Books maintained by the Trustee pursuant to Section 2.08 hereof in
the name of the Nominee. Except as provided in subsection (c), the ownership of all of the
Outstanding Bonds shall be registered in the name of the Nominee on sl1ch Bond Registration
Books.
With respect to Series A Bonds the ownership of which shall be registered in the name
of the Nominee, the City and the Trustee shall have no responsibility or obligation to any
Depository System Participant or to any person on behalf of which the City holds an interest in
the Series A Bonds. Without limiting the generality of the immediately preceding sentence, the
20
City and the Trustee shall have no responsibility or obligation with respect to (i) the accuracy of
the records of the Depository, the Nominee or any Depository System Participant with respect
to any ownership interest in the Series A Bonds, (ii) the delivery to any Depository System
Participant 01' any other person, other than a Bond Owner as shown in the Registration Books,
of any notice with respect to the Series A Bonds, including any notice of redemption, (iii) the
selection by the Depository of the beneficial interests in the Series A Bonds to be redeemed in
the event the City elects to redeem the Series A Bonds in part, (iv) the payment to any
Depository System Participant or any other person, other than a Bond Owner as shown in the
Registration Books, of any amount with respect to principal, premium, if any, or interest
represented by the Series A Bonds or (v) any consent given or other action taken by the
Depository as Owner of the Series A Bonds. The City and the Trustee may treat and consider
the person in whose name each Series A Bond is registered as the absolute owner of such Series
A Bond for the purpose of payment of principal, premium, if any, and interest represented by
such Series A Bond, for the purpose of giving notices of redemption and other matters with
respect to such Series A Bond, for the purpose of registering transfers of ownership of such
Series A Bond, and for all other purposes whatsoever. The Trustee shall pay the principal,
interest and premium, if any, represented by the Series A Bonds only to the respective Owners
or their respective attorneys duly authorized in writing, and all such payments shall be valid
and effective to fully satisfy and discharge all obligations with respect to payment of principal,
interest and premium, if any, represented by the Series A Bonds to the extent of the sum or
sums so paid. No person other than a Bond Owner shall receive a Series A Bond evidencing
the obligation of the City to make payments of principal, interest and premium, if any,
pursuant to Illis Trust Indenture. Upon delivery by the Depository to the Nominee of written
notice to the effect that the Depository has determined to substitute a new Nominee in its place,
'such new nominee shall become the Nominee hereunder for all purposes; and upon receipt of
such a notice the City shall promptly deliver a copy of the same to the Trustee.
(b) Representation Letter. In order to qualify the Series A Bonds for the Depository's
book-entry system, the City shall execute and deliver to such Depository a letter representing
such matters as shall be necessary to so qualify the Series A Bonds. The execution and delivery
of such letter shall not in any way limit the provisions of subsection (a) above or in any other
way impose upon the City or the Trustee any obligation whatsoever with respect to persons
having interests in the Series A Bonds other than the Bond O"vners. Upon the writa'll
acceptance by the Trustee, the Trustee shall agree to take all action reasonably necessary for all
representations of the Trustee in such letter with respect to the Trustee to at all times be
complied with. In addition to the execution and delivery of such letter, the City may take any
other actions, not inconsistent with this Trust Indenture, to qualify the Series A Bonds for the
Depository's book-entry program.
(c) Transfers Outside Book-Enhy System. In the event that either (i) the Depository
determines not to continue to act as Depositmy for the Series A Bonds, or (il) the City
determines to terminate the Depository as such, then the City shall thereupon discontinue the
book-entry system with such Depository. In such event, the Depository shall cooperate with
the City and the Trustee in the execution of replacement Series A Bonds by providing the
Trustee with a list showing the interests of the Depository System Participants in the Series A
Bonds, and by surrendering the Series A Bonds, registered in the name of the Nominee, to the
Trustee on or before the date such replacement Series A Bonds are to be issued. The
Depository, by accepting delivery of the Series A Bonds, agrees to be bound by the provisions
of this subsection (c). If, prior to the termination of the Depository acting as such, the City fails
21
to identify another Securities Depository to replace the Depository, then the Series A Bonds
shall no longer be required to be registered in the Registration Books in the name of the
Nominee, but shall be registered in whatever name or names the Owners h'ansferring Or
exchanging Series A Bonds shall designate, in accordance with the provisions hereof.
In the event the City determines that it is in the best interests of the beneficial owners of
the Series A Bonds that they be able to obtain certificated Series A Bonds, the City may notify
the Depository System Participants of the availability of such certificated Series A Bonds
tlU'ough the Depository. in such event, the Trustee will execute, transfer and exchange Series A
Bonds as required by the Depository and others in appropriate amountq; and whenever the
Depository requests, the Trustee and the City shall cooperate with the DepositOlY in taking
appropriate action (y) to make available one or mare separate certificates evidencing tile Series
A Bonds to any Depository System Participant having Series A Bonds credited to its account
with the Depository, Or (z) to arrange for another Securities Depository to maintain custody of a
single certificate evidencing such Series A Bonds, all at the City's expense.
(d) Payments to the Nomingg. Notwithstanding any other provision of this indenture
to the contrary, so long as any Series A Bond is registered in the name of the Nominee, all
payments with respec t to principal, interest and premium, if any, represented by such Series A
Bond and all notices with respect to such Series A Bond shall be made and given, respectively,
as provided in the letter described in subsection (b) of this Section 01' as otherwisii'instructed by
the Depository.
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ARTICLE III
ISSUE OF SERIES A BONDS; PARITY BONDS
SECTION 3.01. IssuanC;l'!of Series A Bonds. Upon the execution and delivery of this
Indenture, the City shall execute and deliver Series A Bonds in the aggregate principal amount
of Dollars ($[Principal Amount]) to the Trustee for authentication and delivery
to the Original Purchaser thereof upon the Request of the City.
SECTION 3.02. Application of Proceeds of Sale of Series A Bonds. Upon the receipt
of payment for the Series A Bonds on the Closing Date in the amount of ~ ____ ................ __
(being an amount equal to the principal amount of the Series A Bonds ($[Principal Amount]),
plus Ol'iginal issue premium of less underwriter's discount less the
good faith deposit of $ .... held by the City), the Trustee shall apply the proceeds of sale
thereof as follows:
(a) The Trustee shall deposit in the Reserve Account the amount of
$ : and
(b) the Trustee shall transfer to the City, for deposit in the 2009 Water Project
Fund, the amount of and
(c) The Trustee shall deposit in the Cost of Issuance Fund the remainder of such
proceeds, in an amount equal to $_ ............... ~~
The Trustee may establish a temporary fund or account in its records to facilitate such
deposits and transfers.
SECTION 3.03. Reserve Account. On the Closing Date, the Trustee shall deposit to the
Reserve Account, from the proceeds of the Series A Bonds, an amount equal to
the Reserve Requirement. An amount equal to the Reserve Requirement shaH be maintained in
the Reserve Account at all times; and any deficiency therein shall be replenished from available
Net Revenues pursuant to Section 4.03(c), The Reserve Requirement for an issue of Parity
Bonds may be increased by any Parity Bonds Instrument establishing any Parity Bonds
pursuant to Section 3.06.
SECTION 3.04. 2009 Water Project Fund.
There is hereby created a separate Fund to be known as the "City of Palo Alto Water
Revenue Bonds 2009 Water Project Fund", herein referred to as the "2009 Water Project Fund",
to be held in trust by the City. The City shall disburse moneys in the 2009 Water Project Fund
for the purpose of paying or reimbursing the payment of the costs of acquiring and
constructing the 2009 Water Project, including but not limited to all costs incidental to or
connected with such acquisition and construction.
The City may apply any 01' all of the moneys on deposit in the 2009 Water Project Fund
to the financing of any alternative project in place of any component of the 2009 Water Project
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so long as (1) such substitution will not have any adverse effect on the security for the Series A
Bonds, and (2) the alternative project identified will be of benefit to the Water System.
Any amounts l'emaining in the 2009 Water Project Fund after the date of completion of
the 2009 Water Project shall be transferred by the City, accompanied by written instruction as to
amounts and application of deposit to the Trustee, for deposit to the Debt Service Fund, to be
applied to the payment of Debt Service, as the same becomes due and payable.
All interest earnings and profits or losses on the investment of amounts in the 2009
Watel' Project Fund shall be deposited in 01' charged to the 2009 Water Pl'oject Fund and applied
to the purposes thereof.
SECTION 3.05. Cost of Issuance Fund. There is hereby created a fund to be known as
the "City of Palo Alto Water Revenue Bonds, Series A Cost of Issuance Fund" (the "Cost of
Issuance Fund"), which the City hereby covenants and agl'ees to cause to be maintained and
which shall be held in trust by the Trustee. The moneys in the Cost of Issuance Fund shall be
used in the manner provided by law solely for U1e purpose of the payment of Costs of Issuance
upon receipt by the Trustee of Requests of the City therefor, on or aftCl' ilie Closing Date. Any
funds remaining in the Cost of Issuance Fund on ___ ._~, shall be transferred by the Trustee
to the Debt Service Fund,
SECTION 3.06. Issuance of Parity Bonds. In addition to the Series A Bonds, the City
may, by Parity Bonds lnsb'ument, issue or incur other loans, advances or indebtedness payable
from Net Revenues to be derived from the Water System, to provide financing for the Water
System, in such principal amount as shall be determined by ilie City. The City may issue or
incur any such Parity Bonds subject to ilie following specific conditions, which are hereby
made conditions precedent to the issuance and delivery of such Parity Bonds:
(a) The City shall be in compliance wiili all covenants set forth in U1is
Indenture.
(b) (i) The Net Revenues of the Water System, calculated on sound
accounting principles, as shown by the books of the City for the latest Fiscal Year
or any more recent twelve (12) month period selected by the City ending not
mOl'e than sixty (60) days prior to U1e adoption of the Parity Bonds Instrument
pursuant to which such Parity Bonds are issued, as shown by the books of the
City, less withdrawals, if any, from the Water System's rate stabilization fund,
plus, at the option of ilie City, U1e Additional Allowance, shall at least equal One
Hundred percent (100%) of Maximum Annual Debt Service, with Maximum
Annual Debt Service calculated on all Bonds to be Outstanding immediately
subsequent to the issuance of such Parity Bonds which have a lien on Net
Revenues of the Water System; and
(ii) The Net Revenues of the Water System, calculated on sound
accounting principles, as shown by the books of the City for the latest Fiscal Year
or any more recent lwelve (12) month period selected by the City ending not
more than sixty (60) days prior to the adoption of the Parity Bonds Instrument
pursuant to which such Parity Bonds are issued, as shown by the books of the
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City, plus, at the option of the City, any 01' all of the items hereinafter in this
paragraph designated (A), (B) and (C), shall at least equal One Hundred Twenty-
Five percent (125%) of Maximum Annual Debt Service, with Maximum Annual
Debt Service calculated on all Bonds to be Outstanding immediately subsequent
to the issuance of such Parity Bonds which have a lien on Net Revenues of the
Water System. The items any or all of which may be added to such Net
Revenues for the purpose of issuing or incurring Parity Bonds hereunder are the
following:
(A) An allowance for Net Revenues from any additions to or
improvements or extensions of the Water System, and also for Net
Revenues from any such additions, improvements or extensions which
have been made from moneys from any source but in any case which,
during all or any part of such Fiscal Year or such twelve (12) month
period, were not in service, all in an amount equal to ninety percent
(90%) of the estimated additional average annual Net Revenues to be
derived from such additions, improvements and extensions for the first
thirty-six (36) month period in which each addition, improvement 01'
extension is respectively to be in operation, all as shown in the written
report of an Independent Consultant engaged by the City;
(B) The Additional Allowance; and
(C) Funds then on hand in Available Reserves fm the Water
System.
(c) lbe Parity Bonds Instrument providing for the issuance of such Parity
Bonds under this Section 3.06 shaH provide that:
(i) The proceeds of such Parity Bonds shall be applied to the acquisition,
construction, improvement, financing 01' refinancing of additional facilities,
improvements 01' extensions of existing facilities within the Water System, or
otherwise for facilities, improvements or property which the CitY determines are
of benefit to the Water System, 01' for the purpose of refunding any Bonds in
whole or in part, including all costs (including costs of issuing such Parity Bonds
and including capitalized interest on such Parity Bonds during any period which
the City deems necessalY or advisable) relating thereto;
(ii) Interest on such Parity Bonds shall be payable on an Interest Payment
Date;
(iii) The principal of such Parity Bonds shall be payable on June 1 in any
year in which principal is payable; and
(iv) Money shall be deposited in a reserve account for such Parity Bonds
from the proceeds of the sale of such Parity Bonds or othetwise equal to the
Reserve Requirement.
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SECTION 3.07. No Additional Prior Lien Bonds. No additional Bonds shall be issued
pursuant to the 1990 Indenture.
SECTION 3.08. Subordinate Debt. Nothing in this Indenture shall prohibit or impair
the authority of the City to issue bonds 01' other obligations secured by a lien on Net Revenues
which is subordinate to the lien established hereunder, upon such terms and in such pl'incipal
amounts as the City may determine.
SECTION 3.09. Validity of Series A Bond!!. The validity of the authorization and
issuance of the Series A Bonds shall not be affected in any way by any proceedings taken by the
City for the acquisition 01' construction of the Project, 01' by any contracts made by the City in
connection therewith, and the recital contained in the Series A Bonds that the same are issued
pursuant to the Bond Law shall be conclusive evidence of their validity and of the regularity of
their issuance.
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ARTICLE IV
PLEDGE OF NET REVENUES; FUNDS AND ACCOUNTS
SECTION 4.01. Pledge of Net Revenues, Water Revenue Fund.
(a) The City hereby transfers, places a charge upon, assigns and sets over to the Trustee,
for the benefit of the Owners, the Net Revenues of the Water System, on a parity with the 2002
Water Revenue Bonds. The Net Revenues of the Water System shall not be used fOl' any other
purpose while any of the Bonds remain Outstanding, except that out of Net Revenues of the
Water System there may be apportioned and paid such sums for such purposes, as are
expressly permitted by this Article. Said pledge shall constitute a first, direct and exclusive
charge and lien on the Net Revenues of the Water System for the payment of the principal or
Redemption Price of and interest on the Bonds in accordance with the te.l·ms thereof, subject
only to the lien of the 1995 Bonds.
(b) The Net Revenues of the Water System constitute a trust fund for the secUl'ity and
payment of the principal or Redemption PI'ice of and intel'est on the Bonds. The general fund
of the City is not liable and the credit or taxing power of the City is not pledged for the
payment of the principal or Redemption Price of and interest on the Bonds. The Owner of the
Series A Bonds shall not compel the exercise of the taxing power by the City or the forfeiture of
its property. The principal or Redemption Price of and interest on the Series A Bonds are not a
debt of the City, nor a legal or equitable pledge, charge, lien or encumbrance, upon any of its
property, or upon any of its income, receipts, or revenues except the Net Revenues of the Water
System.
SECTION 4.02. Receipt and Deposit of Revenues. The City covenants and agrees that
all Gross Revenues, when and as received, will be received and held by the City in trust
hereunder and will be deposited by the City in the Water Revenue Fund (which has heretofore
been created and now exists in the City Treasury) and will be accounted for through and held
in l1'ust in the Water Revenue Fund, and the City shall only have such beneficial right 01'
interest in any of such money as in .this Indenture provided. All such Gross Revenues shall be
transferred, disbursed, allocated and applied solely to the uses and purposes hereinafter in this
Article set forth, and shall be accounted for separately and apart from all other money, funds,
accounts or other resources of the City.
SECTION 4.03. Establishment of Funds and Accounts and A,U9"ation of Revenues
Thereto. The Debt Service Fund, as a special fund, and the Redemption Account and the
Reserve Account, as special Accounts therein, are hereby created for the Series A Bonds.
The Debt Service Fund and the Redemption Account and the Reserve Account therein
shall be held and maintained by the Trustee.
All Gross Revenues shall be held in trust by the City in the Water Revenue Fund and
shall be applied, transferred, used and withdrawn only for the pUlposes hereinafter authorized
in this Article.
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(a) Operating Costs. The City shall first pay from the moneys in the Water Revenue
Fund the budgeted Maintenance and Operation Costs as such Costs become due and payable.
(b) Debt Service Fund. On or before the third Business Day prior to each Interest
Payment Date, beginning ~~ ... ~~ the City shall transfer from the Water Revenue Fund to the
Trustee for deposit in the Debt Service Fund (i) an amount equal to the aggregate amount of
interest to become due and payable on all Outstanding Bonds on the next succeeding Interest
Payment Date, plus (ii) beginning ..-------' an amount equal to the aggregate amount of
Principal Installments (including any Sinking Fund Installments) becoming due and payable on
all Outstanding Bonds on the next succeeding Principal Installment Date. All interest eamings
and profits or losses on the investment of amounts in the Debt Service Fund shall be deposited
in or charged to the Debt Service Fund and applied to the purposes thereof. No tl"ansfer and
deposit need be made into the Debt Service Fund if the amount contained therein, taking into
account investment earnings and profits, is at least equal to the Interest Requirement or
Principal Installments to become due on the next Interest Payment Date or Principal
Installment Date upon all Outstanding Bonds.
(c) Reserve l\ccQunt. After making the payments, allocations and transfel"s prOVided
for in subsection (b) above, if the balance in the Reserve Account is less than the Reserve
Requirement for the Series A Bonds, the deficiency shall be restored by transfers from the first
moneys which become available in the Water Revenue Fund to the Trustee for deposit in the
Reserve Account, such transfers to be made from the sources and during the time period
specified in Section 4.09(a).
(d) Stll·plus. As long as all of the foregoing payments, allocations and transfers are
made at the times and in the matmer set forth above in subsections (2) and (3), inclusive, any
moneys remaining in the Water Revenue Fund may at any ·time be treated as surplus and
applied as provided in Section 4.07.
SECTION 4.04. Appli(!ation of Debt Service Fund.
(a) The Trustee shall withdraw from the Debt Service Fund, prior to each Interest
Payment Date, an amount equal to the Interest Requirement payable on such Interest Payment
Date, and shall cause the same to be applied to the payment of said interest when due and is
hereby authorized to apply the same to the payment of such interest by check or draft (01' by
wire transfer, as the case may be), as provided in Section 2.01.
(b) The Trustee shall withdraw from the Debt Service liund, prior to each Principal
Installment Date, an amount equal to the principal amount of the Outstanding Serial Bonds, if
any, maturing on said Principal Installment Date, atld shall cause the same to be applied to the
payment of the principal of said Series A Bonds when due, and is hereby authorized to apply
the same to such payment upon presentation and sUlTender of the Series A Bonds as they
become due and payable, as provided in Section 2.01.
(c) All withdrawals and transfers under the provisions of subsection (a) or subsection
(b) of this Section shall be made not earlier than one (1) day prior to the Interest Payment Date
or Principal Installment Date to which they relate, and the amount so withdrawn or transferred
shall, for the purposes of this Indenture, be deemed to remain in and be part of the appropriate
Account until such Interest Payment Date or Principal Installment Date.
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SECTION 4.05. Application ofj{eserve Account.
(a) In General If at any time there shall not be sufficient amounts in the Debt Service
Fund to make payment of Principal Installments 01' Redemption Price of or interest on the
Series A Bonds, the Trustee shall provide notice of such fact to the City (by telephone,
confirmed in writing, provided that no such notice shall be required to be given with respect to
a withdrawal of amounts in excess of the Reserve Requirement or of withdrawals in cOID1ection
with the refunding of the Series A Bonds in whole or in part) and withdraw from the Reserve
Account and pay into the appropriate Fund or Account the amount of the deficiency. Any
amounts in the Reserve Account in excess of the Reserve Requirement (whether derived from
interest or gain on investments or otherwise) shall, on June 2 of each year, be paid by the
Trustee to the City for deposit in the Water Revenue Fund.
SECTION 4.06. Application of Redemption Account. On 01' before the date which is
at least forty-five (45) days prior to ,my Interest Payment Date on which Series A Bonds are
subject to redemption pursuant to Section 2.02(a) or on which any Parity Bonds are subject to
optional redemption pursuant to the provisions of the Parity Bonds Insh'ument authorizing
such Parity Bonds, the City shall transfer from the Water Revenue Fund to the Trustee for
deposit in the Redemption Account an amount at least equal to the Redemption Price
(excluding accrued interest, which is payable from the Debt Service Fund) of such Bonds to be
redeemed on such Interest Payment Date. In addition, the City shall transfer to the Trustee for
deposit in the Redemption Account all amounts required to redeem any Series A Bonds which
are subject to redemption pursuant to Section 2.02 (b) and any Parity Bonds which are subject to
redemption pursuant to any similar provision of the Parity Bonds Instrument authorizing such
Parity Bonds, when and as such amounts become available. Amount, in the Redemption
Account shall be applied by the Trustee solely for the purpose of paying the Redemption Price
of Series A Bonds to be redeemed pursuant to Sections 2.02 (a) 01' (b) and to pay the purchase
price in the same manner and subject to the same limitation as purchasers of Series A Bonds
under Section 2.02(k) 01' the Redemption Price of any Parity Bonds to be redeemed pursuant to
similar provisions of the Parity Bonds Instrument au thorizing such Parity Bonds. If after all of
the Series A Bonds have been paid or deemed to have been paid, there are moneys remaining in
the Redemption Account, such moneys shall be transferred by the Trustee to the City for
deposit in the Water Revenue Fund.
. SECTION 4.07. Surplul!. Moneys remaining in the Water Revenue Fund after making
the payments, allocations and transfers proVided for in subsections (b) and (c) of Section 4.03
shall be applied by the City as required by the city charter.
SECTION 4.08. Investment~. All moneys in the Water Revenue Fund may be invested
by the City from time to time in any Authorized Investments. All moneys in the Debt Service
Fund and Cost of Issuance Fund shall be invested by the Trustee solely in Authorized
Investments, as directed pUl'suant to a Request of the City. In the absence of any such Request
of the City, the Trustee may (but shall not be l'equ:ired to) invest any such moneys in money
market funds meeting the requirements of paragraph (f) of the definition of Authorized
Investments, selected by the Trustee, which by their terms mature plioI' to the date on which
such moneys are requh'ed to be paid out hereunder. Obligations purchased as an investment of
moneys in any Fund or Account shall be deemed to be part of such Fund or Account, and all
interest or gain derived from the investment of amounts in any of the Funds or Accounts
29
established hereunder shall be deposited in the Fund or Account from which such investment
was made; and shall be accounted for and applied as provided in Section 4.04 (with respect to
the Debt Service Fund) and Section 4.05(a) (with respect to the Eeserve Account). For purposes
of acquiring any investments hereunder, the Trustee may commingle funds held by it
hereunder with the written approval of the City. The Trustee may act as principal or agent in
the acquisition of any investment. The Trustee shall incur no liability for losses m'ising from
any investments made pursuant to this Section.
The City acknowledges that to the extent regulations of the Comptroller of the Currency
or other applicable regulatory entity grant the City the right to receive brokerage confirmations
of security transactions as they occur, the City will not receive such confirmations to the extent
permitted by law. The Trustee will furnish the City periodic cash transaction statements which
include detail for all investment transactions made by the Trustee hereunder. The Trustee may
make any investments hereunder through its own bond or investment department or trust
investment department, or those of its parent or any affiliate. The Trustee or any of its affiliates
may act as sponsor, advisor or manager in connection with any investments made by the
Trustee hereundet·. The Trustee may rely upon any investment direction of the City as a
certification to the Trustee that such investment is a legal investment for purposes of this
Indenture.
SECTION 4.09. Valuation; Replenishment of Reserve Account; Investments.
(a) Method of Valuation, Frequency of Valuation; Eeplenishment of Reserve Account.
In computing the amount in any Fund or Account, Authorized Investments shall be valued at
the lower of the cost or the market price, exclusive of accrued interest. With respect to all
Funds and Accounts, valuation shall occur annually, except in the event of a withdrawal from
the Reserve Account, whereupon securities shall be valued immediately after such withdrawal.
If amounts on deposit in the Reserve Account shall, at any time, be less than the Eeserve
Eequirement, such deficiency shall be made up (i) over a period of not more than foUl' (4)
months, in foUl' (4) substantially equal payments, from the Net Eevenues of the Water System
received after making the required deposits to the Debt Service Fund, in the event such
deficiency resull~ from a decrease in the market value of the Authorized Investments on
deposit in the Reserve Account 01' (ii) over a period of not more than twelve (12) months, in
twelve (12) substantially equal payments, from Net Revenues of the Water System, in the event
such deficiency results from a withdrawal from the Eeserve Account by reason of the City's
failure to pay Debt Service.
(b) Invg§tm~nt of Amounts Eepl'esenting Accrued Interest. All amounts representing
accrued interest shall be held by the Trustee in the Debt Service Fund, pledged solely to the
payment of interest on the Series A Bonds and invested only in Federal Securities maturing at
such times and in such amounts as are necessary to match the interest payments to which they
are pledged.
(c) AciciitjQl1aL1imitations. Except as otherwise provided in the following sentence, the
City covenants that ail investments of amount.~ deposited in any fund 01' account created by or
pursuant to this Indenture, or otherwise containing gross proceeds of the Series A Bonds
(within the meaning of section 148 of the Tax Code) shall be acquired, disposed of, and valued
(as of the date that valuation is required by this Indenture 01' the Tax Code) at Fair Market
Value. Investments in funds or accounts (or portions thereof) that are subiect to a yield
30
restriction under applicable provisions of the Tax Code and (unless valuation is undertaken at
least atIDual1y) investments in the Reserve Account shall be valued at their present value
(within the meaning of section 148 of the Tax Code).
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ARTICLE V
COVENANTS OF THE CITY; SPECIAL TAX COVENANTS
SECTION 5.01. Punclt!ill Payment; Compli'Lnce WitllJ)ocuments. The City shall
punctually payor cause to be paid the interest and principal to become due with respect to all
of the Series A Bonds in strict conformity with the terms of the Series A Bonds and of this
Indenture, and will faithfully observe and perform all of the conditions, covenants and
requirements of this Indenture and all Parity Bonds Instruments.
SEC"fION 5.02. Ag!linst E.!l~umbrances. The City will not mortgage or otherwise
encumber, pledge 01' place any charge upon the Water System or any part thereof, or upon any
of the Net Revenues, except as provided in the Indenture; provided, however, that nothing in
this Section 5.02 nor elsewhere in this Indenture shall be construed to prevent the City from
entering into long-term contracts to finance supplies of water, gas, or electric energy, payments
under which are accounted for as Maintenance and Operation Costs under the definition thereof
in Section 1.01.
SECTION 5.03. Discharge of Claims. The City covenants that in order to fully preserve
and protect the priority and security of the Bonds the City shall pay from the Net Revenues and
discharge all lawful claims for labor, materials and supplies fU1'l1ished for or in connection with
the Water System which, if unpaid, may become a lien or charge upon the Net Revenues prior 01'
superior to the lien of the Series A Bonds and impair the security of the Series A Bonds. The
City shall also pay from the Net Revenues all taxes and assessments or other governmental
charges lawfully levied or assessed upon or in respect of the Water System or upon any part
thereof or upon any of the Net Revenues therefrom.
SECTION 5.04. Acqui§iJion, Constructil)n or Financing of any Improve111ell! to the
Water System. The City will acquire, construct, or finance any Improvement to the Water
System to be financed with the proceeds of any Parity Bonds with all practicable dispatch, and
such Improvement will be made in an expeditious manner and in conformity with laws so as to
complete the same as soon as possible.
SEcnON 5.05. l\1ainiE!lliLnCe ancL OperaJJon oL.wate!...§ysJe~j~l1 Effiden!3nd
~Q!!Qmi£ill1Y1ann~~ The City covenants and agrees to maintain and operate the Water System
in an efficient and economical marUler and to operate, maintain and preserve the Water System
in good repair and working order.
SEcnON 5.06. Against Sale, Eminent Domain.
(a) The City will not sell, lease or otherwise dispose of the Water System or any part
thereof essential to the proper operation of the Water System or to the maintenance of the Net
Revenues except as herein expressly permitted. The City will not enter into any lease or
<)greement which inlpairs the operation of the Water System or any part thereof necessary to
secure adequate Net Revenues for the payment of the interest on and principal or Redemption
Price, if any, on the Series A Bonds, or which would otherwise impair the rights of the Holders
with respect to the Net Revenues or the operation of the Water System. Any real 0'1: personal
property which has become non-operative or which is not needed for the efficient and proper
32
operation of the Water System, or any material 01' equipment which has worn out, may be sold
at not less than the market value thereof without the consent of the Holders if such sale will not
reduce Net Revenues and if all of the Net Proceeds of such sale are deposited in the Water
Revenue Fund.
(b) If all or any part of the Water System shall be taken by eminent domain
proceedings, the Net Proceeds realized by the City therefrom shall be deposited by the City
with the Trustee in a special fund in trust, in an account to be established by the Trustee when
deposits are required to be made therein, and applied by the City to the cost of acquiring or
constructing or financing Improvements to the Water System if (A) the City first secures and
files with the Trustee a Certificate of the City showing (i) the estimated loss in annual Net
Revenues, if any, suffered, or to be suffered, by the City by reason of such eminent domain
proceedings, (ii) a general description of the Improvements to the Water System then proposed
to be acquired 01' constructed by the City from such Net Proceeds, and (iii) an estimate of the
additional Net Revenues to be derived from such Improvements; and (B) such Certificate of the
City, shall state that such additional Net Revenues will sufficiently offset the loss of Net
Revenues, resulting from such eminent domain proceedings so that the ability of the City to
meet its obligations hereunder will not be substantially impaired, which determinalion shall be
final and conclusive. If the foregoing conditions are met, the City shall then promptly proceed
with the acquisition or construction 01' financing of such Improvements substantially in
accordance with such Certificate of the City and payments therefor shall be made by the
Trustee from such Net Proceeds and from other moneys of the City lawfully available therefor,
and any balance of such Net Proceeds not required by the City fO!' the purposes aforesaid shall
be deposited in the Water Revenue Fund. If the foregoing conditions are not met, then such
Net Proceeds shall be applied by the Trustee pro rata to the redemption O!' purchase of the
Series A Bonds of each Series then Outstanding in the proportion which the principal amount
of the Outstanding Bonds of each Series bears to the aggregate principal amount of all Series A
Bonds then Outstanding. If the Trustee is unable to purchase or redeem Series A Bonds in
amounts sufficient to exhaust the available moneys allocable to each such Series, the remainder
of such moneys for each such Series shall be held in trust by the Trustee and applied to the
payment of the Series A Bonds of such Selies as the same become due by their terms, and,
pending such application, such remaining moneys may be invested by the Trustee in the
manner pl'ovided in Section 4.08 for the investment of moneys in the Reserve Account.
SECTION 5.07. fusurance. The City covenants that it shall at all times maintain such
insurance on the Water System as is customarily maintained with respect to works and
properties of like character against accident to, loss of 01' damage to such works or properties.
If any useful part of the Water System shall be damaged 01' destroyed, such part shall be
restored to use. The Net Proceeds of insurance against accident to 01' destruction of tl1e physical
Water System shall be used for repairing or rebuilding the damaged or destroyed portions of
the Water System, (to the extent that such repair or rebuilding is determined by the City to be
useful or of continuing value to the Water System) and to the extent not so applied, shall be
applied to the redemption of the Outstanding Bonds issued on a pro rata basis, and for such
purpose shall be paid into the Redemption Account.
Any such insurance shall be in the form of policies or contmcts for insurance with
insurers of good standing and shall be payable to the City, 01' may be in the form of self-
insurance by the City. The City shall establish such fund or funds 01' reserves as are necessary
to provide for its share of any such self-insurance. The City shall file or cause to be filed with
33
the Trustee, annually within one hundred twenty (120) days after the close of each Fiscal Year,
a Certificate of the City (a) setting forth a description in reasonable detail of the insurance then
in effect, including any self-insurance fund, maintained pursuant to the requirements of this
Section, (b) stating that the City is then in compliance with the requirementq of this Section, and
(c) stating whether during the preceding Fiscal Year any loss has been incurred with respect to
the Water System and, if so, the amount of Net Pl'Oceeds of insurance, including the Net
Proceeds of any self-insurance fund, covering such loss and specifying the reasonable and
necessary costs of repair, reconstruction or replacement thereof.
SECTION 5.08. Records and Account~. The City covenants that it shall keep proper
books of record and accounts of the Water System, separate from all other records and
accounts, in which complete and correct entries shall be made of all transactions relating to the
Water System. Said books shall, upon reasonable request, be subject to the inspection of the
Owners of not less than ten percent (10%) of the Outstanding Bonds or their representatives
authorized in wriLing.
The City covenants that it will cause the books and accounts of the Water System to be
audited annually by an Independent Certified Public Accountant and will make available for
inspection by the Bond Owners, upon reasonable request, a copy of the repmt of such
Independent Certified Public Accountant.
The City covenants that it will cause to be prepared annually, not more than one
hundred eighty (180) days after the dose of each Fiscal Year, as a part of its regular alIDual
financial report, a summary statement showing the amount of Gross Revenues and the amount
of all other funds collected which are required to be pledged or otherwise made available as
security for payment of principal of and interest on the Series A Bonds, the disbursements from
the Gross Revenues and other funds in reasonable detail, and a general statement of the
financial and physical condition of the Water System. The City shall furnish a copy of the
statement to the Trustee, and upon written request, to any Bond Owner. 111e Trustee shall have
no duty to review such statement.
SECTION 5.09. l'Lotection of Security and RightsQfj:)wl1ers. The City will preserve
and protect the security of the Bonds and the rights of the Owners, and will warrant and
defend their rights against all claims and demands of all persons. From and after the sale and
delivery of any Parity Bonds by the City, such Parity Bonds shall be incontestable by the City.
SECTION 5.10. Agilil!§LCj:m:!p~titiYl·LFil.eilities. The City will not acquire, construct,
operate or maintain any system or utility within the service area of the City that would be
competitive with the Water System.
SECTION 5.11. Payment of Taxes, Etc. The City will pay and discharge all taxes,
assessments and other governmental charges which may hereafter be lawfully imposed upon
the Water System or any part thereof or upon any Revenues when the same shall become due.
The City will duly observe and conform with all valid requirements of any governmental
authority relative to the Water System or any part thereof, and will comply with all
requirements with respect to any state or federal grants received to assist in paying for the costs
of the acquisition, construction or financing of any Improvements to the Water System.
SECTION 5.12. Rates and Charges.
34
(a) The City shall fix, prescribe, revise and collect Charges for the Water System during
each Fiscal Year which (together with other funds ITansferred from stabiliza lion reserve funds
for the Water System, and which are lawfully available to the City for payment of any of the
following amounts during such Fiscal Year) are at least sufficient, after making allowances for
contingencies and error in the estimates, to pay the following amounts in the following order:
(1) all Maintenance and Operation Costs of the Water System estimated by the
City to become due and payable in such Fiscal Year;
(2 ) the Debt Service;
(3) all other payments required for compliance with this Indentnre and the
instruments pursuant to which any Padty Bonds relating to the Water System shall have
been issued; and
(4) all payments required to meet any other obligations of the City which are
charges, liens, encumbrances upon or payable from the Gross Revenues of the Water
System or Ihe Net lZevenues of the Water System.
(b) In addition, the City shall fix, prescribe, revise and collect Charges for the Water
System during each Fiscal Year which, when added to the balance then on hand in Available
Reserves for the Wate1' System, are sufficient to yield Net Revenues of the Water System at least
equal to one hundred twenty-five percent (125%) of the amounts payable under the preceding
clause (a)(2) in such Fiscal Year for Bonds which have a lien on such Net Revenues.
(c) To the extent that the City appropriates funds from Gross Revenues into a
stabilization reserve fund for the Water System, a deduction shall be made from Gross
Revenues of the Water System in the Fiscal Year during which said transfer occurred for
purposes of calculations to be made under this Section 5.12 and Section 3.06. To the extent that
the City appropriates funds from a stabilization reserve fund for tbe Water System into the
Water Revenue Fund, the City may count the funds so h'ansferred as Gross Revenues in the
Fiscal Year in which said transfer occurs, for purposes of this Section 5.12 and Section 3.06.
SECTION 5.13. Maintenance of Available Reserves; Transfers Therefrom.
(A) The City shall maintain the funds on hand in Available Reserve.s in an aggregate
amount at least equal to five (5.0) times maximum annual debt service on all outstanding
bonded indebtedness secured by Net Revenues of any of the Systems.
(B) The City shall transfer from Available Reserves, to the Water System, as needed,
amounts sufficient to enable the City to pay all maintenance and operation costs of the Water
System, and all debt service on obligations issued to finance imprOVements to the Water
System, when and as the same become due and payable.
SECTION 5.14. Noi'riority for Addition<l,l Obligations. The City covenants that no
additional bonds or other obligatiOns shall be issued or incurred having any priority in
payment of principal 01' interest out of the Net Revenues over the Bonds. Nothing in tbis
Indenture shall prohibit or impair the authority of the City to issue bonds or other obligations
35
secured by a lien on Gross Revenues or Net Revenues which is subol'dina te to the lien
established hereunder, upon such terms and in such principal amounts as the City may
determine.
SECTION 5.15. No Arbitrage. The City shall not take, nor permit nor suffer to be taken
any action with respect to the proceeds of any of the Series A Bonds which would cause any of
t1le Series A Bonds to be "arbitrage bonds" within the meaning of the Tax Code.
SECTION 5.16. Inforn)ation lkport. The City is hereby directed to assure the filing of
an information report for the Series A Bonds in compliance with Section 149 (e) of the Tax
Code.
SECTION 5.17. !,!ival"--Activity Bond Limitation. The City shall assure that the
proceeds of the Series A Bonds are not so used as to cause the Series A Bonds to satisfy the
private business tests of section 141(b) of the Tax Code 01' the private loan financing test of
section 141 (c) of the Tax Code.
SECTION 5.18. Fegera19uar;!ntee Prohibition. The City shall not take any action or
permit or suffer any action to be taken if the result of the same would be to cause any of the
Series A Bonds to be "federally guaranteed" within the meaning of section 149(b) of the Tax
Code.
SECTION 5.19. Further Assurances. The City will adopt, make, execute and deliver
any and all such further resolutions, instruments and assurances as may be reasonably
necessary or proper to cany out the intention or to facilitate the performance of this Indenture,
and for the better assuring and confirming unto the Owners of the Series A Bonds the rights
and benefits provided in this Indenture.
SECTION 5.20. Continuing Disclosure. The City will provide information on the
financial condition of the Water System to any Bond Owner or other interested person upon
request and with payment of the City-prescribed handling costs thereof. Such information will
be limited to financial statements and staff reports which have previously been distributed to
the City Council. Additionally, the City will file annually with the Trustee a copy of its audited
financial reports. The Trustee shall have no duty to review such repmls.
SECTION 5.21. Rebate Requirement. The City shall take any and all actions necessary
to assure compliance with section 148(£) of the Tax Code, relating to lIle rebate of excess
investment earnings, if any, to the federal government, to the extent that such section is
applicable to the Series A Bonds.
SECTION 5.22 Mjlmteni!nc~QLIax-Jlxemption. The City shall take all actions
necessary to assure the exclusion of interest on t1le Series A Bonds from the gross income of the
Owners of the Series A Bonds to the same extent as such-interest is permitted to be excluded
from gross income under the Tax Code as in effect on the date of issuance of the Series A
Bonds.
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ARTICLE VI
THE TRUSTEE
SECTION 6.01. Appointment of Truste~. U.S. Bank National Association, a national
banking association organized and existing under and by virtue of the laws of the United States
of America. at its corporate trust office in San Francisco, California, is hereby appointed Tmstee
by the City for the purpose of receiving all moneys required to be deposited with the Trustee
hereunder and to allocate, use and apply the same as provided in this Indenture. The City
agrees that it will maintain a Tmstee having a corporate tmst office in San Francisco, California,
with a combined capital and surplus of at least One Hundred Million Dollars ($100,000,000),
and subject to supervision 01' examination by federal or State authority, so long as any Series A
Bonds are Outstanding. If such bank or trust company publishes a report of condition at least
annually pursuant to law or to the requirements of any supervising or examining authority
above referred to, then for the purpose of this Section 6.01 the combined capital and surplus of
such bank or trust company shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published.
The Trustee is hereby authorized to pay the Series A Bonds when duly presented for
payment at maturity, 01' on redemption or pmchase prior to maturity, and to cancel all Series A
Bonds upon payment thereof. The Trustee shall keep accurate records of all funds
administered by it and of all Series A Bonds paid and discharged.
SECTION 6.02. ,'\cceptance of Trusts. The Trustee hereby accepts the trusts imposed
upon it by this Indenture, and agrees to perform said trusts, but only upon and subject to the
following express terms and conditions:
(a) The Trustee, prior to the occurrence of an Event of Default and after curing
or waiver of all Events of Default which may have occurred, undertakes to perform such
duties and only such duties as are specifically set forth in this Indenture. In case an
Event of Default hereunder has occurred (which has not been cured or waived) the
Trustee may exercise such of the rights and powers vested in it by this Indenture, and
shall use the same degree of care and skill in their exercise, as a prudent and reasonable
manwould exercise or use unde!' the circumstances in the conduct of his own affairs.
(b) The Trustee may execute any of the trusts or powers hereof and perform the
duties required of it hereunder by or through attorneys, agents, or receivers but shall be
answerable for the selection of the same in accordance with the standard specified
above, and shall be entitled to advice of counsel conce1'11ing all matters of trust and its
duty hereunder, and the Trustee shall not be liable for any action taken or not taken by
it in good faith reliance upon the advice or opinion of such counseL
(c) The Trustee shall not be responsible for any redtal herein, or in the Series A
Bonds, or for the validity of this Indenture or any of the supplements thereto or
instruments of further assurance, or for the sufficiency of the security for the Series A
Bonds issued hereunder 01' intended to be secured hereby and the Trustee shall not be
bound to ascertain or inquire as to the observance or performance of any covenants,
conditions or agreements on the part ot the City hereunder. The Trustee shall not be
37
responsible or liable for any loss suffered in connection with any investment of funds
made by it in accordance with Section 4,08,
(d) The Trustee shall not be accountable for the use of any proceeds of sale of the
Series A Bonds delivered hereunder, The Trustee may become the Owner of Series A
Bonds secured hereby with the same rights which it would have if not the Trustee; may
acquire and dispose of other bonds or evidence of indebtedness of the City with the
same rights it would have if it were not the Trustee; and may act as a depositary 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 fOl'med to protect the rights of Owners of Series A Bonds,
whether or not such committee shallrepl'esent the Owners of the majOl'ity in principal
amount of the Series A Bonds then Outstanding,
(e) In the absence of bad faith on its part, the Trustee shall be protected in acting
upon any notice, request, consent, certificate, order, affidavit, letter, telegram or other
paper or document believed by it to be genuine and correct and to have been signed 01'
sent by the propel' person or persons, Any action taken or omitted to be taken by the
Trustee in good faith and without negligence pursuant to this Indenture upon the
request 01' authority 01' consent of any person who at the time of making such request or
giving such authority 01' consent is the Owner of any Series A Bond, shall be conclusive
and binding upon all future Owners of the same Series A Bond and upon Series A
Bonds issued in exchange therefor or in place thereof. The Trustee shall not be botmd to
recognize any person as an Owner of any Series A Bond 01' to take any action at his
request unless the ownership of such Series A Bond by such person shall be reflected on
the Bond Registration Books,
(f) As to the existence or non-existence of any fact 01' as to the sufficiency 01'
validity of any instrument, paper 01' proceeding, the Trustee shall be entitled to rely
upon a Certificate of the City as sufficient evidence of the facts therein contained and
prior to the OCCUl'l'ence of an Event of Default hereunder of which the Trustee has been
given notice 01' is deemed to have notice, as provided in Section 6,02(h) hereof, shall also
be at liberty to accept a similar certificate to the effect that any particular dealing,
transaction 01' action is necessary or expedient, but may at its discretion secure such
further evidence deemed by it to be necessary or advisable, but shall in no case be
bound to secure the same, The Trustee may accept a Certificate of the City to the effect
that an authorization in the form therein set forth has been adopted by the City, as
conclusive evidence that such authOl'ization has been duly adopted and is in full force
and effect.
(g) 1be perml~slve right of the Trustee to do things enumerated in this
Indenture shall not be construed as a duty and it shall not be answerable for other than
its negligence 01' willful default. The immunities and exceptions from liability of the
Trustee shall extend to its officers, directors, employees and agents,
(h) The Trustee shall not be required to take notice or be deemed to have notice
of any Event of Default hereunder except failme by the City to make any of the
payments to the Trustee required to be made by the City pursuant hereto or failure by
the City to file with the Trustee any document required by this Indenture to be so filed
subsequent to the issuance of the Series A Bonds, unless the Trustee shall be specifically
38
notified in writing of such default by the City or by the Owners of at least twenty-five
percent (25%) in aggregate principal amount of the Series A Bonds then Outstanding
and all notices or other instruments required by this Indenture to be delivered to the
Tl'1Istee must, in order to be effective, be delivered at the Tl'1Ist Office of the Trustee, and
in the absence of such notice so delivered the Trustee may conclusively assume there is
no Event of Default hereunder except as aforesaid.
(i) At any and all reasonable times the Trustee, and its duly authorized agents,
attorneys, experts, engineers, accountants and representatives, shall have the right (but
not the duty) fully to inspect the Water System, including all books, papers and recOl'ds
of the City pel·taining to the Water System and the Series A Bonds, and to take such
memoranda from and with regard thereto as may be desired but which is not privileged
by statute or by law.
G) 1be TlUstee shall not be required to give any bond or surety in respect of the
execution of the said trusts and powers or otherwise in respect of the premises.
(k) Notwithstanding anything elsewhere in this Indenture with respect to the
execution of any Series A Bonds, the withdrawal of any cash, the release of any
property, or any action whatsoever within the purview of this Indenture, the Trustee
shall have the right, but shall not be required, to demand any showings, certificates,
opinions, appraisals or other information, 01' corporate action or evidence thereof, as
may be deemed desirable for the purpose of establishing the right of the City to the
execution of any Series A Bonds, the withdrawal of any cash, 01' the taking of any other
action by the Trustee.
(1) Before taking the action referred to in Section 8.03 the Trustee may require
that a satisfactory indemnity bond be furnished for the reimbursement of all expenses to
which it may be put and to protect it against all liability, except liability which is
adjudicated to have resulted from its negligence or willful default in connection with
any such action.
(m) All moneys received by the Trustee shall, until used or applied or invested
as herein provided, be held in trust for the purposes for which they were received but
need not be segregated from other funds except to the extent required by law. The
Trustee shall not be under any liability for interest on any moneys received hereunder
except such as may be agreed upon.
SECTION 6.03. Fees,'Charges and Expenses of Trustee. The Trustee shall be paid by
the City and reimbursed by the City for reasonable fees for its services rendered hereunder and
all advances, counsel fees (including expenses) and other expenses reasonably and necessarily
made or incurred by the Trustee in connection with such services. Upon the occurrence of an
Event of Default hereunder, but only upon an Event of Default, the Trustee shall have a first
lien with right of payment prior to payment of any Series A Bond upon the amounts held
hereunder for the foregoing fees, charges and expenses incurred by it respectively,
SECTION 6.04. Notice to Bond Owners of Default. If an Event of Default hereunder
occurs with respect to any Series A Bonds, of which the Tl'Ustee has been given or is deemed to
have notice, as provided in Section 6.02(h) hereof, then the Trustee shall promptly give written
39
notice thereof by first-class mail to the Owner of each such Series A Bond, unless such Event of
Default shall have been cured before the giving of such notice; provided, however, that unless
such Event of Default consists of the failure by the City to mak.,e any payment when due, the
Trustee may elect not to give such notice if and so long as the Trustee in good faith determines
that it is in the best interests of the Bond Owners not to give such notice.
SECTION 6.05. Intery~ntion by Trustee. In any judicial proceeding to which the City
is a party which, in the opinion of the Tl'Ustee and its counsel. has a substantial bearing on the
interests of Owners of any of the Series A Bonds, the Tl'Ustee may intervene on behalf of such
Bond Owners, and subject to Section 6.02 (I) hereof, shall do so if requested in writing by the
Owners of at least twenty-five percent (25%) in aggregate principal amount of such Series A
Bonds then Outstanding.
SECTION 6.06. Removal of Trustee. The Owners of a majority in aggregate principal
amount of the Outstanding Bonds may at any time, and the City may, so long as no Event of
Default shall have occurred and then be continuing, remove the Trustee initially appointed,
and any successor thereto, by an instrument or concurrent insb'uments in writing delivered to
the Trustee (where applicable), whereupon the City or such Owners, as the case may be, shall
appoint a successor or succeSSOrS thereto; provided that any such successor shall be a bank or
trust company meeting the requirements set forth in Section 6.01 hereof.
SECTION 6.07. ResignatiolJ, by Trustee. The Trustee and any successor Trustee may at
any time resign by giving thirty (30) days' written notice by registered or certified mail to the
City. Upon receiving such notice of resignation, the City shall promptly appoint a successor
Trustee. Any resignation 01' removal of the Trustee and appointment of a successor Trustee
shall become effective upon acceptance of appointment by the successor Trustee. Upon such
acceptance, the City shall cause notice thereof to be given by first class mail to the Bond Owners
at their respective addresses set forth on the Bond Registration Books. No resignation of the
Trustee shall take effect until a successor is appointed and has accepted.
SECTION 6.08. Appointment of Successor Trustee. In the event of the removal or
resignation of the Trustee pursuant to Sections 6.06 or 6.07, respectively, the City shall promptly
appoint a successor Trustee. In the event the City shall for any reason whatsoever fail to
appoint a successor Trustee within forty-five (45) days following the delivery to the Trustee of
the instrument described in Section 6.06 or within forty-five (45) days following the receipt of
notice by the City pursuant to Section 6.07, the Trustee may apply to a court of competent
jurisdiction for the appointment of a successor Trustee meeting the requirements of Section 6.01
hereof. Any such successor Trustee appointed by such court shall become the successor Trustee
hereunder notwithstanding any action by the City purporting to appoint a successor Trustee
following the expiration of such fOl'ty-five-day period.
SECfION 6.09. Merger or Consolidation. Any company into which the Trustee may
be merged 01' converted or which it may be consolidated 01' any company resulting from any
merger, conversion or consolidation to which it shall be a party or any company to which the
Trustee may sell or transfer all or substantially all of its corporate trust business, provided that
such company shall be eligible under Section 6.01, shall be the successor to the Trustee and
vested with all of the title to the trust estate and all of the trusts, powers, discretions,
immunities, privileges and all other matters as was its predecessor, without the execution or
filing of any paper or further act, anything herein to the contrary notWithstanding.
40
SECTION 6.10. Concerning any Successor Trustee. Every successor Trustee
appointed hereunder shall execute, acknowledge and deliver to its predecessor and also to the
City an instrument in writing accepting such appointment hereunder and thereupon such
successor, without any further act, deed or conveyance, shall become fully vested with all the
estates, properties, rights, powers, trusts, duties and obligations of its predecessors; but such
predecessor shall, nevertheless, On the Request of the City, or of its successor, execute and
deliver an instrument transferring to such successor all the estates, properties, rights, powers
and trusts of such predecessor hereunder; and every predecessOI' Trustee shall deliver all
securities and moneys held by it as the Trustee hereunder to its successor. Should any
instrument in writing from the City be required by any successor Trustee for more fully and
certainly vesting in such successor the estate, rights, powers and duties hereby vested or
intended to be vested in the predecessor, any and all such insh'uments in writing shall, on
request, be executed, acknowledged and delivered by the City.
SECTION 6.11. Appointment of Co-Trustee. It is the purpose of this Indenture that
there shall be no violation of any law of any jurisdiction (including particularly the law of the
State) denying or restricting the right of banking corporations Or associations to transact
business as Trustee in such jurisdiction. It is recognized that in the case of litigation under this
Indenture, and in particular in case of the enforcement of the rights of the Trustee on default, or
in the case the Trustee deems that by reason of any present or future law of any jurisdiction it
may not exercise any of the powers, rights or remedies herein granted to the Trustee or hold
title to the properties, in trust, as herein granted, or take any other action which may be
desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an
additional individual 01' institution as a separate or co-trustee. The following provisions of this
Section 6.11 are adopted to these ends.
In the event that the Trustee appoints an additional individual or institution as a
separate or co-trustee, each and every remedy, power, right, claim, demand, cause of action,
immunity, estate, title, interest and lien expressed or intended by this Indenture to be exercised
by Or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest
in such separate or co-h'ustee but only to the extent necessary to enable such separate or co-
hustee to exercise such powers, rights and remedies, and every covenant and obligation
necessary to the exercise tllereof by such separate or co-trustee shall run to and be enforceable
by either of them.
Should any instrument in writing from the City be required by the separate trustee or
co-trustee so appointed by the Trustee for more fully and celtainly vesting in and confirming to
it such properties, rights, powers, trusts, duties and obligations, any and all such instruments in
writing shall, on request, be executed, acknowledged and delivered by the City. In case any
separate trustee or co-trustee, or a successor to either, shall become incapable of acting, resign
or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such
separate trustee or co-trustee, so far as permitted by law, shall vest in and be exercised by the
Trustee until the appointment of a new trustee or successor to such separate h'ustee or eo-
trustee.
SECTION 6.12. IndemnificatiQn; Limited Lillbility of Trustee. The City shall
indemnify and hold the Trustee harmllo'.ss from and against all claims, losses, costs, expenses,
liabilities and damages including legal fees and expenses arising from the exercise and
41
performance of its duties hereunder. Such indemnity shall survive the resignation or removal
of the Trustee hereunder. No provision in this Indenture shall requh<e the Trustee to risk or
expend its own funds or otherwise incur any financial liability hereunder if it shall have
reasonable grounds for believing repayment of such funds or adequ~te indemnity against such
liability or risk is not assured to it. The Trustee shall not be liable for any action taken or
omitted to be taken by it in accordance with the direction of a majority (or other percentage
provided herein) of the Owners of the principal amount of Bonds Outstanding relating to the
exercise of any right, power or action, or the time, method and place of conducting any
proceeding or remedy available to the Trustee under this Indenture.
42
ARTICLE VII
MODIFICATION AND AMENDMENT OF THE INDENTURE
SECTION 7.01. AlllfI.14111f!,~Consent9i BoncLQ!vnfrs. This Indenture and the
rights and obligations of the City and of the Owners of the Series A Bonds may be modified or
amended at any time by a Parity Bonds Instrument which shall become binding when the
written consent of the Owners of a majority in aggregate principal 'amount of the Series A
Bonds then Outstanding exclusive of Series A Bonds disqualified as provided in Section 7,03
hereof, are filed with the Trustee. No such modification or amendment shall (a) extend the
maturity of or reduce the interest rate on any Series A Bond or otherwise alter 01' impair the
obligation of the City to pay the principal, interest 01' redemption premiums at the time and
place and at the rate and in the cU1'1'ency provided therein of any Sel'ies A Bond without the
express written (;onsent of the Owner of such Series A Bond, (b) reduce the percentage of Series
A Bonds required for the written consent to any such amendment or modification, or (c)
without its written consent thereto, modify any of the rights 01' obligations of the Trustee.
SEC'TION 7.02. AmendmentJ'Vitho!!LCo!1sent2'fJ!ondhoJd~. This Indentul'e and
the rights and obligations of the City and of the Owners of the Series A Bonds may also be
modified or amended at any time by a Parity Bends Instrument which shall become binding
upon execution and delivery, without consent of any Bond Owners, but only to the extent
permitted by law and only for anyone or more of the following purposes-
(a) to add to the covenants and agreements of the City in this Indenture
contained, other covenants and agreements thereafter to be observed, or to limit or
surrender any rights or power herein reserved to or conferred upon the City; or
(b) to make such provisions for the purpose of curing any ambiguity, or of
curing, coneeting or supplementing any defective provision contained in this Indenture,
or in any other respect whatsoever as the City may deem necessary or desirable,
provided under any circumstances that such modifications or amendments shall not
adversely affect tile interests of the Owners of the Series A Bonds;
(c) to provide for the issuance of any Parity Bonds, and to provide the terms and
conditions under which such Parity Bonds may be issued, including but not limited to
the establishment of special funds and accounts relating to such Parity Bonds and any
other provisions relating solely to such Parity Bonds, subject to and in accordance with
the provisions of Section 3.06; or
(d) to make such additions, deletions or modifications as may be necessary or
desirable to assure exemption from federal income taxation of interest on the Series A
Bonds.
SECTION 7.03. Qisquo:t!ifi~<!JJo!1.<ill. Series A Bonds owned or held by 01' for the
account of the City (but excluding Series A Bonds held in any employees' retirement fund) shall
not be deemed Outstanding for the purpose of any consent or other action or any calculation of
Outstanding Bonds in this article provided for, and shaH not be entitled to consent to, or take
any other action in Ulis article provided for.
43
SECTION 7.04. Endorsement or Replacement of S~ries A Bonds After Amendment.
After the effective date of any action taken as hereinabove provided, the City may determine
that the Series A Bonds shall bear a notation, by endorsement in form approved by the City, as
to such action, and in that case upon demand of the Owner of any Bond ,Outstanding at such
effective date and presentation of his Series A Bond for that pUl'pose at the Trust Office of the
Trustee, a suitable notation as to such action shall be made on such Series A Bond. If the City
shall so determine, new Series A Bonds so modified as, in the opinion of the City, shall be
necessary to conform to such Bond Owners' action shall be prepared and executed, and in that
case upon demand of the Owner of any Series A Bond Outstanding at such effective date such
new Series A Bonds shall be exchanged at the Tl'Ust Office of the Trustee, without cost to each
Bond Owner, for Series A Bonds then Outstanding, upon surrender of such Outstanding Series
A Bonds.
SECTION 7.05. Amendment by Mutual Consent. The provisions of this Article VII
shall not prevent any Bond Owner from accepting any amendment as to the particular Series A
Bond held by him, provided that due notation thereof is made on such Series A Bond.
44
ARTICLE VIII
EVENTS OF DEFAULT AND REMEDIES OF BOND OWNERS
SECTION 8.01. Events of Default and A<eceleration of Maturities. The following
events shall be Events of Default hereunder:
(a) Default in the due and punctual payment of the principal of any Series A
Bond when and as the same shall become due and payable, whether at maturity as
therein expressed, by proceedings for redemption, by declaration or otherwise;
(b) Default in the due and punctual payment of any installment of interest on
any Series A Bond when and as such interest installment shall become due and payable;
(c) Default by the City in the observance of any of the covenants, agreements or
conditions on its part in this Indenture or in any Parity Bonds Instrument or in the
Series A Bonds contained, and such default shall have continued for a period of sixty
(60) days after the City shall have been given notice in writing of such default by the
Trustee; or
(d) The filing by the City of a petition or answer seeking reorganization or
arl'angement under the federal bankruptcy laws or any other applicable law of the
United States of America, or if a court of competent jurisdiction shall approve a petition,
filed with or without the consent of the City, seeking reorganization under the federal
bankruptcy laws or any other applicable law of the United States of America, or if,
under the provisions of any other law for the relief or aid of debtors, any court of
competent jurisdiction shall assume custody or control of the City or of the whole or any
substantial part of its property.
Upon the occurrence of an Event of Default, the Trustee may, and shall, at the direction
of the owners of a majority of the principal amount of the Series A Bonds, by written notice to
the City, declare the principal of Ule Series A Bonds to be immediately due and payable,
whereupon that portion of the principal of the Series A Bonds thereby coming due and there
interest thereon accrued to the date of payment shall, without further action, become and be
immediately due and payable, anything in this Indenture or in the Series A Bonds to the
contrary notwithstanding. This provision, however, is subject to the condition that if, at any
time after the principal of the Series A Bonds shall have been so declared due and payable and
before any judgment 01' decree for the payment of the moneys due shall have been obtained or
entered, the City shall deposit with the Trustee a sum sufficient to pay all of the principal of
and interest on the Series A Bonds having come due prior to such declaration, with interest on
such overdue principal and interest calculated at the rate of interest per annum Ulen borne by
the Outstanding Bonds, and the reasonable fees and expenses of the Trustee and those of its
attorneys, and any and all other defaults known to the Trustee (other than in the payment of
the principal of and interest on the Series A Bonds having come due and payable solely by
reason of such declaration) shall have been made good or cured to the satisfaction of the
Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then,
and in every such case, the Owners of a majority in aggregate principal amount of the Series A
Bonds at the time Outstanding may, by wTitten notice to the City and to the Trustee, on behalf
45
of the Owners of all of the Outstanding Bonds, rescind and annul such declaration and its
consequences. However, no such rescission and annulment shall extend to or shall affect any
subsequent default, or shall impair or exhaust any right or power consequent thereon.
SECTION 8.02. Application of Funds Upon Acceleration. All amounts received by
the Trustee pursuant to any right given or action taken by the Trustee under the provisions of
this Indenture shall be applied by the Trustee in the following order upon presentation of the
several Series A Bonds, and the stamping thereon of the amount of the payment if only
partially paid, or upon the surrender thereof if fully paid -
First, to the payment of the costs and expenses of the Trustee and of Bond
Owners in declaring such Event of Default, including reasonable compensation to their
agents, attorneys and counsel, and to the payment of the costs and expenses of the
Trustee, if any, in carrying out the provisions of this Article Vlll, including reasonable
compensation to its agents, attorneys and counsel; and
Second, to the payment of the whole amount then owing and unpaid upon the
Series A Bonds for interest and principal, with interest on such overdue 'amounts to the
extent permitted by law at the rate of interest then borne by the Outstanding Bonds, and
in case such moneys shall be insufficient to pay in full the whole amount so owing and
unpaid upon the Series A Bonds, then to the payment of such interest, principal and
interest on overdue amounts without preference or priority among such interest,
principal and interest on overdue amounts ratably in proportion to the aggregate of
such interest, principal and interest on overdue amounts.
SECTION 8.03. Other Remedies; Rights of Bond Owners. Upon the occurrence of an
Event of Default, the Trustee may pursue any available remedy, in addition to the remedy
specified in Section 8.01, at law or in equity to enforce the payment of the principal of,
premium, if any, and interest on the Outstanding Bonds, and to enforce any rights of the
Trustee 1,lnder or with respect to thi~ Indenture.
If an Event of Default shall have occurred and be continuing and if requested so to do
by the Owners of at least twenty-five percent (25%) in aggregate principal amount of
Outstanding Bonds and indemnified as provided in Section 6.02 (I), the Trustee shall be
obligated to exercise such one or more of the rights and powers conferred by this Article VIII, as
the Trustee, being advised by counsel, shall deem most expedient in the interests of the Bond
Owners.
No remedy by the terms of this Indenture conferred upon or reserved to the Trustee (or
to the Bond Owners) is intended to be exclusive of any other remedy, but each and every such
remedy shall be cumulative and shall be in addition to any other remedy given to the Trustee
or to the Bond Owners hereunder or now or hereafter existing at law or in equity.
No delay or omission to exercise any right or power accruing upon 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 acquiescence therein; such right or power may be exercised from time to time as
often as may be deemed expedient.
46
SECTION 8.04. Power of Trustee to Control Proceedings. In the event that the
Trustee, upon the happening of an Event of Default, shall have taken any action, by judicial
proceedings or otherwise, pursuant to its duties hereunder, whether upon its own discretion or
upon the request of the Owners of a majority in principal amount of the Series A Bonds then
Outstanding, it shall have full power, in the exercise of its discretion for the best interests of the
Owners of the Series A Bonds, with respect to the continuance, discontinuance, withdrawal,
compromise, settlement or other disposal of such action; provided, however, that the Trustee
shall not, unless there no longer continues an Event of Default, discontinue, withdraw,
compromise or settle, or othelwise dispose of any litigation pending at law or in equity, if at the
time there has been filed with it a written request signed by the Owners of a majority in
principal amount of the Outstanding Bonds hereunder opposing such discontinuance,
withdrawal, compromise, settlement or other disposal of such litigation. Any suit, action or
proceeding which any Owner of Series A Bonds shall have the right to bring to enforce any
right or remedy hereunder may be brought by the Trustee for the equal benefit and protection
of all Owners of Series A Bonds similarly situated and the Trustee is hereby appointed (and the
successive respective Owners of the Series A Bonds issued hereunder, by taking and holding
the same, shall be conclusively deemed so to have appointed it) the b·ue and lawful attorney-in-
fact of the respective Owners of the Series A Bonds for the purpose of bringing any such suit,
action or proceeding and to do and perform any and all acts and things for and on behalf of the
respective Owners of the Series A Bonds as a class or classes, as may be necessary or advisable
in the opinion of the Trustee as such attorney-in-fact.
SECTION 8.05. Appointment of Receivers. Upon the occurrence of an Event of
Default hereunder, and upon the filing of a suit or other commencement of judicial proceedings
to enforce the rights of the Trustee and of the Bond Owners under this Indenture, the Trustee
shall be entitled, as a matter of right, to the appointment of a receiver or receivers of the Net
Revenues and other amounts pledged hereunder, pending such proceedings, with such powers
as the court making such appointment shall confer.
SECTION 8.06. Non-Waiver. Nothing in this Article VIII or in any other provision of
this Indenture, or in the Series A Bonds, shall affect or impair the obligation of the City, which
is absolute and unconditional, to pay the interest on and principal of the Series A Bonds to the
respective Owners of the Series A Bonds at the respective dates of maturity, as herein provided,
out of the Net Revenues and other moneys herein pledged for such payment.
A waiver of any default or breach of duty or conb·act by the Trustee or any Bond
Owners shall not affect any subsequent default or breach of duty or contract, or impair any
rights or remedies on any such subsequent default or breach. No delay or omission of the
Trustee or any Owner of any of the Series A Bonds 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 of
any such default or an acquiescence therein; and every power and remedy conferred upon the
Trustee or Bond Owners by the Bond Law or by this Article VIII may be enforced and exercised
from time to time and as often as shall be deemed expedient by the Trustee or the Bond
Owners, as the case may be.
If a suit, action or proceeding to enforce any right or exercise any remedy is abandoned
or determined adversely to the Bond Owners, the City and the Bond Owners shall be restored
to their former positions, rights and remedies as if such suit, action or proceeding had not been
brought or taken.
47
SECTION 8.07. Rights and Remedies of Bond Owners. No Owne1' of any Series A
Bond issued hereunder shall have the right to institute any suit, action or proceeding at law or
in equity, for any remedy under or upon this Indenture, unless (a) such Owner shall have
previously 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 all the Series A Bonds then Outstanding
shall have made written request upon the Tmstee to exercise the powers hereinbefore granted
or to instihlte such action, suit or proceeding in its own name; (c) said Owners shall have
tendered to the Trustee indemnity reasonably acceptable to the Trustee against the costs,
expenses and liabilities to be incurred in compliance with such l'equest; and (d) the Trustee
shall have refused or omitted to comply with such request for a period of sixty (60) days after
such written request shall have been received by, and said tender of indemnity shall have been
11141de to, the Trustee,
Such notification, request, tender of indemnity and refusal or orruss10n are hereby
declared, in every case, to be conditions precedent to the exercise by any Owner of Series A
Bonds of any remedy hereunder; it being understood and intended that no one or more Owners
of Series A Bonds shall have any right in any manner whatever by his or their action to enforce
any right under this Indenrure, except in the manner herein provided, and that all proceedings
at law 01' in equity to enforce any pl'Ovision of this Indenrure shall be instituted, had and
maintained in the manner herein provided and for the equal benefit of all Owners of the
Outstanding Bonds,
The right of any Owner of any Series A Bond to receive payment of the principal of and
interest and premium (if any) on such Series A Bond as herein pl'Ovided 01' to institute suit for
the enforcement of any such payment, shall not be impaired or affected without the written
consent of such Owner, notwithstanding the foregoing provisions of this Section or any other
provision of this Indenrure.
SECTION 8,08. Termination of Proceedings. In case the Trustee shall have proceeded
to enforce any right under this Indenture by the appointment of a receiver 01' otherwise, and
such proceedings shall have been discontinued or abandoned for any reason, 01' shall have been
determined adversely, then and in every such case, the City, the Trustee and the Bond Owners
shall be restored to their former positions and rights hereunder, respectively, with regard to the
pl'Operty subject to this Indenture, and all rights, remedies and powers of the Trustee shall
continue as if no such proceedings had been taken,
48
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Limited Liability of City. Notwithstanding anything in this Indenture
contained, the City shall not be required to advance any moneys derived from any source of
income other than the Net Revenues for the payment of the principal of or interest on the Series
A Bonds, or any premiums upon the redemption thereof, or for the performance of any
covenahts herein contained (except to the extent any such covenants are expressly payable
hereunder from the Gross Revenues). The City may, however, advance funds for any such
purpose, provided that such funds are derived from a source legally available for such purpose
and may be used by the City for such purpose without incurring indebtedness.
SECTION 9.02. Benefits of Indenture Limited to Parties. Nothing in this Indenture,
expressed or implied, is intended to give to any person other than the City, the Trustee and the
Owners of the Series A Bonds, any right, remedy or claim under or by reason of this Indenture.
Any covenants, stipulations, promises or agreements in this Indenture contained by and on
behalf of the City shall be for the sale and exclusive benefit of the Trustee and the Owners of
the Series A Bonds.
SECTION 9.03. Discharge of Indenture. If the City shall pay and discharge any or all
of the Outstanding Bonds in anyone or more of the following ways:
(a) by well and truly paying or causing to be paid the principal of and interest
and premium (if any) on such Series A Bonds, as and when the same become due and
payable;
(b) by depositing with the Trustee, in h"ust, at or before maturity, money which,
together with the available amounts then on deposit in the funds and accounts
established pursuant to this Indenture, is fully sufficient to pay such Series A Bonds,
including all principal, interest and redemption premiums; or
(c) by depositing with a qualified escrow holder, in h'ust, Defeasance Obligations
in such amount as the City (verified by an Independent Certified Public Accountant)
shall determine will, together with the interest to accrue thereon and available moneys
then on deposit in the Funds and Accounts established pursuant to this Indenture, be
fully sufficient to pay and discharge the indebtedness on such Series A Bonds (including
all principal, interest and redemption premiums, if any) at or before their respective
maturity dates;
and if such Series A Bonds are to be redeemed prior to the maturity thereof notice of such
redemption shall have been mailed pursuant to Section 2.02( d) or provision satisfactory to the
Trustee shall have been made for the mailing of such notice, then, at the election of the City,
and notwithstanding that any of such Series A Bonds shall not have been surrendered for
payment, the pledge of the Net Revenues and other funds provided for in this Indenture with
respect to such Series A Bonds, and all other pecuniary obligations of the City under this
Indenture with respect to all such Series A Bonds, shall cease and terminate, except only the
obligation of the City to payor cause to be paid to the Owners of such Series A Bonds not so
49
surrendered and paid all sums due thereon from amounts set aside for such purpose as
aforesaid, and all expenses and costs of the Trustee. Notice of such election shall be filed with
the Trustee.
Any funds thereafter held by the Trustee, which are not required for said purposes,
shall be paid over to the City.
Refunding bonds may be issued at any time without regard to whether an Event of
Default exists.
To accomplish defeasance the City shall cause to be delivered (i) a report of an
Independent Certified Public Accountant verifying the sufficiency of the escrow established to
pay the Series A Bonds in full on the maturity or earlier redemption date ("Verification"), «ii) an
escmw deposit agreement, and (iii) an opinion of nationally recognized bond counsel to the
effect that the Series A Bonds are no longer "Outstanding" under this Indenture; each
Verification and defeasance opinion shall be acceptable in form and substance, and addressed,
to the City and the Trustee.
SECTION 9.04. Succes~Qr Is Deemed Incluc\,?d in All ReferencesJ9 Predecessor.
Whenever in this Indenture or any Parity Bonds Instrument the City is named or refelTed to,
such reference shall be deemed tu include the successor to the powers, duties and functions,
with respect to the management, administration and control of the affairs of the City, that are
presently vested in the City, and all the covenants, agreements and provisions contained in this
Indenture by or on behalf of the City shall bind and inure to the benefit of its successors
whether so expressed or not.
SECTION 9.05. Content of C",.rtificates. Every certificate with respect to compliance
with a condition 01' covenant provided for in this Indenture shall include (a) a statement that
the person or persons making or giving such certificate have read such covenant or condition
and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of tl1e
examination or investigation upon which the statements 01' opinions contained in such
certificate are based; (cl a statement that, in the opinion of the signers, they have made or
caused to be made such examination or investigation as is necessary to enable them to express
an informed opinion as to whether 01' not such covelilant or condition has been complied with;
and (d) a statement as to whether, in the opinion of the signers, such condition or covenant has
been complied with.
Any such certificate made 01' given by an officer of the City may be based, insofar as it
relates to legal matters, upon a certificate or opinion of or representations by counsel, unless
such officer knows that the certificate or opinion or representations with respect to the matters
upon which his certificate may be based, as aforesaid, are erroneous, or in the exercise of
reasonable care should have known that the same were erroneous. Any such certificate or
opinion or representation made or given by counsel may be based, insofar as it relates to factual
matters, on information with l'espect to which is in the possession of the City, upon the
certificate or opinion of 01' representations by an officer or officers of the City, unless such
counsel knows that the certificate 01' opinion or representations with respect to the matters
upon which his certificate, opinion or representation may be based, as aforesaid, are el'l'oneous,
or in the exercise of reasonable care should have known that the same were erroneous.
50
SECTION 9.06. J:ixecution of Documents byJlond Owners. Any request, consent or
other instrument required by this Indenture to be signed and executed by Bond Owners may be
in any number of concurrent writings of substantially similar tenor and may be signed or
executed by such Bond Owners in person or by agent or agents duly appointed in writing.
Proof of the execution of any such request, consent 01' other insh'ument or of a writing
appointing any such agent, shall be sufficient for any purpose of this Indenture and shall be
conclusive in favor of the Trustee and of the City if made in the manner provided in this
Section 9.06.
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 affidavit of a wiiness of such execution or 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 or writing acknowledged to him the execution thereof.
The ownership of Series A Bonds shall be provided by the Bond Registration Books.
Any request, consent or vote of the Owner of any Series A Bond shall bind every future
Owner of the same Series A Bond and the Owner of any Series A Bond issued in exchange
therefor or in lieu thereof, in respect of anything done or suffered to be done by the Trustee or
the City in pursuance of such request, consent or vote.
In determining whether the Owners of the requisite aggregate principal amount of
Series A Bonds have concurred in any demand, request, direction, consent or waiver under this
Indenture, Series A Bonds which are owned or held by or for the account of the City (but
excluding Series A Bonds held in any employees' retirement fund) shan be disregarded and
deemed not to be Outstanding for the purpose of any such determination, provided, however,
that for the purpose of determining whether the Trustee shall be protected in relying on any
such demand, I'equest, direction, consent or waiver, only Series A Bonds which the Trustee
knows to be so owned or held shall be disregarded.
In lieu of obtaining any demand, I'equest, direction, consent or waiver in writing, the
Trustee may call and hold a meeting of the Bond Owners upon such notice and in accordance
with such rules and obligations as the Trustee considers fair and reasonable for the purpose of
obtaining any such action.
SECTION 9.07. WaiverQLPersonal Liability. No officer, agent 01' employee of the City
shall be individually or personally liable for the payment of the interest on or principal of the
Series A Bonds; but nothing herein contained shall relieve any such officer, agent 01' employee
from the performance of any official duty pl'Ovided by law.
SECTION 9.08. Partial l!:lyaIidity. If anyone or more of the covenants or agreements,
or portions thereof, pl'Ovided in this Indenture on the part of the City (01' of the Trustee) to be
performed should be contrary to law, then such covenant or covenants, such agreement or
agreements, or such portions thereof, shall be null and void and shall be deemed separable
from the remaining covenants and agreement~ or portions thereof and shall in no way affect
the validity of this Indenture or of the Series A Bonds; but the Bond Owners shall retain all
rights and benefits accorded to them under the Bond Law 01' any other applicable provisions of
law. The City hereby declares that it would have entered into this Indenture and each and
51
every other section, paragraph, subdivision, sentence, clause and phrase hereof and would
have authorized the issuance of the Series A Bonds pursuant hereto irrespective of the fact that
anyone or more sections, paragraphs, subdivisions, sentences, clauses or phrases of this
Indenture or the application thereof to any person or circumstance may be held to be
unconstitutional, unenforceable or invalid.
SECTION 9.09. Destruction of Cancelled Series A Bonds. Whenever in this Indentme
provision is made for the surrender to the City of any Series A Bonds which have been paid or
cancelled pursuant to the provisions of this Indenture, the Trustee shall desb'oy such Series A
Bonds and furnish to the City a certificate of such destruction. ,
SECTION 9.10. Funds and Accounts. Any Fund or Account required by this Indenture
to be established and maintained by the City or the Trustee may be established and maintained
in the accounting records of the City or the Trustee, as the case may be, either as a Fund or an
Account, and may, for the purpose of such records, any audits thereof and any reports or
statements with respect thereto, be treated either as a Fund or as an Account. All such records
with respect to all such Funds and Accounts held by the City shall at all times be maintained in
accordance with geherally accepted accounting principles and all such records with respect to
all such Funds and Accounts held by the Trustee shall be at all times maintained in accordance
with industry practices; in each case with due regard for the protection of the security of the
Series A Bonds and the rights of every Owner thereof.
SECTION 9.11. Notices. Any notice, request, complaint, demand, communication or
other paper shall be sufficiently given and shall be deemed given when delivered or mailed by
registered or certified mail, postage prepaid, or sent by telegram, addressed as follows: if to the
City, to City of Palo Alto, City Hall, 250 Hamilton Avenue, Palo Alto, California 94301,
Attention: Director of Adminisb'ative Services; and if to the Trustee, at One California Sb'eet,
Tenth Floor, Suite 1000, San Francisco, CA 94111, Attention: Corporate Trust Services. The City
and the Trustee may designate any further or different addresses to which subsequent notices,
certificates or other communications shall be sent.
SECTION 9.12. Unclaimed Monevs. Anything in this Indenture to the contrary
notwithstanding, any moneys held by the Trustee in bust for the payment and discharge of any
of the Series A Bonds which remain unclaimed for one (1) year after the date when such Series
A Bonds have become due and payable, either at their stated maturity dates 01' by call for
earlier redemption, if such moneys were held by the Trustee at such date, or for one (1) year
after the date of deposit of such moneys if deposited with the Trustee after said date when such
Series A Bonds become due and payable, shall, at the Request of the City, be repaid by the
Trustee to the City, as its absolute property and free from trust, and the Trustee shall thereupon
be released and discharged with respect thereto and the Bond Owners shall look only to the
City for the payment of such Series A Bonds; provided, however, that before being required to
make any such payment to the City, the Trustee shall, at the expense of the City, cause to be
mailed to the Owners of all such Series A Bonds, at their respective addresses appearing on the
Bond Registration Books, a notice that said moneys remain unclaimed and that, after a date
named in said notice, which date shall not be less than thirty (30) days after the date of mailing
of such notice, the balance of such moneys then unclaimed will be returned to the City.
SECTION 9.13. Execution in Several Counterparts. This Indenture may be executed in
any number of counterpaits and each of such counterparts shall for all purposes be deemed to
52
be an original; and all such counterparts, or as many of them as the City and the Trustee shall
preserve undesh'oyed, shall together constitute but one and the same instrument.
SECTION 9.14. Governing Law. This Indenture shall be governed by and construed in
accordance with the laws of the State of California.
SECTION 9.15. Payment on Business Days. In any case where the date of the maturity
of interest or of principal (and premium, if any) of the Series A Bonds or the date fixed for
redemption of any Series A Bonds or the date any action is to be taken pursuant to this
Agreement is other than a Business Day; the payment of interest or principal (and premium, if
any) or the action need not be made on such date but may be made on the next succeeding day
which is a Business Day with the same force and effect as if made on the date required and no
interest shall accrue for the period from and after such date.
53
IN WITNESS WHEREOF, the CITY OF PALO AerO has caused this Indenture to be
signed in its name by its Director of Administrative Services and its seal to be affixed hereon
and attested by its City Oerk, and U.S. Bank National Association, in token of its acceptance of
the trust created hereunder, has caused this Indenture to be signed in its corporate name by its
officer identified below, all as of the day and year first above written.
[SEA LJ
Attest:
CityOerk
54
CITY OF PALO ALTO
By ________________________ __
Director of Administrative Services
U.S. Bank National Association,
as Trustee
By ________ ~~--~~-------
Authorized Officer
EXHIBIT A
Form of Series A Bond
1
EXHIBITB
Description of 2009 Water Project
EXHlBITB
OFFICIAL NOTICE OF SALE
$[Principal Amount]*
CITY OF PALO ALTO
(SANTA CLARA COUNTY, CALIFORNIA)
WATER REVENUE BONDS
TAX-EXEMIYf 2009 SERIES A
AND
TAXABLE 2009 SERIES B
(DIREct PAYMENT BUILD AMERICA BONDS)
NOTICE IS HEREBY GIVEN by the City of Palo Alto (the "City") that electronic hids
will he received by the City for the purchase of $ City of Palo Alto Water Revenue
Bonds, Tax-Exempt 2009 Series A and/ or Taxable 2009 Series B (Direct Payment Build America
Bonds) (together, the "Bonds"). Only electronic bids will be accepted, via PARITY@. No hand
delivered or facsimile bids will be accepted. The bids will he received in the manner and up to
the time and date specified below:
DATE AND TIME:
ELECTRONIC BIDS:
_~ A.M. Pacific Daylight Time on __ _
2009, (subject to postponement or cancellation in
accordance with this Official Notice of Sale).
Bid proposals may only be submitted elech·onically, via
P ARITY@, as provided below.
See "TERMS OP SALE -Warnings Regarding E1ectr·onlc Bids" herein.
The City may postpone the date or change the time of the sale to any subsequent date or any
other time by providing notification via Bloomberg Financial Markets or Thomson Municipal
Market Monitor (www.tm3.com) at least 24 hours prior to the scheduled date and time of sale.
The actual principal amount of the Bonds may vary, higher or lower, as a function of how the
actrlal interest rates affect the amount of costs of issuance and the size of the reserve fund and
as a function of the aemal discount taken by the successful bidder. The definitive principal
amount will be determined on the date of sale. Bidders should refer to the preliminary Official
Statement for definitions of terms and credit information regarding the Bonds.
TERMS OF THE BONDS
ISSUE. The Bonds will be issued ,under an Indenmre of Trust, dated as of November 1-
2009, between U.S. Bank National Association (the "Trustee") and the City (the" Indenmre"), in
the aggregate principal amount of approximately $[Principal Amount]* designated "City of
Palo Alto Water Revenue Bonds, Tax-Exempt 2009 Series A (the "Series A Bonds") and/or
Taxable 2009 Series B (Direct Payment Build America Bonds) (the "Series B Bonds")," consisting
• Preliminary, subject to change.
1-
of fully-registered bonds, without coupons, executed and delivered in book-enhy only form
,md registered in the name of Cede & Co., as nominee for The Depository Trust Company
("DTC"), in the denorllination of five thousand dollars ($5,000) each or any integral multiple
thereof.
The City is offering the Series A Bonds as tax-exempt obligations or as taxable Series B
Bonds, which the City will elect to designate as Qualified Direct Payment Build America Bonds.
A bidder may bid on all of the Bonds as Series A Bonds, or all of the Bonds as Series B Bonds, or
a combination of Series A Bonds and Series B Bonds. All of the Bonds of each maturity will be
designated as either Series A Bonds or Series B Bonds. A bidder must submit a bid for all of the
Bonds.
If the Bonds are issued as Series B Bonds, the City will elect to receive direct subsidy
payments from the U.s. Department of Treasury. The owners of, and owners of beneficial
interestq in, the Series B Bonds will not receive any tax credit with respect to such Bonds.
DATE, MATURITIES AND AMOUNTS. The Bonds will be dated their date of delivery,
with interest from such date at the rate or rates fixed upon the sale thereof and will mature
serially or be paid as Mandatory Sinking Fund Installments on June 1 in each year as set forth
in the following table:
Maturity Date
(Tune 1)
Principal
Amount *
ADIUSTMENLQFPRINCIP AL AMOUNTS. The City reserves the right to increase or
decrease the principal amount of any maturity of the Bonds as the City deems advisable in
order to accomplish the optimal sizing of the Bond issue, however, the total principal amount
will not exceed $ . Notice of such increase or decrease shall be given to the
successful bidder within 24 hours of bid opening. No such adjustment will have the effect of
altering the basis upon which the best bid is determined; provided, howe1ler, that any such
increase or decrease shall result in a pro rata increase or decrease, as the case may be, in the
amount of discount or premium on the purchase of the Bonds. In the event of any such
adjustment, no re-bidding or re-calculation of the bids submitted will be required or permitted,
and the successful bid or bids may not be withdrawn, and the successful bidder will not be
permitted to change the interest rate(s) in its bid for the Bonds.
The purchaser may elect to combine any number of consecutive maturities of Bonds for
which an identical interest rate has been specified to comprise term bonds by indicating such
• Preliminary, subject to change.
-2-
an election on the bid form. The election to create term bonds in such manner will require the
creation of a mandatory sinking fund so that the Sinking fund redemption payments shall equal
the corresponding serial bond amounts.
PRIOR REDEMPTION.
(a) Optional Redemption. The Bonds maturing on 01' before June 1, 20~ are not subject
to optional redemption prior to maturity. The Bonds maturing on or after June 1, 20_ are
subject to redemption prior to their respective maturity dates, at the option of the City, in any
order directed by the City, and by lot within a maturity, on any date occurring on 01' after June
1, 20 .. ., from any source of available funds, at the following respective redemption prices
(expressed as percentages of the principal amount of the Bonds to be redeemed), plus accrued
interest thereon to the date of redemption:
Redemption Periods Redemption Prices
(b) Optional Redemption at Make-Whole:lSl"demption Price. 1he Series B Bonds are
subject to optional redemption prior to their stated maturity, at the option of the City, in whole
or in part on any date occurring on 01' before June 1, 20~, but only upon the occul'l'ence of a
Fedcral Subsidy Termination Event, at a redemption price equal to the greater of:
(1) 100% of the principal amount of the Series B Bonds to be
redeemed; 01'
(2) the sum of the present values of the remammg scheduled
payments of principal and interest on the Series B Bonds to be redeemed
(exclusive of interest accrued to thc date fixed for redemption) discounted
to the date of redemption on a semialIDual basis (assuming a 360-day year
consisting of twelve 3Q-.days months) at the TreasUlY Note Rate (defined
below) plus __ basis points;
plus in each case, accrued and unpaid interest on the Series B Bonds being
redeemed to the date fixed for redemption.
For purposes of this subsection (b), the following terms have the following
respecti ve meanings:
"<:::omparable Treasury Issue" means the United States Treasury security or
securities selected by . (or any successor Broker-Dealer)
which has an actual or interpolated maturity comparable to the remaining
average life of the Series B Bonds to be redeemed, and that would be
utilized in accordance with customary financial practice in pricing new
issues of debt securities of comparable maturity to the remaining average
life of such Series B Bonds.
-3-
"Comparabl~ .. T'·easury Price" means with respect to any "edemption date,
(i) the average of the Reference Treasury Dealer Quotations for such
redemption date, after excluding the highest and lowest Reference
Treasury Deal Quotntions, 01' (ii) if the City obtains fewer than four such
Reference Treasury Dealer Quotations, the average of all such quotations.
"Federal Subsidy Termination Event" means the date on which the U.S.
Department of Treasury suspends (or announces the suspension of), the
direct payment to issuers of Build America Bonds (Direct Payment), of the
tax credit provided for in Sections 54AA(b) and 6431 of the Internal
Revenue Code of 1986, as amended (the "Code").
"Reference Treasury DealC1J ' means ....... __ (01' any successor
Broker-Dealer) and three other firms, specified by the City from time to
time, that are primary U.S. Government securities dealers in the City of
New York (each a "Primary Treasury Dealer"); provided, Iwwever, that if any
of them ceases to be a Primary Treasury Dealer, the City will substitute
another Primary Treasury Dealer.
"Referen~e Treasury Deal~r Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average as
determined by the City, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal
amount) quoted in writing to the City by such Reference Treasury Dealer at
3:30 p.m., New York City time, on the third Business Day preceding such
redemption date.
"Trca"ury Note Rate" means, with respect to any redemption date, the rate
pel' annum equal to the semiannual equivalent yield to maturity or
interpolated maturity of the Comparable Treasury Issue, assuming that the
C'.omparable Treasury Issue is purchased on the redemption date for a price
equal to the Comparable Treasury Price.
(c) Special Mandatory Redemption From Insurance or Condemnation Proceeds. The
Bonds are also subject to redemption as a whole or in part on any date prior to maturity, in
inverse order of maturity and by lot within a maturity, to the extent of the net proceeds of
hazard insurance not used to repair 01' rebuild the Water System (as herein defined) or the net
proceeds of condenmation awards received with respect to the Water System (as herein
defined) to be used for such purpose, at a redemption price equal to the principal amount of the
Bonds plus interest accrued thereon to the date fixed for redemption, without premium.
(d) MapdatorySinking Fund Redemption. The Bonds which mature in the years which
are checked in the Bid Form as being Term Bonds are also subject to mandatory redemption in
part by lot, on June 1 in each of the years checked under the heading 'Term Bonds" in the Bid
Form, from Mandatory Sinking Fund Installments, at a Redemption Price equal to the principal
amount thereof to be redeemed, without premium, in the aggregate l'espective principal
amounts and in the respective years as set forth in the Bid Form (as adjusted according to the
provisions of "ADJUSTMENT OF PRINCIPAL AMOUNTS" above).
-4-
PAYMENT. Interest on the Bonds is payable semiannually on each June 1 and
December 1 (each, and "Interest Payment Date" or "Payment Date"), commencing June 1, 2010.
So long as Cede & Co. is the registered holder of the Bonds, principal of and premium, if any,
and interest evidenced and represented by the Bonds will be paid by the Trustee at its principal
corporate trust office directly to DTC, which will in turn remit such principal, premium, if any,
and interest to its participants for subsequent di9bul'sement to the beneficial owners of tlle
Bonds.
PURPOSE OF ISSUE. The Bonds are to be issued by the City and are authorized
pursuant to the charter of the City and the provisions of Chapter 12.28 (commencing with
Section 12.28.010), of the Palo Alto Municipal Code, to (i) finance certain improvements to tile
City's water system (the "Water System"), (il) establish a debt service reserve fund for the Bonds
and (iii) pay certain costs of issuing the Bonds.
SECURITY. The City has transferred, placed a charge upon, assigned and set over to tile
Trustee, for tile benefit of tile Owners, tile Net Revenues of tlle Water System of the City, as
more particularly provided for in the Indenhtre, which is necessary to pay the principal or
redemption price of and interest on the Bonds in any Fiscal Year, together with all moneys on
deposit in the Debt Service Fund, and such Net Revenues has been irrevocably pledged to the
punctual payment of the principal or redemption price of and interest on the Bonds. Such Net
Revenues carumt be used for any other purpose while any of the Bonds remain Outstanding,
except that out of Net Revenues there may be apportioned and paid such sums for such
purposes, as are expressly permitted by the Indenture. Said pledge constitutes a direct charge
and lien on such Net Revenues for the payment of the principal or redemption price of and
interest on the Bonds and any bonds outstanding 01' issued on a parity therewith, including the
City's Utility Revenue Bonds, 2002 Series A, issued on Febl'Uary 7, 2002 in the principal amount
of $26,055,000, of which $19,690,000 are presently outstanding and seeUl'ed by a pledge the Net
Revenues of the Water System (and certain other revenues), all in accordance witll the terms
tIlereof. However, the City'S Utility Revenue Bonds, 1995 Series A (the "1995 Bonds") are
cUl'rentiy outstanding in the principal amount of $5,320,000 (as of June 30, 2009), and are
secured by a lien on Net Revenues of the City's entire enterprise system, which collectively
consists of the Sewer System, the Storm Drain System, the Gas System, the Electric System and
the Water System. The lien of the 1995 Bonds on the Net Revenues of the Water System is
senior to tile lien on tIlose Net Revenues securing the Bonds.
The Net Revenues constitute a trust fund for the security and payment of the principal
01' redemption price of and interest on the Bonds. The general fund of the City is not liable and
the credit 01' taxing power of the City is not pledged for the payment of the principal or
redemption price of and interest on the Bonds. The owners of the Bonds cannot compel the
exercise of the taxing power by the City or the forfeiture of its property. 'Ine principal or
redemption price of and interest on tile Bonds are not a debt of the City, nor a legal 01' equitable
pledge, charge, lien or encumbrance, upon any of its property, 01' upon any of its income,
receipts, or revenues except the Net Revenues of the Water System.
Neither the faith and credit nor the taxing power of the City, tile State of California, or any
politiCill subdivision thereof is pledged to tile payment of lite Bonds. TIle Bonds are not general
obligations of 111£ Citlj, but are limited obligations payable solely from certain funds Ileld pursuant to the
-5-
Indenture. Neither tile Cih) of Palo Alto liar the State of California s'JaIl be obligated to pay the principal
of the Bonds, or tile interest thereon and neitlwr the faith and credit nor the taxing p01ver of the CihJ of
Palo Alto, ti,e State of California or any of its politiCf!l subdivisions thereof is pledged to the payment of
the principal of or the interest on the Bonds.
TAX-EXEMPT STATUS. In the opinion of Jones Hall, A Professional Law Corporation,
San Francisco, California, Bond Counsel, subject, however to certain qualifications, under
existing law, the interest on the Series A Bonds is excluded from gross income for federal
income tax purposes, and is not an item of tax preference for pUlposes of the federal altel'l1ative
minimum tax imposed on individuals and corporations.
In the event that, prior to the delivery of the Series A Bonds (a) the interest on other
obligations of the same type and character shall be declal'ed to be subject to taxation (either at
the time of such declaration or at any future date) under any federal income tax laws, either by
the terms of such laws or by ruling of a federal income tax authority or official which is
followed by the Internal Revenue Service, or by decision of any federal court, or (b) any federal
income tax law is enacted which will have a substantial adverse effect upon the owners of the
Series A Bonds as such, the successful bidder may, at its option, prior to the tender of the Series
A Bonds, be relieved of its obligation to purchase the Series A Bonds, and in such case the
deposit accompanying its bid will be returned.
EXEMPTION FROM CALI;f'QRNIA INCOMETAX. In the opinion of Bond Counsel,
interest on both the Series A Bonds and the Series B Bonds is exempt fmm Calif01'l1ia personal
income taxes.
LEGAL OPINION. The legal opinion of Jones Hall, A Professional Law Corporation,
San Francisco, California, Bond Counsel, appmving the validity of the Bonds and regarding
"TAX-EXEMPT STATUS" above will be furnished to tIle successful bidder without cost.
FURTHER INFORMATION. A copy of the Preliminary Official Statement describing
the Bonds will be furnished upon request to the financial advisor to the City: Stone &
Youngberg LLC, One Ferry Building, Suite 275, San Francisco, California 94111, telephone:
(415) 445-2300 (the "Financial Advisor").
RATING. The City has applied for and received ratings from Moody's Investor's Service
and Standard & Poor's Ratings Services. Information on such ratings may be obtained from the
Financial Advisor. The City will pay the fees for such ratings. Any additional nltings desired by
the purchaser of the Bonds, as well as any fees associated with such additional ratings, will be
tIle sale responsibility of the purchaser.
TERMS OF SALE
SUBMISSION OF BIDS: All bids must be for not less than all of the Bonds hereby offered
for sale. Bidders may submit only one bid, electl'Onically through P ARITY®. All bids must
comply with the requirement for a good faith deposit. See "GOOD FAITH DEPOSIT' herein.
ELECTRONIC BIDS. Elech'onic bids must conform with the procedures established by
PARITY®. Electronic bids will be received exclUSively through PARITY® in accordance with
·6
this Official Notice of Sale until_ a.m. Pacific Daylight Time on the sale date, but no bid
will be received after the time specified for receiving bids. To the extent any insh'Uctions or
directions set forth in PARITY® conflict with this Official Notice of Sale, the terms of this
Official Notice of Sale shall control. For further information about PARITY®, including any
fees charged by PARITY®, potential bidders may contact PARITY®, 40 W. 23cd Street, New
York, NY 10010, telephone (212) 812-0971.
THE CITY RETAINS ABSOLUTE DISCRETION TO DETERMINE WHETHER ANY BID
IS TIMELY, LEGIBLE AND COMPLETE. THE CITY TAKES NO RESPONSIBILITY FOR
INFORMING ANY BIDDER PRIOR TO THE TIME FOR RECEIVING BIDS THAT ITS BID IS
INCOMPLETE, ILLEGIBLE OR NOT RECEIVED.
WARNING REGARDING ELECTRONIC BIDS: THE CITY WILL ACCEPT BIDS IN
ELECTRONIC FORM SOLELY THROUGH PAmTY®. EACH BIDDER SUBMITTING AN
ELECTRONIC BID UNDERSTANDS AND AGREES BY DOING SO THAT IT IS SOLELY
RESPONSIBLE FOR ALL ARRANGEMENTS WITH PARITY®, AND THAT PARITY® IS NOT
ACTING AS AN AGENT OF THE CITY. INSTRUCTIONS FOR SUBMITTING ELECTRONIC
BIDS MUST BE OBTAINED FROM PARITY®, AND THE CITY ASSUMES NO
RESPONSIBILITY FOR ENSURING OR VERIFYING BIDDE!, COMPLIANCE WITH THE
PROCEDURES OF PARITY®. THE CITY SHALL ASSUME THAT ANY BID RECEIVED
THROUGH PARITY® HAS BEEN MADE BY A DULY AUTHORIZED AGENT OF THE
BIDDER.
THE CITY, THE FINANCIAL ADVISOR AND BOND COUNSEL ASSUME NO
RESPONSIBILITY FOR ANY ERROR CONTAINED IN ANY BID SUBMITTED
ELECTRONICALLY, OR FOR FAILURE OF ANY BID TO BE TRANSMITTED, RECEIVED OR
OPENED AT THE OFFICIAL TIME FOR RECEIPT OF BIDS. THE OFFICIAL TIME FOR
RECEIPT OF BIDS WILL BE DETERMINED BY THE CITY AT THE PLACE OF BID OPENING,
AND THE CITY SHALL NOT BE REQUIRED TO ACCEPT THE TIME KEPT BY PARITY® AS
THE OFFICIAL TIME.
FORM OF BIQ;M!NIMUM PURCHASE PRICE: Each proposal must be for not less than all
of the Bonds hereby offered for sale. The purchase price to be paid for the Bonds may not be
less than __ % of the pal' value thereof. Each bid must be delivered as set forth above, and
must be received not later than the date and time of sale set fOlth above. If the City receives
multiple bids from a single bidder by any means or combination of means, the City will accept
the best of such bids, and each bidder agrees by submitting any bid to be bound by its best bid.
In order to comply with the provisions of the American Recovery and Reinvestment Act
of 2009 governing the issuance of Build America Bonds, all Series B Bonds of each maturity
must be offered to the ultimate purchasers thereof (not including bond houses, brokers or
similar persons or organizations acting in the capacity of underwriters or wholesalers) at the
price of par, and at least ten percent (10%) of the first Series B Bonds sold in each maturity of
the issue will be actually sold at a price not excess of the par amount thereof x .0025 x the
number of complete years to maturity from the date of issue of the Series B Bonds to the date of
said maturity.
-7-
DESIGNATION OF INTEREST RATES: Each bidder must specify the rate or rates of
interest which the Bonds will bear. Interest on each Bond will be computed from the date of
original delivery to its stated maturity at the interest rate specified in the proposal, payable on
the Interest Payment Dates as set forth above. A bidder will be permitted to bid different rates
of interest for each maturity of Bonds; but:
• Each interest rate specified must be in a multiple of 1/20% or 1/8%.
• The maximum rate bid on any maturity may not exceed % per annum.
• All Bonds maturing at anyone time must bear the same rate of interest.
• The rate of interest bid on any maturity of Bonds may not exceed the rate of
interest bid on any other maturity of Bonds by more than ~ .. % per annum.
• The interest rate bid on any successive maturity of Bonds may not be less
than the interest rate 011 the immediately prior maturity.
DETEHMINATlON OF B}::ST BIT!: The Bonds will be awarded to the responsible bidder
whose bid produces the lowest true interest rate on the Bonds. The true interest rate specified
in any bid will be that rate which, when used in computing the present wOlth of all payments
of principal and interest to be paid on all Bonds from an assumed dosing date of November ~
2009, to their respective maturity dates or mandatory sinking fund redemption dates, produces
an amount equal to the purchase price specified in such bid. For the Series A Bonds, such
interest to be paid on the Series A Bonds will be based on the stated rate, and for Series B
Bonds, such interest will be based on the stated nlte, multiplied by 0.65. If two or more bidders
offer bids at the same lowest trust interest rate, the City will determine by lot which bidder will
be awarded the Bonds. For purposes of computing the true interest rate represented by any
proposal, the purchase price specified in such proposal will be equal to the pal' amount of the
Bonds, plus any premium or less any discount specified in such proposal, and the true interest
rate will be calculated by the use of a semiannual interval of compounding interest based on
the Interest Payment Dates for the Bonds.
RIGHT OF REJECTION: The City reserves the right, in its discretion, to reject any and all
bids and to the extent not prohibited by law to waive any irregularity or informality in any bid.
PRQMPT AWARD: The City Council of the City has authorized one of its officers to
accept the best responsible bid for the purchase of the Bonds and to accept such bid, for and in
the name of the City, by notice to the successful bidder. The Bonds will be awarded, or all bids
will be rejected, not later than 24 hours after the expiration of the time prescribed for the receipt
of proposals, unless such time of award is waived by the successful bidder; provided, that the
award may be made after the expiration of the specified time if the bidder has not notified the
City in writing of the withdrawal of such proposal.
PLACE OF DELIVERY; (:AN<::ELLAIIQl'I FOR LATE DEUVERY: It is expected that the
Bonds will be delivered to DTC for the account of the successful bidder on November ~ 2009.
The successful bidder has the right, at its option, to cancel the contract of purchase if the Bonds
8
are not tendered for delivery within 60 days from the date of the sale thereof, and in such event
the successful bidder will be entitled to the retum of the deposit accompanying its bid.
GOOD FAITH DEPOSIT: A good faith deposit (the "Deposit") in the form of a certified or
cashier's check or a Financial Surety Bond in the amount of $ payable to the Ol'der of
the City, is required for each bid to be considered. If a check is used, it must be drawn on a
Califomia bank and must accompany the bid. If a Financial Surety Bond is used, it must be
from an insurance company licensed to issue such a bond in the State of California, and such
bond must be submitted to Stone & Youngberg LLC as financial advisor to the City prior to the
opening of the bids. The Financial Surety Bond must identify each bidder whose Deposit is
guaranteed by such Financial Surety Bond. If the Bonds are awarded to a bidder utilizing a
Financial Surety Bond, then such bidder must submit its Deposit to the City in the form of a
cashier's check (or wire transfer such amount as instructed by the financial advisor) not later
than 12:00 p.m. (noon) California time on the next business day following the award. If such
Deposit is not received by that time, the Financial Surety Bond may be drawn by the City to
satisfy the Deposit requirement. No interest on the Deposit will accrue to the purchaser. The
amount of the I)eposit will be applied as a credit towards the payment of the purchase price by
the successful bidder. If after the award of the Bonds, the successful bidder fails to complete its
purchase on the terms stated in its pl'Oposal, the full amount of the good faith deposit will be
retained by the City.
PAYMENT Qr PURCHASE P.RICF: The successful bidder is required to pay the ptll'chase
price of the Bonds, reduced by the good faith deposit made pursuant to the preceding
paragraph, in funds which are immediately available to the City, or at the direction of the City,
the Trustee. Such payment must be made on the date of Ol'iginal delivery of the Bonds by the
City to DTC.
$TATEMENT OF TRUE INTEREST RATE: Each bidder is requested, but not required, to g.
state in its proposal the percentage true interest rate represented by its pTOposal, determined as
described above, which will be considered as inf01'mative only and not binding on either the
bidder or the City.
CERTIFICATION OF REOFFERING PRICE. The successful bidder will, as of the date
the Bonds are sold pursuant to this Notice of Sale, certify to the City the prices at which it
reasonably expects to initially offer each maturity of the Bonds to the general public (the "Initial
Offering Prices"). For this purpose, the general public does not include bond houses, brokers or
similar persons or organizations acting in the capacity of underwriters or wholesalers.
The successful bidder agrees that, on or prior to the Closing Date, it will actually offer
100% of each maturity of the Bonds to the general public in a bona fide public offering for
prices equal to 01' less than the Initial Offering Prices.
The successful bidder agrees that, prior to the Closing Date, it will deliver a certificate
dated as of the Closing Date in form and substance attsched as Exhibit A and satisfactory to
Bond Counsel.
-9-
SERIFS A BONDS DESIGNATED AS "QUALIFIED TAX-EXEMPT OBLIGATIONS". The
Series A Bonds will be designated by the City as "qualified tax-exempt obligations" for
purposes of Section 265(b )(3) of the Internal Revenue Code of 1986 as amended.
No LITIGATION: There is no litigation pending concerning the validity of the Bonds,
the corporate existence of the City or the entitlement of the officers thereof to their respective
offices, and the purchaser will be furnished a no-litigation certificate certifying to the foregoing
as of and at the time of delivery of the Bonds.
CUSIP NUMBERS AND OTHER FEES: It is anticipated that CUSIP numbers will be
printed on the Bonds, but neither the failure to print such numbers on any Bonds nor any error
with respect thereto will constitute cause for a failure or refusal by the purchaser to accept
delivery of and pay for the Bonds in accordance with the terms hereof. All expenses in relation
to the printing of CUSlP numbers on the Bonds will be paid for by the City; provided, however,
that the CUSIP Service Bureau charge for the assignment of said numbers will be the
responsibility of and will be paid for by the purchaser. The successful bidder will also be
required to pay all fees required by the Depository Trust Company, Bond Market Association,
Municipal Securities Rulemaking Board, and other similar entity imposing a fee in connection
with the issuance of the Bonds (including the California Debt and Investment Advisory
Commission as described below).
CALIFORNIA DEBT.AND INVESTMENT AQV!SORY COMMISSION EEj3S: All fees payable
to the California Debt and Investment Advisory Corrunission in connection with the issuance of
the Bonds will be the responsibility of the purchaser of the Bonds.
OFFICIAL STATl.lMENT: The City has approved a preliminary Official Statement relating
to the Bonds. Copies of such preliminary Official Statement will be distributed to any ·:bidder,
upon request, prior to the sale in a form "deemed final" by the City for PU1'poses of Rule 15c2-
12 under the Securities Exchange Act of 1934 (the "Rule"). Within seven business days from the
sale date, the City will deliver to the purchaser copies of the final Official Statement, executed
by an authorized representative of the City and dated the date of delivery thereof to the
purchaser, in sufficient number to allow the purchaser to comply with paragraph (b)(4) of the
Rule and to satisfy the Municipal Securities Rulemaking Board (the "MSRB") RuleG-32 or any
other rules adopted by the MSRB, including information permitted to be omitted by paragraph
(b)(I) of the Rule and such other amendments or supplements as are approved by the City (the
"Final Official Statement"). The purchaser agrees that it will not confirm the sale of any Bonds
unless the confirmation of sale is accompanied or preceded by the delivery of a copy of the
Final Official Statement. The City will furnish to the successful bidder, at no charge, not in
excess of 100 copies of the Official Statement for use in cOlmection with any resale of the Bonds.
CERTIFICATE REGARDING OFFICIAL STATEMENT: A responsible officer of the City will
certify to the original purchaser of the Bonds, as a condition of closing, that based on such
officer's participation in the preparation of the Official Statement, nothing has come to his or
her attention to lead him or her to believe that the Official Statement (except for certain
financial statements, statistical data and other information) contains any untrue statement of a
material fact Of omits to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not misleading.
-10 -
CONTINUING DISCLOSURE. In order to assist bidders in complying with S.E.C. Rule
15c2-12(b)(5), the City has committed to undertake, pursuant to the Resolution and a
Continuing Disclosul'e Certificate, to provide certain annual financial information and notices
of the occurrence of certain events, if material. A description of this undertaking is set forth in
the preliminary Official Statement and will also be set forth in the final Official Statement. Such
Continuing Disclosure Certificate will be a document required to be delivered at closing by the
City, and the failure by the City to deliver such document in form and substance acceptable to
Bond Counsel and the successful bidder will relieve the successful bidder of its obligation to
purchase the Bonds
GNEN pursuant to resolution of the Council of the City of Palo Alto adopted __ _
_ ,2009.
Dated: _~,2009
-11-
By: lsi
Administrative Services Director
City of Palo Alto
EXHIBIT A
Reoffering Price Certificate
$_-
CITY OF PALO ALTO
WATER REVENUE BONDS, TAX-EXEMPT SERIES A
CERTIFICATE OF PURCHASER
The undersigned, on behalf of . , as underwriter (the "Underwriter") of
the above-captioned bonds (the "Bonds"), hereby confirms our advice that:
(i) Based upon reasonable expectations and actual facts which existed on
___ ~. 2009, being the date upon which the City of Palo Alto (the
"Issuer") sold the Bonds to the Underwriter (the "Sale Date"), the
Underwriter reasonably expected to sell a substantial amount of earn
maturity of the Bonds (being at least 10% of each maturity) to the general
public (for plll'poses of this Certificate, "general public" excludes bond
houses, brokers 01' similar persons or organiza tions acting in the capacity of
underwriters or wholesalers) in a bona fide public offering at the prices, or
in the case of obligations sold on a yield basis, at the respective yields
(together the "Initial Offering Prices") set forth in Exhibit A attached hereto
and by this l'eference incorporated herein (these prices are also shown of the
cover of the Official Statement).
(ii) The aggregate of the Initial Offering Prices is $~ _____ _
(iii) As of the date hereof, 100% of the Bonds of each Illi1turity were actually
offered to the general public in a bona fide public offering for the Initial
Offering Prices.
(iv) As of the Sale Date, the Underwriter, taking into account market conditions,
had no reason to believe any of the Bonds would be initially sold to the
general public at prices greater than the Initial Offering Prices.
(v) As of the Sale Date, other than the and
_____ maturities of the Bonds, at least 10% of each maturity of the
Bonds was initially sold to the general public for the respective Initial
Offering Prices.
(vi) In our opinion, the Initial Offering Prices do not exceed the fair market
value of said maturities of the Bonds to the general public as of the Sale
Date.
Capitalized terms used herein and not . otherwise defined shall have the meanings
ascribed thereto in that certain Indenture of Trust, dated as of November 1, 2009, by and
between the Issuer and , .... ~ as trustee, authorizing the issuance of the Bonds.
A-l-
Dated: _______ ~, 2009
as Underwriter
By _________________________ _
Name,
Title
A-2-
EXHIBITC
NOTICE OF INTENTION TO SELL
CITY OF PALO ALTO
(Santa Clara County, California)
$[Principal Amount}
WATER REVENUE BONDS
Tax-Exempt 2009 Series A
&
Taxable 2009 Series B
(Direct Payment Build America Bonds)
NOTICE IS HEREBY GIVEN by the City of Palo Alto (the "City") that bids will be
received vin PARITY@,on
..... __ , November _ ... 2009
At . a.m. Pacific Daylight Time for the purchase of approximately $[Principal
Amount] principal amount of Water Revenue Bonds, Tax-Exempt Bonds 2009 Series A (the
"Series A Bonds") & Taxable Bonds 2009 Series B Direct Payment Build America Bonds (the
"Series B Bonds," and together with the Series A Bonds, the "Bonds"), payable under an
Indenture of Trust, dated as of November 1, 2009, between the City and US. Bank National
Association. The Series A Bonds will be issued as tax-exempt obligations, and the Series B
Bonds will be issued as taxable Direct Payment Build America Bonds. A bidder may bid on all
of the Bonds as Series A Bonds, or all of the Bonds as Series B Bonds, or a combination of Series
A Bonds and Series B Bonds. Bidders are directed to the Notice of Sale (described below) for
information on the City, the City's Water System, the Bonds, the security for the Bonds, and
details on bidding on the Bonds.
The City may postpone the date or change the time of the sale to any subsequent date or
any other time by providing notification via Bloomberg Financial Markets or Thomson
Municipal Market Monitor (www.tm.1.com) at least 24 hours prior to the scheduled date and
time of sale. The sale of the Bonds will be conducted upon the terms and conditions set forth in
the Official Notice of Sale for the Bonds. Such Official Notice of Sale and the preliminary form
of the Official Statement describing the Bonds may be obtained from the financial advisor to the
City, Stone & Youngberg LLC, One Ferry Building, Suite 275, San Francisco, California 94111,
telephone (415) 445-2327, Attention -Sohai! Bengali.
Dated: _,2009
PRELIMINARY OFI'ICIAL STATEMENT DATED SEPTEMBER _~ 2009
EXHIBITD NEW ISfH!li-BOOK-ENTRY ONLY RATINGS:
Moody's: " __ "
s&CP:# "
See "RAtiNGS" herein,
In the (lpinion of Jones Hall, A Pro(essionaltaw Corpol'<\tion, San Frall.;;:isco, California, Bond COtmsel, subjed, however to certain qUAlifications described
herein, under existing Jaw, the interest on the 2009 Bonds issued as Tax-Exempt Bonds is I1Xduded flom gross income for federal income tax purposes and
such interest is not nn item of tax preference for purposes of the federnl alronmtive minimum tax imposed on individuals and corporations.ln the opinion
of Bond Counsel, subject; however to (;ertain quahfications described he~hl, under existing law, the interest on the 2009 Bonds issued as Build America
Bouds is not excluded from gross income for federal income tax purposes. In the further opinion of Bond Counsel, interest on the 2009 Bonds. whether
issued <lsTax-Exempt Bonds ox 1\S Build Americiil Bonds. is exempt from California personal income t .. xes. See "LEGAL MATTERS-Tax Mfltters" herein.
Dated: Date of Delivery
$ CIT:C-Y:-O:-:F::-:P=-A--:L:-O~A-=LTO *
(Santa Clara County, California)
Water Revenue Bonds, 2009 Series A
Due: June 1~ as shown on the inside cover
The City of Palo Allor a chartered city <lnd municipal corporation (the "'City"), is issuing its Water Revenue Bonds, 2009 Series A (the "2009 Bonds"),
pursuanf Lo an Indenture of Trus~, dated as (If October l~ 2009 (the "Indenture"), by ilnd between the City and U.S. Bank National ASSOciation, as trustee
(the "Trustee"), the ¢harter of the City a11d Chapter 12,28 of the Palo Alto Munkipal Code.
r It is expected that the 2009 Bonds will be issued as (i) bonds the interest on:w:h;:-i~'~h'j:g:ex:c"l~u~d~edT,f:ro=m::Cg=':""'C::C;:in=oom==.:-;to-r-purposes of federlu lm:olnekUation
: ("Tax~Exempt Bonds"), (ii) bonds desigfli1ted as "Direct Payment Build America Bonds" under the provisions of the American Re<:overy and Reinvestment i Act of 2009 ("Build America Bonds"), the interest on which is not excluded frol11 gt()$S incol11e for purposes of federal income taxation, or (lli) a
combination of Tax~Exempt Bonds and Build America Bonds, determined at the time of sale of the 2009' Bonds. See "TAX MATrERS" he'ein. 1£ issued as
Build America Bonds, the City expects to receive" cash subsidy payment from the United States Treasury equal to 35% of the interest payable on such 2009
Bonds. See "THE 2009 BONDS-Designation ~ 2009 Bonds as Build America Bon~.~c'''~~~~~_
The 2009 Bonds are being issued to (i) finance certain improvements to the City's water utility system {the "Water Syswm"), (ii) establish 01 debt service
reServe fund for the 2009 Bonds, (iii) flood capitalized interest for the Bonds through ____ , and (iv) pay cetfain costs of issuing the 2009 Bonds. See
"FINANCING PLAN."
The 2009 Bonds are special Dbligatiolls £If the City and nre secured by amounts held ffOln rime to time in the Debt Service [lund established under the
Indenture and, subject to certnin restrictions set forth in the fndenture; a pledge of and lien on certain net revenues generated by the Water System (the
"Net Revenues"). The 2009 B(mds are secured by from Net Revenues on a Pfl.rity, as to payment and security; with the portion of the City's outstanding
Utility Revenue Bonds, 2002 Series A (the "2002 Bonds"}, issued to finance certain improvements to the Water Syslem.1he 2002 Bonds are also secured by
certain net revenm,s derived from the City's gas system (the "Gas System"), which fite not pledged for the payment of the 2009 Bonds. The City has also
agreed to advance moneys from certain rate stabilization reserve fUI\ds (the "AvailabJe Reserves"), if ncressary; fO pay debk service on the 2009 Bonds, The
2002 Bonds and the City's Utility Revenue and Refunding Bonds, 1999 Series A. constitute additional claims on the AVililable Reserves as weJJ as certain
other rate stabilization re.sen·e funds. Soo "SECURITY FOR THE 2009 BONDS" herein.
The 2009 Bonds will be issued in fuJJy registered form only iUldF when executed and delivered, will be registered in the name of Cede & Co., as nomhme of
The Depository Trust Company, New York, New York ("OTe"). DTC will act as securities depositOl'y for the 2009 Bonds. Beneficia! oW1lership interests in
the 2009 Bonds mny be purchasad in book-entry forl11 only. Payments of principal and intetest (find premium, if any) win be paid by the Tmstee to DTC for
subsequeut disbursements to rrrc Participants who will remit such payments tD the beneficial owners of the 2009 Bonds. See "nlE 2009 BONDS-Book-
Entry OnlySystemff herein. nw 2009 Bonds will be issued as fully registered bonds in denommntions of $5,000 or any integral muitiple of $5,000. Interest is
payable on each Jlffie 1 and December 1, commencing June 1, 2010.
The 2009 Bonds are subject to optional and mandatory redemption prior 10 maturity. The redemption provisions reJating to 2009 Bonds issued flS Tax~
Exempt Donds and 2009 Bonds issued flS Build Amer.lcil Bonds will differ. See "THE 2009 BONDS-RedemptiDn'" herein.
The City's Utility Revenue Bonds, 1995 Series A (the "1995 floods"'), are currently outstanding in the principal amount of $5,320,000 ~nd are secured by il
lien on net revenues of the City's entire "Enterprise." which consists of the Water System; the Gas System, the City's storm and sl1rface water drainage
system (the "Storm Drain System"), the CUy's Mnitary sewer system (the "Sewer Systemfi), and the City's electric utility (the "Electric System"). TiJe lien of
tile 1995 Bonds olilfle Net Revenues is senior to tile lien 011 Net ReUeI!fie5 securing the 2009 Bonds lind fhe 2002 BOllds, The 1995 BOnds are also secured by certain
net revenueS derived from the Storm Drain System. the Se\ver System find the Electric System which are not pledged for the payment of the 2009 Bonds or
the 2002 Bonds.
Additional boruls and other indebtedness payable fmm Net Revenues may be issued on a parity with the 2009 Bonds and of Ole portion or the 2002 Bonds
payable from Net Revenues (and subordinate 10 the 1995 Bonds), subject to the conditions contained III the Indenture. See "SECURITY FOR mE 2009
BONDS-Limitations on Net Revenue Pledge" herein.
NBITHER THE GENERAL FUND, TIlE FULL FAITH AND CREDIT NOT THE TAXING POWER OF THE CITY, THE STATE OF CALIFORNIA OR
ANY OF ITS POLlTICALSUBDIVISJONS IS PLEDGED FOR THE PAYMENT OF 1'HE 2009 BONDS.
MAIURIIYSCHEDUI Ii
SEE INSIDE caVBR
Bids fer t1w. purchase 01 the 2009 Bonds will be ~lved by the City oJ:; ~ September -' 2009, until 9:00 A.M., Pacific time,. electnmic!l/(r; <Jllly, through the facilities
of the PAlUTY® system. The 2009 Bonds will be sold pursuant to the (eons of sale set forth in the Official Notice of Sale, dtlted Se:plember -' 2009. Each bidder w!ll
s ecif .Y its bid is lOr tllx~Exempt Bonds, Build Amerlca Bonds .. ~r both. ... .. __ ~~~~-l
This cover page contains information for general reference only. It is nut a snmmary of this issue, Potential purchasers of the 2009 Bonds rae advised [0
read the eotireOffida:i St .. tement to obtttin information esscntial to m<lking 00 informed investment decision,
The 2009 Bonds will be offered when, as and if issued and rcceiwd by the UndeJwriter subjed to the approval of legality by Joru>~'l Hall, A Professional Law
Corporation, Sflf) Pl<lndsco, California, Bond Counsel. Certain disclosure matters will be passed upon for the City by Quin.t &: Thimmig LLP, San Francisco,
California, Dlsdoswe Counsel Certain matters will be passed upon for the City by C,lry M. Bamn, &'1', the City AtfOrney. It is expected that !:he 2009
Bonds, in book-entry form, will be available for delivery on or about October _.J 20{)9,
Dated: September __ ~, 2009
*:rrolimmrrry, subje<t to eiumge.
Maturity
Date
1!.un.n
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Principal Interest Price or
bmoun( fuW: Yl&l!!
*Prcliminary, ~lubIect to change,
,. $ CITYO::-:-:O::-;F;::-P::':-A:-:L~O:::-:A-::L TO
(Santa Clara County, California)
Water Revenue Bonds, 2009 Series A
MATuRITY SCHEDULE'
CUSIP
Suffixt
Maturity
Date
(Junel)
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Principal
Amount
Interest Price or
fuW: Yi<!ld
CUSIP
J>uffu:t
t Copyrighf 2009, AmeriCan Baniwrs Association. CUSTP® Is II registered tl4\demark of the American I:lllnhilt'S Assoch'lfion, eUSIP datil h(>(~in Is provIded by the CUSIP
ServJce Bureau, operated by Standard &: Poor's, a division of The M.:<Araw·HilI Companil:!S, Inc. This datl'l is not intended to creale a databllsc Md does not serve ill11ny
way as a substitute lor the CUSlP Scrvi«'b Bureau. CUSIP numh/!ffl bave been assigned by an Independen~ compl\fly not affilialed with thp C!ty ,uto. <'Ite induded soiely fur
the convenience of the regJstered owners of the 2009 Bonds. The City is not responsible for the seloction or uses of these CU51P numbers, and no representation is made 11$
to (heir correctness on the 2009 Bonds or as included herein, TIm CUSIP [lumber for <'I sp<!'ci.fic mAhlrily Is sublect to bt'ing dlanged IIfler the Issuance of the 201)9 Bonds !l$ " result of vatlo\IS subsequent actions including, but not limited to, a refunding in whole or In pn(t or <'IS a result of the procurument of secondary market portfolio inauranre
or other similarcnh,mcemenf by i.p.vestors that is applicable to all or a portion of certam maturities of tht' 2009 Bottds.
No dealer, broker, salesperson or any other person has been authorized to give any information
or make any representation with respect to the 2009 Bonds, other than as contruned in this Official
Statementl and, if given or made, any such information or representation must not be relied upon as
having been authorized by the City.
This Official Statement does not constitute an offer of any securities other than those described on
the cover page or an offer to sell or a solicitation of an offer to buy, nor may there be any sale of the 2009
Bonds by any person in any jurisdiction in which it is unlawful to make such offer, solicitation or sale.
This Official Statement is not to be construed as a contract with the purchasers of the 2009 Bonds.
The information set forth in this Official Statement has been furnished by the City and other
sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness. 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 2009 Bonds will, under any
circumstances, create any implication that there has been no change in the affairs of the City since the
date of this Official Statement.
Summaries and references to statutes and documents in this Official Statement do not purport to
be comprehensive or defmitive and are qualified in their entireties by reference to each such statute or
document.
This Official Statement is submitted in connection with the sale of the 2009 Bonds and may not be
reproduced or be used, as a whole or in part, for any other purpose.
In connection with the offering of the 2009 Bonds, the Underwriter may over-allot or effect
transactions which stabilize or maintain the market price of the 2009 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 2009 Bonds to certain dealers and dealer banks and banks
acting as agent and others at prices lower than the public offering prices stated on the cover page of this
Official Statement, and those public offering prices may be changed from time to time by the
Underwriter.
The 2009 Bonds have not been registered under the Securities Act of 1933, as amended, in reliance
upon an exemption contained in that act. The 2009 Bonds have not been registered or qualified under the
securities laws of any state.
Certain statements included or incorporated by reference in this Official Statement constitute
"forward-looking statements" within the meaning of the United States Private Seeurities Litigation
Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and
Section 27 A of the United States Securities Act of 1933, as amended. Such statements are generally
identifiable by the terminology used such as "plan/' "expect.," fJestimat:e/' "project/~ Hbudget'l or other
similar words. Such forward-looking statements include, but are not limited to, certain statements
contained in the information under the caption "THE WATER SYSTEM." The achievement of certain
results or other expectations contained in such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual results, perfonnance or achievements
described to be materially different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The City does not plan to issue any updates or revisions to
the forward-looking statements set forth in this Official Statement.
CITY OF PALO ALTO
CITY COUNCIL MEMBERS
Peter Drekmeier, Mayor
Jack Morton, Vice May&
John Barton, Council Member
Patrick Burt, Council Member
Sid Espinosa, Council Member
Yoriko Kishimoto, Council Member
Larry Klein, Council Member
Greg Schmid, Council Member
Ylaway Yeh, Council Member
CITY STAFF
James Keene, Cily Manager
Steve Emslie, Assistant City Manager
Lalo Perez, Director of Administrative Services
Joe Sacdo, Deputy Director of Administrative Services
Tarun Narayan, Senior Financial Analyst, Adminis/ratio" Seroices
Gary M. Baum, Cil1j Attorney
Donna G. Rogers, City Clerk
Utilities Department
Valerie Fong, Direclar of Utilities
Tom Auzenne, Assistant Director Of Utilities, Customer Support Services
Tomm Marshall, Assistant Director of Utilities, Engineering
Jane Ratchye, Assistant Director of Utilities, Resource Management
Dean Batchelor, Assis/ant Director of Utilities, Operations
SPECIAL SERVICES
Bond Counsel
Jones Hall
A Professional Law Corporation
San Francisco, California
Disclosure Counsel
Quint & Thimmig LLP
San Francisco, California
Financial Advisor
Stone & Youngberg LLC
San Francisco, California
Trustee
U.S. Bank National Association
San Francisco, California
LOCATION MAP
TABLE OF CONTENTS
INTRODUCTION " ............. " ..................................... 1 Management Discussion of Operations ............ 31
Balance Sheet ......................................................... 33
THE 2009 BONDS ......... "." ....................... " .... "" ....... 3
Bond Terms ................. "." ..................... " ................ 3
Transfer and Exchange " ..... "." ............................ ..4
2009 Bonds Mutilated, Destroyed, Stolen or
Lost .......... " .... " .......... " ....... "." ........ " ............ " ....... 4
Designation of 2009 Bonds as Build America
Bonds .............. "."." .................................. " ....... " ... 5
Redemption ........ " .... " ..... "" .. " ................. "" ... ".".,,5
Book-Entry-Only 5ystem." .. " ...... " ...................... ,,8
Historical Operating Results ............................... 34
Projected Operating Results and Debt Service
Coverage .............................................................. 35
AVAILABLE RESERVES ........................................ .36
The City's Rate Stabilization Reserves For Its
Enterprise Funds ................................................. 36
Rate StabiIi:r.ation Reserve for the Water
System ................................................................... 37
Rate Stabilization Reserves for the Electric
FINANCING PLAN ......... " .... """ .... ,, ..................... ,,8
Purposes of the Bonds ......................................... ,,8
Estimated Sources and Uses of Funds ................. 9
Annual Debt Service ............... "."." ....................... 9
System ................................................................... 38
Rate Stabilization Reserves for the Gas
5ystem ................................................................... 39
Calaveras-Stranded Costs Reserve .................... .40
SECURITY FOR THE 2009 BONDS ............. " ....... 10 CONSTITUTIONAL LIMITATIONS ON TAXES
Pledge of Net Revenues ...... " ......................... " .... 10 AND W ATER RATES AND CHARGES .............. .42
Limitations on Net Revenue Pledge .................. 11 Article XIIlA .......................................................... 42
Rate Covenant ....................................................... 12 Article XIIlB ........................................................... 43
Available Reserves ............................................... 12 Artides XIIlC and XllID ...................................... 43
Parity and Subordinate Bonds ........... " ............... 13
Reserve Account .. " ..... " .. ""."." ......... "." ........ " .... 14 RISK FACTORS RELATING TO THE 2009
BONDS ...................................................................... ,46
THE CITY AND CITY UTILITIES ......................... 14
The City ...... " ........ " ........................... " .. " ......... " .. " 14
City Utilities " ................. "." .................................. 15
Management of the Utilities Department ......... 15
Enterprise Staffing and Technology .................. 17
Limited Obligations .............................................. 46
Sys tern Expenses .................................................. .46
Limited Recourse on Def. ult ............................ ..46
Limitations on Remedies ..................................... 47
Balance of the Available Reserves ...................... 47
Enterprise Management Policy .......................... 17
Rates and Billing .......... "." .................................... 16
Reserve Policies .................................................... 19
Annual Financial Statements and Significant
Accoun ting Policies .................. " .... " .................. 20
Initiatives .............................................................. .47
Bankruptcy ............................................................ 48
Tax Exemption of the 2009 Bonds .................... ..48
Additional Obligations ........................................ 48
Seismic Considerations ....................................... .48
THE WATER SYSTEM ............................................ 21 Investment of City Funds ................................... .49
History ................................................................... 21
Service Area ........................................................... 21
Water Storage and Distribution System ............ 21
Sources of Water Supply ..................................... 21
Recycled Water Project ........................................ 24
Water Conservation Policies and Procedures .. 25
LEGAL MATTERS .................................................. .49
Approval of Legal Proceedings ........................ ..49
Absence of Litigation ......................................... ..49
Tax Matters .................................................... , ...... .49
CONTINUING DISCLOSURE ............................... 50
Historical Production and Deliveries ................ 25 RATINGS ................................................................... 51
Environmental Issues Relating to the Water
System ............................................................... ".26
Capital Improvement Program Summary ........ 26
Water Rates, Fees and Charges .......................... 28
UNDERWRITING .................................................... 51
MISCELLANEOUS .................................................. 51
Water Demand and Customer Base .................. 29
APPENDIX A -SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE OF TRUST
APPENDlX B -GENERAL AND ECONOMIC INFORMATION ABOUT THE CITY
AI'PENDIXC-COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE
FISCAL YEAR ENDED JUNE 30, 2008
APPENDIX D -PROPOSED FORM OF BOND COUNSEL OPINION
APPENDIX E -FORM OF CONTINUING DISCLOSURE CERTIFICATE
APPENDIX F -DTC AND THE BOOK-ENTRY ONLY SYSTEM
$ *
CITY OF PALO ALTO
Water Revenue Bonds
2009 Series A
INTRODUCTION
The purpose of this Official Statement, which includes the cover page and appendices
hereto, is to set forth certain information in connection with the sale by the City of Palo Alto (the
"City") of its * Water Revenue Bonds, 2009 Series A (the "2009 Bonds").
It is expected that the 2009 Bonds will be issued as (i) bonds the interest on which is
excluded from gross income for purposes of federal income taxation ("Tax-Exempt Bonds"), (ii)
bonds designated as "Direct Payment Build America Bonds" under the provisions of the
American Recovery and Reinvestment Act of 2009 ("Build America Bonds"), the interest on
which is not excluded from gross income for purposes of federal income taxation, or (iii) a
combination of Tax-E)(empt Bonds and Build America Bonds, determined at the time of sale of
the 2009 Bonds. See "TAX MATTERS" herein. If issued as Build America Bonds, the City
expects to receive a cash subsidy payment from the United States Treasury equal to 35% of the
interest payable on such 2009 Bonds. See "THE 2009 BONDS-Designation of 2009 Bonds as
Build America Bonds."
Certain capitalized terms used in this Official Statement and not otherwise defined have
the meanings set forth under "SECURITY FOR THE 2009 BONDS-Definitions" and
APPENDIX A-"SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE OF TRUST."
All references to and summaries of provisions of the Indenture are qualified in their entirely by
reference to the full Indenture, copies of which are available for inspection at the offices of the
City.
Authority for Issuance. The 2009 Bonds are being issued pursuant to (a) the charter of the
City and the proviSions of Chapter 12.28 (commencing with Section 12.28.010), of the Palo Alto
Municipal Code, all as in effect on the Closing Date (the "Bond Law"), (b) the terms and
conditions of an Indenture of Trust, dated as of October 1, 2009 (the "Indenture"), by and
between the City and U.s. Bank National Association, as trustee (the "Trustee"), and (c) a
resolution of the City Council, adopted on July 27, 2009, authorizing the issuance of the 2009
Bonds.
Payments of Principal and Interest. Principal of the 2009 Bonds is payable on each June 1 in
the years set forth on the cover of this Official Statement. Interest on the 2009 Bonds is payable
on each June 1 and December 1 each year, beginning on June 1,2010. See "THE 2009 BONDS-
Bond Terms."
Purposes. The 2009 Bonds are being issued to (a) finance certain improvements (the
"Project") to the City's water utility system (the "Water System"), (b) establish a debt service
reserve fund for the 2009 Bonds, (c) fund capitalized interest for the Bonds through ___ _
and (d) pay certain costs of issuing the 2009 Bonds. See "THE FINANCING PLAN."
Pledge of Net Revenues. The 2009 Bonds are special obligations of the City and are secured
by amounts held from time to lime in the Debt Service Fund established under the Indenture
and, subject to certain restrictions set forth in the Indenture, a pledge of and lien on the "Net
. PreHminmy, subject tD change.
Revenues" generated by the Water System, See "SECURITY FOR THE 2009 BONDS-Pledge of
Net Revenues" and "-Limitations on Net Revenue Pledge." Such pledge is on a parity as to
payment and security with a portion of the City's Utility Revenue Bonds, 2002 Series A (the
"2002 Bonds"), which are currently outstanding in the principal amount of $19,690,000, and is
subordinate to a portion of the City's Utility Revenue Bonds, 1995 Series A (the "1995 Bonds"),
which are currently outstanding in the principal amount of $5,320,000,
Covenant to Maintain and Advance From Available Reserves, The City has established utility
rate stabilization reserve funds (collectively, the "Available Reserves") for certain of its utility
systems, including the Water System, listed below (collectively, the "Systems"), As additional
security for the 2009 Bonds, the City will, if necessary, advance funds to pay debt service On the
2009 Bonds from the Available Reserves, which the City will maintain in an aggregate amount
at least equal to five times maximum annual debt service on all outstanding bonded
indebtedness secured by net revenues of any of the Systems: ,
(i) Rate Stabilization Reserve for the Water System,
(ii) Distribution Rate Stabilization Reserve for the City's electric utility (the "Electric
System"),
(iii) Distribution Rate Stabilization Reserve for the Gas System (the "Gas System"),
(IV) Supply Rate Stabilization Reserve for the Electric System,
(v) Supply Rate Stabilization Reserve for the Gas System, and
(vi) the Electric System's Calaveras-Stranded Costs Reserve (the "Calaveras Reserve"),
See "SECURITY FOR THE 2009 BONDS-Available Reserves" and " AVAILABLE
RESERVES,"
Other Claims on Available Reserves. The City has also covenanted to advance funds, if
necessary, from the Available Reserves, as well as rate stabilization reserve funds established by
the City for its wastewater collection system, its wastewater treatment system and its refuse
utility, to pay debt service on the City's Utility Revenue and Refunding Bonds, 1999 Series A
(the "1999 Bonds"), which are currently outstanding in the principal amount of $13,735,000. The
1999 Bonds are primarily secured by a lien on net revenues of the Wastewater Collection
System, the Wastewater Treatment System and the City's storm and surface water system (the
"the Storm Drain System"),
The City has also covenanted to advance funds, if necessary, from the Available
Reserves, as well as rate stabilization reserve funds established by the City for its wastewater
collection system, its wastewater treatment system and its refuse utility, to pay debt service on
the 2002 Bonds. The 2002 Bonds are secured by a lien on net revenues of the Water System and
the Gas System. See "SECURITY FOR THE 2009 BONDS-Other Claims on Available
Reserves,1I
Limitations on Net Revenue Pledge. The debt service on the 2009 Bonds is payable from
Net Revenues generated by the Water System and from moneys advanced from the Available
Reserves. See "SECURITY FOR THE 2009 BONDS-Limitations on Net Revenue Pledge."
Neither the general fund, the full faith and credit, nor the taxing power of the City, the
State of California (the "State") or any other political subdivision thereof is pledged to the
payment of the 2009 Bonds. The 2009 Bonds are not secured by a legal or equitable pledge of or
charge, lien or encumbrance upon any property of the City or any of its income or receipts
except the Net Revenues.
Senior Obligations, The 1995 Bonds are secured by a lien on net revenues of all systems.
The lien of the 1995 Bonds on the Net Revenues is senior to the lien on Net Revenues securing
-2-
the 2002 Bonds and the 2009 Bonds. See "SECURITY FOR THE 2009 BONDS-Limitations on
Net Revenue Pledge."
Parity Bonds. The lien of the 2002 Bonds on the Net Revenues is on a parity with the lien
on Net Revenues securing the 2009 Bonds. Additional bonds and other indebtedness payable
from Net Revenues may be issued on a parity with the 2009 Bonds and the portion of the 2002
Bonds secured by Net Revenues (and subordinate to the portion of the 1995 Bonds secured by
Net Revenues) subject to the conditions of the Indenture. See "SECURITY FOR THE 2009
BONDS-Parity and Subordinate Bonds."
Rate CovelUlnt. The City covenants in the Indenture that it will fix, prescribe, revise and
collect Charges for the Water System in each Fiscal Year which are:
(i) sufficient (along with moneys transferred from the Available Reserve for the Water
System) to pay 100% of debt service on all oul<;tanding 2009 Bonds, the portion of the 2002
Bonds payable from Net Revenues and all Parity Bonds payable from Net Revenues, and
(Ii) equal, when added to the balance then on hand in the Available Reserve for the
Water System, to 125% of principal of and interest payable in that Fiscal Year on all outstanding
bonds payable from Net Revenues.
See "SECURlTY FOR THE 2009 BONDS-Rate Covenant."
Reserve Account. To further secure the payment of the principal of and interest on the
2009 Bonds, the Indenture establishes the Reserve Account to be held by the Trustee. The
Indenture defines the Reserve Requirement to be equal to the lesser of (i) Maximum Annual
Debt Service on the 2009 Bonds, (ii) 10% of the principal amount of the 2009 Bonds, and (iii)
125% of Average Annual Debt Service on the 2009 Bonds. See "APPENDIX A-"SUMMARY OF
CERTAIN PROVISIONS OF THE INDENTURE OF TRUST" and "SECURITY FOR THE 2009
BONDS-Reserve Account."
THE 2009 BONDS
Bond Tenns
General. The 2009 Bonds will be dated their date of delivery and are to be issued in the
aggregate principal amount, bear interest at the rate per annum and mature on the dates set
forth on the cover page of this Official Statement. Interest on the 2009 Bonds is payable on each
June 1 and December 1, commencing June 1, 2010.
Registered Form. The 2009 Bonds are deliverable in fully registered form in the
denomination of $5,000 each or any integral multiple of $5,000, and when issued will be
registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York,
New York ("DTC"). Beneficial owners of the 2009 Bonds will not receive physical certificates
representing the 2009 Bonds purchased, but will receive a credit balance on the books of the
nominees of such beneficial owners. So long as Cede & Co. is the registered holder of the 2009
Bonds, principal of and premium, if any, and interest evidenced and represented by the 2009
Bonds will be paid the Trusl-ee directly to DTC, which will in turn remit such principal,
premium, if any, and interest to its participants for subsequent disbursement to the beneficial
owners of the 2009 Bonds. See "THE 2009 BONDS-Book-Entry-Only System." Principal of and
premium, if any, on the 2009 Bonds will be payable at maturity or prepayment upon surrender
thereof at the principal corporate trust office of the Trustee.
-3-
Manner of Payment. Interest on the 2009 Bonds is payable on each Interest Payment Date
to the person whose name appears on the Bond Registration Books as of the Record Date
immediately preceding the applicable Interest Payment Date, such interest to be paid by check
or draft of the Trustee mailed by first class mail to the Owner or, at the option of any Owner of
at least $1,000,000 aggregate principal amount of the 2009 Bonds with respect to which written
instructions have been filed with the Trustee prior to the Record Date, by wire transfer, at the
address of the owner as it appears on the Bond Registration Books. Principal of and premium (if
any) on any 2009 Bond will be paid upon presentation and surrender thereof at the corporate
trust office of the Trustee in San Francisco, California. Both the principal of and interest and
premium (if any) on the 2009 Bonds will be payable in lawful money of the United States of
America.
So long as Cede & Co., is the registered holder of the 2009 Bonds, references to the
holders or owners or registered holders or owners of the 2009 Bonds means Cede & Co. and not
the beneficial owners of the 2009 Bonds.
Transfer and Exchange
Any 2009 Bond may, in accordance with its terms, be transferred upon the Bond
Registration Books by the person in whose name it is registered, in person or by his duly
authorized attorney, upon surrender of the 2009 Bond for cancellation, accompanied by
delivery of a written instrument of transfer in a form approved by the Trustee, duly executed.
Whenever any 2009 Bond is so surrendered for transfer, the City will execute and the Trustee
will authenticate and deliver to the transferee a new 2009 Bond or 2009 Bonds of like tenor,
maturity and aggregate principal amount. If a notice of redemption of any 2009 Bonds has been
mailed pursuant to the redemption provisions of the Indenture, those 2009 Bonds will not be
subject to transfer.
The 2009 Bonds may be exchanged at the Trust Office of the Trustee, for 2009 Bonds of
the same tenor and maturity and of other authorized denominations.
2009 Bonds Mutilated, Destroyed, Stolen or Lost
If any 2009 Bond becomes mutilated, the City, at the expense of the Owner of that 2009
Bond, will execute, and the Trustee will authenticate and deliver, a new 2009 Bond of like
maturity and principal amount in exchange and substitution for the 2009 Bonds so mutilated,
but only upon surrender to the Trustee of the 2009 Bond so mutilated. The Trustee will cancel
every mutilated 2009 Bond so surrendered, and will deliver those canceled 2009 Bonds to, or
upon the order of, the City.
If any 2009 Bond is lost, destroyed or stolen, evidence of such loss, destruction or theft
may be submitted to the City and the Trustee. If such evidence is satisfactory to them, and
indemnity satisfactory to them is given, the City, at the expense of the Owner, will execute, and
the Trustee will authenticate and deliver, a new 2009 Bond of like maturity and principal
amount in lieu of and in substitution for the 2009 Bond so lost, destroyed or stolen. (If any such
2009 Bond matures or is called for redemption, instead of issuing a substitute 2009 Bond the
Trustee may pay the same without surrender thereof upon receipt of indemnity satisfactory to
the Trustee).
The City may require payment of a reasonable fee for each new 2009 Bond issued and
the reimbursement of any expenses incurred by the City or the Trustee. Any 2009 Bond issued
in lieu of any 2009 Bond alleged to be lost, destroyed or stolen will constitute an original
contractual obligation on the part of the City whether or not the 2009 Bond alleged to be lost,
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destroyed or stolen is at any time enforceable by anyone, and will be equally and
proportionately entitled to the benefits of the Indenture with all other 2009 Bonds secured by
the Indenture.
Designation of 2009 Bonds as Build America Bonds
If any 2009 Bonds are issued as "Direct Payment Build America Bonds" for purposes of
the American Recovery and Reinvestment Act of 2009, signed into law on February 17, 2009 (the
"Recovery Act"), the City expects to receive a cash subsidy payment from the United States
Treasury pursuant to the Recovery Act equal to 35% of the interest payable on such 2009 Bonds
on or about each Interest Payment Date. The cash payment does not constitute a full faith and
credit guarantee of the United States, but is required to be paid by the Treasury under the
Recovery Act. Any cash subsidy payments received by the City will constitute a portion of the
Gross Revenues. The City is obligated to make all payments of principal of and interest on the
2009 Bonds whether or not it receives cash subsidy payments pursuant to the Recovery Act.
Redemption
If the 2009 Bonds are issued as Tax-Exempt Bonds, the folllYWing redemption provisions will
apply to such 2009 Bonds:
Optional Redemption. The 2009 Bonds maturing on or before June 1,2019, are not
subject to optional redemption prior to maturity. The 2009 Bonds maturing on or after
June 1, 2020, are subject to redemption prior to their respective maturity dates, at the
option of the City, as a Whole, or in part in inverse order of maturities and by lot within
a maturity, from any source of available funds, on any Interest Payment Date on or after
June 1, 2019, at a Redemption Price equal to the principal amount of the 2009 Bonds to
be redeemed, plus accrued interest thereon to the date of redemption, without premium.
[To be applicable if the successful bidder of the 2009 Bonds designates certain
maturities as term bonds] Sinking Fund Redemption. The 2009 Bonds maturing on June 1,
(the "Term Bonds") are subject to mandatory redemption in part from sinking fund
payments to be made by the City on June 1, ~ and on each June 1 thereafter up to
and including June 1, ~~, at a redemption price equal to 100% of the principal amount
thereof plus accrued interest, if any, to the redemption date without premium, as
follows:
JJme 1 Principal Amount
Special Mandato1'1) Redemption from Insurance or Condemnation Proceeds. The 2009
Bonds are subject to redemption as a whole on any date, or in part on any Interest
Payment Date in inverse order of maturity and by lot within a maturity, to the extent of
the Net Proceeds of hazard insurance not used to repair or rebuild the Water System or
the Net Proceeds of condemnation awards received with respect to the Water System to
be used for such purpose, at a Redemption Price equal to the principal amount of the
2009 Bonds plus interest accrued thereon to the date fixed for redemption, without
premium.
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If the 2009 Bonds are issued as Build America Bonds, the following redemption prooisions will
apply to slIch 2009 Bonds:
Optional Redemption. The 2009 Bonds maturing on or before June 1, 2019, are not
subject to optional redemption prior to maturity. The 2009 Bonds maturing on or after
June 1, 2020, are subject to redemption prior to their respective maturity dates, at the
option of the City, as a whole, or in part in inverse order of maturities and by lot within
a maturity, from any source of available funds, on any Interest Payment Date on or after
June 1, 2019, at a redemption price equal to the principal amount of the 2009 Bonds to be
redeemed, plus accrued interest thereon to the date of redemption, without premium.
[To be applicable if the successful bidder of the 2009 Bonds designates certain
maturities as term bonds] Sinking Fund Redemption. The 2009 Bonds maturing on June 1,
_ ..... _ (the "Term Bonds") are subject to mandatory redemption in part from sinking fund
payments to be made by the City on June 1, ~ and on each June 1 thereafter up to
and including June 1, __ J at a redemption price equal to 100% of the principal amount
thereof plus accrued interest, if any, to the redemption date without premium, as
follows:
Principal AmQunt
tMaturity
Special Mandatory Redemption from Insurance or Condemnation Proceeds. The 2009
Bonds are subject to redemption as a whole on any date, or in part on any Interest
Payment Date in inverse order of maturity and by lot within a maturity, to the extent of
the Net Proceeds of hazard insurance not used to repair or rebuild the Water System or
the Net Proceeds of condemnation awards received with respect to the Water System to
be used for such purpose, at a Redemption Price equal to the principal amount of the
2009 Bonds plus interest accrued thereon to the date fixed for redemption, without
premium.
Special Optional Redemption upon the Occurrence of a Federal Subsidy Termination
Event. The 2009 Bonds are subject to optional redemption prior to their stated maturity,
at the option of the City, in whole or in part on any date occurring on or before June 1,
20_, but only upon the occurrence of a Federal Subsidy Termination Event, at a
redemption price equal to the greater of:
(1) 100% of the principal amount of Ihe 2009 Bonds 10 be redeemed; or
(2) the sum of the present values of the remaining scheduled payments of
principal and interest on the 2009 Bonds to be redeemed (exclusive of interest
accrued to the date fixed for redemption) discounted to the date of redemption
on a semiannual basis (assuming a 360-day year consisting of twelve 3O--days
months) at the Treasury Note Rate (defined below) plus basis points;
plus in each case, accrued and unpaid interest on the 2009 Bonds being redeemed to the
date fixed for redemption.
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(iii) if fewer than all Outstanding 2009 Bonds are to be redeemed, the
identification (and, in tile case of partial redemption, the respective principal amounts)
of the 2009 Bonds to be redeemed,
(iv) that on fue redemption date the Redemption Price will become due and
payable wifu respect to each such 2009 Bond or portion thereof called for redemption,
and that interest with respect thereto will cease to accrue from and after fue redemption
date, and
(v) the place or places where such 2009 Bonds are to be surrendered for payment
of fue Redemption Price, which places of payment may include the corporate trust office
of the Trustee.
At least 45 days prior to any redemption date, the City must deposit with the Trustee an
amount of money sufficient to pay the Redemption Price of all the 2009 Bonds or portions of
2009 Bonds which are to be redeemed on that date.
So long as the 2009 Bonds are held only in the book-entry system of DTC, notice of
redemption will be sent to Cede & Co., as nominee for DTC, and will not be sent to the
beneficial owners of the 2009 Bonds.
Purchase ill Lieu of Optional Redemption. In lieu of optional redemption, amounts in fue
Redemption Account of fue Debt Service Fund may be used for the purcl1ase of 2009 Bonds at
public or private sale as and when and at sucl1 prices (including brokerage and other charges,
but excluding accrued interest, which is payable from the Debt Service Fund) as the City may
determine, but not to exceed fue principal amount of such 2009 Bonds plus the redemption
premium applicable on the next ensuing optional redemption date.
Book-Rntry-Only System
While the 2009 Bonds are subject to the book-entry system, the principal, interest and
any redemption premium with respect to a 2009 Bond will be paid by the Trustee to The
Depository Trust Company, New York, New York ("DTC"), which in tum is obligated to remit
such payment to its DTC Participants for subsequent disbursement to Beneficial Owners of the
2009 Bonds, as described in APPENDIX F-"DTC AND THE BOOK-ENTRY ONLY SYSTEM."
FINANCING PLAN
Purposes of the Bonds
The 2009 Bonds are being issued to (a) finance fue Project, which will consist of
improvements to the Water System, (b) establish a debt service reserve fund for the 2009 Bonds,
(c) fund capitalized interest for,the Bonds through , and (e) pay certain costs of
issuing the 2009 Bonds. C
See "THE WATER SYSTEM-Capital Improvement Program Summary" for a
description of fue water utility facilities to be financed with the proceeds of the 2009 Bonds.
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Estimated Sources and Uses of Funds
The following table sets forth the estimated sources and uses of funds for the 2009
Bonds:
Sources of Funds:
Principal Amount of 2009 Bonds
Plus: Original Issue Premium
Less: Underwriter's Discount
Total Sources
Uses of Funds:
Deposit to Project Fund
Deposit to Reserve Account
Deposit to Debt Service Fund (1)
Deposit to Costs of Issuance Fund (1)
Total Uses
...... -~.---c---;;-;;-:-; (1) Represents capitalized interest for the Bonds through .
(2) Represents amounts to pay fees of rating agencies ... the Trustee, bond counsel, disclosure counsell the finandal
advisor, printing and other miscellaneous costs of issuing (he 2009 Bonds,
Annual Debt Service
Set forth below is the annual debt service on the 2009 Bonds based on the interest rates
and maturity schedule set forth on the cover of this Official Statement (assuming no optional
redemption).
Bond Year
Ending June 1
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
20a~
2034
2035
Principal Interest Bond Year Total
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Set forth below is the combined annual debt service on the 2()()9 Bonds and the portion
of the 2002 Bonds secured by Net Revenues (assuming no optional redemption).
Bond Year
. Ending June 1
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Pledge of Net Revenues
2002 Bonds 2009 Bonds .-=---Total
SECURITY FOR THE 2009 BONDS
General. The 2009 Bonds are special obligations of the City and, pursuant to the
Indenture, there is pledged, for the benefit of the Owners of the 2009 Bonds, the Net Revenues
on a parity with a lien on the Net Revenues securing the 2002 Bonds.
"Net Revenues" are defined in the Indenture to mean, for any period of computation, the
amount of the Gross Revenues during such period, less the amount of Maintenance and
Operation Costs becoming payable during that period.
"Gross Revenues" are defined in the Indenture as, for any period of computation, all
gross charges received for, and all other gross income and revenues derived by the City from,
the ownership or operation of the Water System or otherwise arising from the Water System
during that period, including but not limited to (a) all Charges received by the City for use of
the Water System, (b) all receipts derived from the investment of funds held by the Director of
Administrative Services or the Trustee under the Indenture, (c) transfers from any related
stabilization reserve fund into the Revenue Fund, and (d) all moneys received by the City from
other public entities whose inhabitants are served pursuant to contracts with the City.
"Maintenance and Operation Costs" are defined in the Indenture as the reasonable and
necessary costs spent or incurred by the City for maintaining and operating the Water System,
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calculated in accordance with sound accounting principles. Maintenance and Operation Costs
include the cost of supply of water, gas and electric energy under contracts or otherwise, the
funding of reasonable operating reserves, and all reasonable and necessary expenses of
management and repair and other expenses to maintain and preserve the Water System in good
repair and working order. Maintenance and Operation Costs further include all reasonable and
necessary administrative costs of the City attTibutable to the Water System and the 2009 Bonds,
such as salaries and wages and the necessary contribution to retirement of employees,
overhead, insurance, taxes (if any), expenses, compensation and indemnification of the Trustee,
and fees of auditors, accountants, attorneys or engineers, and all other reasonable and necessary
costs of the City or charges required to be paid by it to comply with the terms of the 2009 Bonds
or the Indenture. Maintenance and Operation Costs do not include depreciation, replacement
and obsolescence charges or reserves therefor and amortization of intangibles or other
bookkeeping entries of a similar nature.
"Charges" is defined in the Indenture as fees, tolls, assessments, rates and rentals
prescribed under the Bond Law or any other law of the State by the City Council for the services
and facilities of the Water System furnished by the City.
Flow of Funds. The City covenants and agrees in the Indenture that all Gross Revenues
will be received and held by the City in trust and will be deposited by the City in the Revenue
Fund which exlsts in the City Treasury.
All Gross Revenues will be transferred, disbursed, allocated and applied solely to the
uses and purposes set forth in the Indenture, and will be accounted for separately and apart
from all other money, funds, accounts or other resources of the City.
Limitations on Net Revenue Pledge
Limited Obligations Of the City. The general fund of the City is not liable and the credit or
taxing power of the City is not pledged for the payment of the principal or redemption price of
and interest on the 2009 Bonds. 111e owners of the 2009 Bonds cannot compel the exercise of the
taxing power by the City or the forfeiture of its property. 'fl1€ principal or redemption price of
and interest on the 2009 Bonds are not a debt of the City, nor a legal or equitable pledge, charge,
lien or encumbrance, upon any of its property, or upon any of its income, receipts, or revenues
except the Net Revenues.
Senior Lien of 1995 Bonds. The pledge of Net Revenues to the 2009 Bonds and to the
portion of the 2002 Bonds which financed improvements to the Water System is subordinate to
-the lien of the 1995 Bonds, which are secured by a lien on net revenues of all Systems. Therefore,
the lien of the 1995 Bonds on the Net Revenues is senior to the lien on the Net Revenues
securing the 2009 Bonds and to the portion of the 2002 Bonds which financed improvements to
the Water System. It should be noted, however, that unlike the 2009 Bonds, the 1995 Bonds are
also secured by net revenues of the Sewer System, the Storm Drain System and the Electric
System and the 2002 Bonds are also payable from net revenues of the Gas System and unlike the
2009 Bonds, the 2002 Bonds are also secured by net revenues of the Gas System.
The 1995 Bonds mature by their terms on June 1, 2020. The Indenture provides that no
additional bonds can be secured by a pledge of Net Revenues that is prior to the lien securing
the 2009 Bonds and the portion of the 2002 Bonds which financed improvements to the Water
System.
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Rate Covenant
The City has covenanted in the Indenture to fix, prescribe, revise and collect Charges for
the Water System during each Fiscal Year which (together with other funds transferred from the
stabilization reserve fund for the Water System and which are lawfully available to the City for
payment of any of the following amounts during such Fiscal Year) are at least sufficient, after
making allowances for contingencies and error in the estimates, to pay the following amounts in
the following order:
(a) all Maintenance and Operation Costs with respect to the Water System estimated by
the City to become due and payable in that Fiscal Year;
(b) the principal of and interest on the Outstanding Bonds payable from the Net
Revenues becoming due and payable during that Fiscal Year, including the redemption price of
Term Bonds subject to sinking fund redemption during such Fiscal Year;
(c) all other payments required for compliance with the Indenture and the instruments
pursuant to which any Parity Bonds that are issued with respect to the Water System ("Parity
Bonds" are defined below under "Parity and Subordinate Bonds"); and
(d) all payments required to meet any other obligations of the City which are charges,
liens, encumbrances upon or payable from the Gross Revenues or the Net Revenues.
In addition, the City has covenanted in the Indenture to fix, prescribe, revise and collect
Charges for the Water System during each Fiscal Year which, when added to the balance then
on hand in Available Reserve for the Water System, are sufficient to yield Net Revenues at least
equal to 125% of the principal of and interest on the Outstanding Bonds payable from the Net
Revenues becoming due and payable during such Fiscal Year, including the redemption price of
Term Bonds subject to sinking fund redemption during such Fiscal Year.
See" Available Reserves" below for a discussion of limitations on the treatment of
appropriation of funds from or into a System's related Available Reserve for purposes of
satisfying the rate covenant.
Available Reserves
Covenant to Maintain Aggregate Available Reserves. The City has covenanted in the
Indenture to maintain the funds on hand in Available Reserves in an aggregate amount at least
equal to five times maximum annual debt service on all outstanding bonded indebtedness
secured by net revenues of any of the Systems.
Transfers. In addition, the City has covenanted to advance from Available Reserves to
the Water System, as needed, amounts sufficient to enable the City to pay all Maintenance and
Operation Costs and all Debt Service payable with respect to the Water System, when and as
the same become due and payable. See "AVAILABLE RESERVES" below for information about
the Available Reserves. '
The Indenture further provides the City will transfer from Available Reserves, to the
Water System, as needed, amounts sufficient to enable the City to pay all Maintenance and
Operation Costs and all debt service on obligations issued to finance improvements to the
Water System, when and as the same become due and payable.
Other Claims on Available Reserves. The City has also covenanted to advance funds, if
necessary, from the Available Reserves to pay debt service on the 1999 Bonds. The 1999 Bonds
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are secured by a lien on net revenues of the Wastewater Collection System, the Wastewater
Treatment System and the Storm Drain System. The City has also covenanted to advance funds,
if necessary, from the Available Reserves to pay debt service on the 2002 Bonds. The 2002 Bonds
are secured by a lien on Net Revenues and by a lien on net revenues of the Gas System.
Parity and Subordinate Bonds
In addition to the 2009 Bonds, the City may issue or incur other loans, advances or
indebtedness payable from Net Revenues in a principal amount determined by the City.
Parity Bonds. The City may issue or incur any such Parity Bonds subject to the following
specific conditions, which are hereby made conditions precedent to the issuance and delivery of
such Parity Bonds:
(a) TI,e City shall be in compliance with all covenants set forth in the Indenture.
(b) (i) The Net Revenues, calculated on sound accounting principles, as shown by the
books of the City for the latest Fiscal Year or any more recent twelve (12) month period selected
by the City ending not more than sixty (60) days prior to the adoption of the Parity Bonds
Instrument pursuant to which such Parity Bonds are issued, as shown by the books of the City,
less withdrawals, if any, from the Water System's rate stabilization fund, plus, at the option of
the City, the Additional Allowance, shall at least equal one hundred percent (100%) of
Maximum Annual Debt Service, with Maximum Annual Debt Service calculated on all Bonds to
be Outstanding immediately subsequent to the issuance of such Parity Bonds which have a lien
on Net Revenues of the Water System; and
(ii) The Net Revenues of the Water System, calculated on sound accounting principles,
as shown by the books of the City for the latest Fiscal Year or any more recent twelve (12)
month period selected by the City ending not more than sixty (60) days prior to the adoption of
the Parity Bonds Instrument pursuant t? which such Parity Bonds are issued, as shown by the
books of the City, plus, at the option of the City, any or all of the items hereinafter in this
paragraph designated (i), (ii) and (iii), shall at least equal one hundred twenty-five percent
(125%) of Maximum Annual Debt Service, with Maximum Annual Debt Service calculated on
all Bonds to be Outstanding immediately subsequent to the issuance of such Parity Bonds
which have a lien on Net Revenues of the Water System. The items any or all of which may be
added to such Net Revenues for the purpose of issuing or incurring Parity Bonds hereunder are
the following:
(A) An allowance for Net Revenues from any additions to or improvements or
extensions of the Water System, and also for Net Revenues from any such additions,
improvements or extensions which have been made from moneys from any source but
in any case which, during all or any part of such Fiscal Year or such twelve (12) month
period, were not in service, all in an amount equal to ninety percent (90%) of the
estimated additional average annual Net Revenues to be derived from such additions,
improvements and extensions for the first thlrty-six (36) month period in which each
addition, improvement or extension is respectively to be in operation, all as shown in
the written report of an Independent Consultant engaged by the City;
(B) The Additional Allowance; and
(C) Funds then on hand in Available Reserves for the Water System.
(e) The Parity Bonds Instrument providing for the issuance of such Parity Bonds shall
provide that:
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(il The proceeds of such Parity Bonds shall be applied to the acquisition,
construction, improvement, financing or refinancing of additional facilities,
improvements or extensions of existing facilities within the Water System, or otherwise
for facilities, improvements or property which the City determines are of benefit to the
Water System, or for the purpose of refunding any Bonds in whole or in part, including
all costs (including costs of issuing such Parity Bonds and including capitalized interest
on such Parity Bonds during any period which the City deems necessary or advisable)
relating thereto;
(Ii) Interest on such Parity Bonds shall be payable on an Interest Payment Date;
(iii) The principal of such Parity Bonds shall be payable on June 1 in any year in
which principal is payable; and
(iv) Money shall be deposited in a reserve account for such Parity Bonds from the
proceeds of the sale of such Parity Bonds or otherwise equal to the Reserve
Requirement.
Subordinate Bonds. The Indenture authorizes the City to issue Bonds secured by Net
Revenues of the Water System on a basis subordinate to the pledge of Net Revenues to the 2009
Bonds.
Reserve Account
General. The Indenture provides for establishment of a Reserve Account. On the date of
issuance of the 2009 Bonds, the City intends to satisfy the Reserve Requirement with a cash
deposit made from a portion of the proceeds of the 2009 Bonds.
Use of the Reserve Account. If at any time there are insufficient amounts in the Debt
Service Fund to pay principal and redemption price of or interest on the 2009 Bonds, the Trustee
will withdraw from the Reserve Account the amount of the deficiency. Any amounts in the
Reserve Account in excess of the Reserve Requirement (whether derived from interest or gain
on investments Or otherwise) will, on June 2 of each year, be paid by the Trustee to the City for
deposit in the Revenue Fund.
THE CITY AND CITY UTILITIES
The City
The City is located in northern Santa Clara County (the "County"), approximately 35
miles south of the City of San Francisco. The City has a current population of approximately
64,500. It is part of the San Francisco Bay metropolitan area. Partly due to the presence of
Stanford University, which is adjacent to the City, the City is considered the birthplace of the
high technology industry that has made the County famous worldwide as Silicon Valley. The
630-acre Stanford Research Park includes prestigious and innovative high-tech leaders such as
Hewlett-Packard, SAP America, Varian Medical Systems, VMware, Tibco Software, Space
Systems Lora!, the Electric Power Research Institute and Communications and Power
Industries. The City is also a major employment center, including U.S. Department of Veteran
Affairs' Palo Alto Health Care System, Stanford Hospitals and Clinics, Lockheed Martin
Missiles and Space, Palo Alto Medical Foundation, Stanford Shopping Center, the law offices of
Wilson Sonsini Goodrich and Rosati, and the Xerox Palo Alto Research Center.
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The City was incorporated in 1894. Its first Charter was granted by the State of
California in 1909, and the City continues to operate as a charter dty. Municipal operations are
conducted under the Council-Manager form of government. The nine Council Members are
elected at large for four-year, staggered terms. The Mayor and Vice Mayor are elected annually
at the first Council meeting in January. The Mayor presides over all Council meetings. The City
Manager is responsible for the operation of all municipal functions, except the offices of the City
Attorney, City C1erk, and City Auditor. These officials are appointed by, and report directly to,
the City Council. For general, economic and demographic information regarding the City, see
AI'PENDIX B-"GENERAL AND ECONOMIC INFORMATION ABOUT THE CITY."
City Utilities
The City operates the foJlowing utility systems:
• the Sewer System,
• the Electric System,
• the Gas System,
• the Storm Drain System,
• the Refuse System,
• the Water System, and
• the Fiber Optics System.
The City's Utilities Deparhnent is in charge of the operation of the Electric System, the
Fiber Optics System, the Gas System, the Water System and the Wastewater Collection System
(which comprises a portion of the Sewer System) and the City's Public Works Department is in
charge of the operation of the Storm Drain System, the Refuse System and the Wastewater
Treatment System (which comprises the remaining portion of the Sewer System).
As described more completely above (see "SECURITY FOR THE 2009 BONDS"), in
addition to Net Revenues, the City will, if Net Revenues are insufficient, advance funds from
moneys on deposit from time to time in the Available Reserves to pay debt service on the 2009
Bonds, specifically:
(i) Rate Stabilization Reserve for the Water System,
(ii) Distribution Rate Stabilization Reserve for the Electric System,
(iii) Distribution Rate Stabilization Reserve for the Gas System,
(iv) Supply Rate Stabilization Reserve for the Electric System,
(v) Supply Rate Stabilization Reserve for the Gas System, and
(vi) the Electric System's Calaveras Reserve.
The City has covenanted to maintain the aggregate balance of the reserves at an amount
at least equal to five times maximum annual debt service on all outstanding bonded
indebtedness secured by Net Revenues of any of the Systems. See "THE AVAILABLE
RESERVES" below for a discussion of each of the Available Reserves and the City's current
policies with respect to each. However, Proposition 218 that may require the City to replenish
certain Available Reserves in the event of an advance from an Available Reserve for payment of
debt service on the 2009 Bonds. See "CONSTITUTIONAL LIMITATIONS ON TAXES AND
WATER RATES AND CHARGES-Articles XIIIC and XIIID."
Management of the Utilities Department
The Utilities Department is responsible for the operation of four utility systems (the
Electric System, the commercial Fiber Optics System, the Gas System, the Water System and the
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Wastewater Collection System) that serve the City. The City, through its Utilities Department,
services customer accounts for all of the City's utilities (including the Storm Drain System, the
Refuse System and the Wastewater Treatment System).
The Utilities Department is currently staffed by the following individuals, among others:
Valerie Fang, Director of Utilities. On October 16, 2006, the City appointed Valerie Fong as
Director of Utilities. Ms. Fong began her career with PG&E working on various gas and electric
procurement and regulatory matters of increasing responsibility, including working with
customers in the company's field offices, testifying in regulatory proceedings, negotiating long-
term prOCUrement contracts, and overseeing the development and management of the
company's electric and gas core customer procurement portfolios. She was at PG&E for 22
years. Subsequently, she worked for the City of Alameda for over four years, whete she was the
Utility Services Manager, and later, the General Manager over the utility's two business lines,
the electric and the telecommunications businesses. Ms. Fong earned a Bachelor's Degree in civil
engineering from the University of Califomia, Berkeley and is a registered profeSSional engineer
in the State of California
Tom Auzenne, Assistant Director of Utilities, Customer Support Services. Tom Auzenne has
19 years of utility experience with PG&E, and 14 years with the CPAU. At PG&E he held
positions in Gas and Electric Operations, Gas Transmission, Customer Services, Marketing, and
Governmental Affairs. At the City, he has been the Utilities Marketing Manager and Assistant
Director. The Customer Support Services Division comprises 35 full-time equivalent staff
divided into: (a) marketing, which implements efficiency programs, sells fiber optic
connectivity, and provides key account management services; (b) customer service, providing
call center services, credit and collection activities, meter reading, and utilities billing; and, (c)
utilities rates, which provides long-term financial forecasting, and establishes rates and reserve
requirements for CPAU's $178 million in annual sales for the water, electricity, natural gas, fiber
optic and wastewater collection business lines. Mr. Auzenne received a Bachelor's degree from
San Francisco State University.
Tomm Marshall, Assistant Director of Utilities, Engineering. Mr. Marshall graduated from
Washington State University in 1976 with Bachelors of Science in Electrical Engineering. He
began work in distribution engineering with Pacific Gas and Electric Company in 1980. At
Pacific Gas and Electric he worked in the Electric Distribution Engineering, System Protection
Engineering, Substation and. Transmission Regional Operations, working primarily on capital
project justification and implementation, and operational and maintenance issues with the
electric system. In 1993, he started a job at the consultant firm of Enertech ConBultants where he
worked on research and operational projects related to Electromagnetic Fields. In 1995, he
became the Electric Engineering Manager for the City where he was responsible for the
planning design and implementation of the capital improvement projects. Currently, as
Assistant Director of Engineering for the City, he is responsible for the planning design and
implementation of the capital improvement projects for the Electric, Water, Gas and Wastewater
Utilities.
Jane Ratchye, Assistant Director of Utilities, Resource Mnnagement. Ms. Ratchye first came to
the City in 1985 as an account representative advising large customers on how to reduce peak
electrical demand and save energy. She then worked on the design and evaluation of efficiency
programs and in the supply side resource planning area for water, gas and electricity. She has
worked on many areas of supply portfolio management, integration of demand-and supply-
side resources, and the initiation of the City's gas and electric commndity risk management
program. As Assistant Director for Resource Management, Ms. Ratchye is responsible for the
management and contracting of the electric, gas, and water supplies for the City, legislative
advocacy, representation in regulatory proceedings, coordination with joint action agencies,
and rate setting and financial reserve management for the Utilities Department. Ms. Ratchye
holds a Bachelor of Science degree in Mechanical Engineering and a Master of Science degree in
Engineering-Economic Systems, both from Stanford University.
Dean Batchelor, Assistant Directot of Utilities, Operatiolls. Mr. Batchelor has 27 years of
experience in utility operations and holds a Bachelors of Arts degree in Business from Long
Beach State. He has extensive experience in telecommunications, gas and electrical operations.
From 1982 101997, he worked for Pacific Gas and Electric in the Gas and Electric distribution
systems. He joined 'fCII AT&T in 1997 as the operations Manager were he oversaw the
installation, construction, maintenance and engineering of many CATV-HSD plants. In 2002, he
started with the City of Alameda as the CATV Operational Superintendent including
coordinating the work of technicians engaged in construction, maintenance and operation of the
plant, head-end and ensuring optimum customer service. In 2005, he became the Operations
Manager where he was responsible for electric utility transmission, substations, distribution
system and the CATV system. In October of 2008, he joined the City as the Assistant Director of
Operations were he is in charge of administrative activities, operations and maintenance
planning that include the water, gas, and electric receiving facilities, water transmission
facilities, the water, gas and electric distribution systems and the wastewater collection system.
Enterprise Staffing and Technology
The City employs approximately 229 full-time equivalent employees to operate its
utilities. All of these employees, excluding those in the management classification, are
represented by Service Employees International Union ("SEIU") in all matters pertaining to
wages, benefits and working conditions. The current two-year agreement with this union,
which is in the form of a memorandum of understanding, expired on June 30,2009. The City
and SEIU are negotiating a new agreement. Management employees receive substantially the
same fringe benefit package as the SEIU members. The City's wage and fringe benefits are
generally comparable to those offered by other local public agencies.
The City covers all of its permanent employees under the Public Employees' Retirement
System ("PERS"). Pension costs are co-funded by monthly contributions to PERS by the City
and its employees. At June 30, 2006 (the most recent actuarial information available), the total
pension benefit obligation for all City employees was $593,960, net assets available for plan
benefits were $526,576 and the total pension benefit obligation exceeded the City's net assets
available for plan benefits by $67,384.
Enterprise Management Policy
Treated as enterprise funds, the Electric, Gas, Refuse, Water, Fiber Optics. Sewer and
Storm Drain Systems are financed and operated in a manner comparable to private business
enterprises. The City utilizes a Strategic Planning process in concert with its annual budget to
identify and record progress in meeting benchmark goals and objectives. In addition, business
plans are developed on an annual basis for the Water, Gas, Electric and Wastewater Collection
Systems. For the Gas and Electric Systemq, separate business plans are developed for the supply
and distribution business units.
The City uses the accrual basis of accounting with respect to the enterprise funds.
Revenues are recognized when earned, and expenses are recognized when incurred. Utility
revenues are used to pay operating costs, bond debt service, most capital expenditures, and
reserve accumulations. In accordance with City policy, the cost of providing utility services to
the general public continues to be funded predominately through user charges. Policies for cash
reserves and Utilities Transfers to the City's General Fund (which are transferred from the Gas
and Electric Systems only) are established by the City Council in a manner consistent with the
-17-
voter-approved City Charter. Transfers to the General Fund are based on the approved rate of
return for comparable public utilities.
The methodology used to calculate the transfers to the General Fund is a "Return on
Rate Base" method which requires an annual calculation of the "rate base" for the Electric and
Gas Funds. The "rate base" for the Electlic and Gas Funds includes (1) the net asset value of the
utility assets as of the latest audited fiscal year; (2) working capital for the supply purchases for
the upcoming fiscal year; (3) working capital for non-energy supply operating costs for the
upcoming fiscal year; (4) additional capital projects budgeted during the current fiscal year less
customer-funded improvements; and (5) depreciation for the current fiscal year. The rate base is
adjusted by an appropriate return on equity, equal to PG&E's approved return on equity
adjusted downward by 30% to reflect the City's tax-exempt status, and adjusted again by a 15%
"risk" adjustment based on the concept that an investment in a municipal utility is less risky
than an investment in an investor-owned utility.
The Utilities and Public Works Departments are expected to continue meeting all of their
financial obligations while charging retail rates to their customers that are comparable to those
charged in neighboring cities. Careful budgeting and sound financial planning have been and
will continue to be important factors in maintaining competitive rates. The Utilities Department
recognizes the importance of minimizing wholesale commodity costs which is the largest
expenditure category. Much time and effort are spent in dealing with the various commodity
suppliers, regulatory agencies and commissions to help ensure reasonable and economical
wholesale commodity costs.
Rates and Billing
The City Council has full discretion to set utility rates for each utility system. The City's
rate-making objectives are "to price utilities competitively, consLstent with sound financial
planning, while promoting efficient resource utilization and customer satisfaction." To achieve
an appropriate balance between these objectives, the City forecasts all financial obligations and
funding sources over a five year planning horizon. In this manner, timely rate adjustments for
all utilities are coordinated and alternated to assure adequate funding, minimize consumer
impacts, and promote rate stability. To provide for rate stability and to insure funds are
available to cover any unforeseen cost contingencies, Rate Stabilization Reserves are funded
from surplus net sales revenues and withdrawn in subsequent periods to supplement retail
sales revenue as needed. ,
Compared to industry benchmarks, the City's utilities have low debt and interest
expense. This is due to the City's preference since the 19605 to finance major capital
improvements on a "pay as you go" basis. This conservative approach to finance additions
through rates helps keep rates low, since interest costs associated with long-term finanCing are
avoided.
The City collects utility charges by means of a single monthly bill to each customer,
listing charges for each service provided. Uncollectible accounts for all utilities average
approximately 0.16% of the amount billed. In 2007, the City Council approved a project to
implement a new utilities customer information system using SAP. The system was successfully
implemented in May 2009, and it allows for the billing of utilities customers. It also provides
customer service staff with secure online access to customer information and gives customers
the choice to pay their bill online.
Reserve Policies
In 1993, 1998, 2007 and again in 2009, the City Council established new utility rate
stabilization reserve' policies and guideline levels, See" AVAILABLE RESERVES" below. On an
annual basis, operating reserves are funded, withdrawn, or unchanged depending on the
particular circumstances of that utility fund.
In 1996, the City Council adopted the Calaveras Reserve Policy, which established a
reserve balance to recover potential stranded costs related to outstanding obligations for the
Calaveras Hydroelectric Project and other asseta whose costs were above market values such as
the California Oregon Transmission Project and the Seattle City Light Energy Exchange
Contract. This policy initially required an annual review of the stranded cost issue and an
update of the underlying assumptions to calculate stranded costs. An updated cost calculation
performed in 1999, which took into account a refinancing of the Calaveras Reserve by the
Northern California Power Agency, resulted in a target balance of $65 million to be achieved by
December 31, 2001. This target was in fact achieved during Fiscal Year 2000-01. This reserve
balance was planned to gradually decline through Fiscal Year 2031-32. Each year, the Calaveras
Reserve accrues interest income which is added to the year-end reserve balance.
In May 2009, the Council revised the Calaveras Reserve Policy. Under the new policy,
the stranded costs are to be reviewed and recalculated annually during the budget process to
set a minimum transfer from the Calaveras Reserve to the Electric Supply Operating Budget.
The review also includes a recalculation of the stranded cost for the long-term (until 2032 when
the Calaveras debt is paid off) of the electric supply portfolio to determine the sufficiency of the
Calaveras Reserve balance to cover the amount. To the extent funds are available in excess of
long-term stranded cost needs, the Council may consider and approve projects funded by the
Calaveras Reserves which will benefit electric ratepayers.
Following the electric deregulation in 1997, the City Council unbundled electric rates
into the cost components of distribution, power supply, transition, cost recovery and public
benefits. Because of the need to recover costs and capture revenues for specific business
activities, the rate stabilization reserve for the Electric System was replaced with two separate
reserves for distribution and supply services. Similarly, the City Council separated its single
rate stabilization reserve for the Gas System into two separate reserves.
In 1998, 2001, 2003, 2007, and 2009, the City council adopted various updated guidelines
for the rate stabilization reserves. The 2009 rate stabilization reserve guidelines incorporate the
following:
* For the Electric Distribution and Gas Distribution Rate Stabilization Reserves, the
minimum and maximum guideline levels are equal to 15% and 30% of the
annual distribution sales revenues respectively;
• For the Water and Wastewater collection Rate Stabilization Reserves, the
minimum and maximum guidelioe levels equal 15% and 30% of annual sales
revenues respectively;
• For the Electric Supply Rate Stabilization Reserve, the minimum and maximum
guideline levels equal 50% and 100% of supply purchase costs, respectively
(unchanged from 2007);
• For the Gas Supply Rate Stabilization Reserve, the minimum and maximum
guideline levels equal 35% and 70% of supply purchase costs, respectively.
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Annual Financial Statements and Significant Accounting Policies
The City's annual financial statements are audited by Maze & Associates, Accountancy
Corporation, Walnut Creek, California, in accordance with generally accepted auditing
standards and the standards for financial audits issued by the Comptroller General of the
United States. The Maze & Associates audit report contains opinions that the financial
statements present fairly the financial position of the various funds maintained by the City. The
annual financial statements include certain notes which may not be fully described in this
Official Statement, but which constitute an integral part of the audited financial statements.
The City's most recent annual financial statement is attached as APPENDIX C-
"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR
ENDED JUNE 30, 2008." Copies of prior reports are available on the City's website
(http://www.cityofpaloalto.org/depts/asd/financiaLreporting.asp) or upon request to the
Administrative Services Department, City of Palo Alto, 250 Hamilton Avenue, Palo Alto, CA
94301.
Governmental accounting systems are organized and operated on a fund basis. A fund
is defined as an independent fiscal and accounting entity with a self-balancing set of accounts
recording cash and other financial resources, together with all related liabilities and residual
equities or balances, and changes therein. Funds are segregated for the purpose of carrying on
specific activities or attaining certain objectives in accordance with special regulations and
restrictions.
As indicated above, the various Systems are accounted for as enterprise funds.
Enterprise funds are used to account for operations (i) that are financed and operated in a
manner similar to private business enterprises (where the intent of the governing body is that
the costs and expenses, including depreciation, of providing goods or services to the general
public on a continuing basis be financed or recovered primarily through user charges), or
(il) where the governing body has decided that periodic determination of revenueS earned,
expenses incurred or net income is appropriate for capital maintenance, public policy,
management control, accountability or other purposes.
The City's enterprise funds are accounted for using the accrual basis of accounting. Each
fund's revenues are recognized when they are earned, and their expenses are recognized when
they are incurred, except for revenues from utility customers, which are recognized based on
cycle billings. Revenues for services provided but not billed at the end of a fiscal period are not
material and are not accrued.
The City follows those Financial Accounting Standard Board Statements issued before
November 30, 1989 that do not conflict with Governmental Accounting Standards Board
Statements.
The City has not requested nor did the City obtain permission from Maze & Associates
to include the audited financial statements as an appendix to this Official Statement.
Accordingly, Maze & Associates has not performed any post-audit review of the financial
condition or operations of the City.
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THE WATER SYSTEM
History
When the City was incorporated in 1894, the majority of its population was served by
private water companies that drew their supply from relatively shallow wells. In 1896, a bond
issue was approved for purchase by the City of these private water companies. In succeeding
years, additional purchases completed the acquisition of privately owned facilities. Deep wells
provided water to the gradually increasing population until 1938, when the decline of the
groundwater table necessitated the purchase of imported.water. Thereafter, the City's growing
demand was met with increasing water supplies from the Public Utilities Commission of the
City and County of San Francisco (the "SFPUC"), through a 36-inch pipeline. In 1962, in order
to prOVide a very high quality of water to its customers, the City began supplying 100% of its
water from the SFPUC. Approximately 85% of the SFPUC supply is derived from snowfield
run-off to the Hetch Hetchy Reservoir in Yosemite National Park, and the remaining 15% is
derived from rainfall run-off stored in San Francisco's East Bay and Peninsula Reservoirs. Over
the years, the City has added three additional SFPUC pipeline connections.
As the population grew in the 1930s, 1940s and 19508, the City issued bonds to finance
the necessary water distribution system expansions and improvements. This policy was
changed in the 1960s to a "pay as you go" funding approach, whereby current revenues were
raised to accommodate capital improvement projects.
Service Area
The City is the primary provider of water service within its incorporated limits and on
other land owned or leased by the City. The City's service area encompasses approximately 26
square miles.
Water Storage and Distribution System
The City's water distribution system distributes potable water throughout the City to
meet residential, commercial, industrial, irrigation and other water demands. The City operates
five connections or turnouts from the SFPUC's Hetch-Hetchy system. Pursuant to the City's
Rule and Regulation 3, the distribution system pressures vary between 30 and 125 pounds per
square inch; an average of 50 pounds per square inch will be maintained, with the maximum
and minimum pressures being experienced at the lower and higher elevations of the
distribution system The City's water system is presently comprised of 214 miles of mains
ranging in pipe diameter sizes from 4" to 30" serving nine pressure zones spanning 26 square
miles. The City also operates five turnouts with SFPUC, five booster pump stations and six
storage reservoirs ranging from 1.0 MG to 4.0 MG. City water is distributed to approximately
19,500 metered connections.
Sources of Water Supply
The City's current potable water supply consists entirely of purchased water from the
SFPUC's Hetch Hetchy system. The City also maintains interconnections with four neighboring
water distribution systems, as well as five deep wells, which are available on an emergency
basis. The sources of supply are further described below.
SFPUC's Hetch Hetchy System. The SFPUC's water supply originates in the Hetch Hetchy
reservoir and surrounding watersheds located in and around Yosemite National Park. Water
flows by gravity across the California central valley to Sunol, where it is blended with water
-21-
from local reservoirs, and is then pumped across the Hayward fault and through the Irvington
Tunnel. There the SFPUe's Bay Division pipelines Number 1 and 2 carry water across the San
Francisco Bay to Redwood City and to the Palo Alto Pipeline, which carries water south to three
of the City's water turnouts at Sand Hill Road, Lytton Avenue and California Avenue. SFPUC
Bay Division Pipelines Number 3 and 4 carry water arollnd and below the southern end of San
Francisco Bay to the City's other two connections to the SFPUC system at Arastradero Road and
Page Mill Road. The resulting blend of water represents approximately 85% Belch Betchy
water and 15% local reservoir water.
The City has two 25-year water delivery contracts with the SFPUC, both of which were
executed in June 2009: (i) a "Water Supply Agreement," which is a master agreement between
the City and County of San Francisco and the 27 wholesale customers (the "Suburban
Purchasers"), and (ii) an Individual "Water Sales Contract." The contracts contain provisions for
adjusting wholesale water rates to match changing wholesale revenue requirements of the
SFPUC on a periodic basis.
The Water Supply Agreement guarantees a maximum supply of 184 million gallons per
day (the "Maximum Supply Assurance") collectively to all of the SFPUe's wholesale customerS.
In 2009, the SFPUC and the wholesale customers agreed to maintain the existing allocation
methodology that divides the Maximum Supply Assurance among the individual Suburban
Purchasers. The City's Maximum Supply Assurance share is 17.075 million gallons per day, or
8,333,000 hundred cubic feet (cd) per year'. In Fiscal Year 2007-08, the SFPUC delivered an
average of approximately 12.72 million gallons per day to the City, or a total of approximately
6,205,790 hundred cubic feet.
The Water Supply Agreement provides that the amount of water made available to the
Suburban Purchasers is subject to reductions due to water shortage, drought, earthquakes, other
acts of God, or rehabilitation or malfunctioning of the SFPUe's water delivery system.
On October 30, 2008, theSFPUC approved the Water System Improvement Program
(WSlP), a long-range financial plan and capital improvement plan to address capital
improvement needs and priorities for its water enterprise, which are intended to replace old
systems or upgrade systems to imj:>rove reliability and meet future customer needs. The WSIP
will be debt funded. The total estimated cost of the WSlP, which includes the SPPUC
infrastructure to serve the City of San Frandsco and the 27 wholesale customers, including
inflation and contingencies, is approximately $4.4 billion. The new contracts specify the
repayment method and the amount that is to be borne by the wholesale customers (including
the City).
The City's cost of water purchased from the SPPUC has increased in recent years as a
result of rising operations and maintenance costs of the aging water delivery systems that
transport SFPUC water. It is anticipated that purchased water costs will continue to increase as
the WSIP is implemented. SFPUC wholesale water rates for Fiscal Year 2007-08 were $1.30 per
hundred cubic feet. Recent SFPUC wholesale water rate projections indicate that wholesale
rates are expected to increase to $3.57 per hundred cubic feet by Fiscal Year 2015-16.
The SFPUC adopted a capital program to repair and upgrade the regional water system
that serves the City and other Bay Area communities. The SFPUe's Water System Improvement
Program (WSIP) consists of projects that arc designed to increase the reliability of the regional
system, especially if subjected to a large earthquake. According to the SFPUC, the objectives of
the WSIP include:
1 1 cd equals 748 gallons
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•
•
•
•
•
Improve the system to provide high-quality water that reliably meets all current and
foreseeable local, State, and Federal requirements.
Reduce vulnerability of the water system to damage from eal'thquakes.
Increase system reliability to deliver water by providing the redundancy needed to
accommodate outages.
Provide improvements related to water supply / drought protection.
Enhance sustainability through improvements that optimize protection of the natural
and human environment.
Prior to completion of the WSIP, the SFPUe's studies showed that the service area could
be without water for up to 60-days after a major earthquake. The 50 WSIP projects for the
regional system include replacement of some sections of pipeline, replacement of pump
stations, upgrades to water treatment plants, new pipelines, dam and reservoir improvements,
control system upgrades, large valve replacements, and fisheries enhancements.
Wholesale water p~ices have increased over the past five years as the SPPUC has started
the planning, environmental review and design stage for many of the WSIP projects. The
wholesale water rates for the past five years are as follows:
Fiscal Year
2005
2006
2007
2008
2009
Rate perCCF
$1.13
$1.02
$1.22
$1.30
$1.43
The latest forecast of wholesale water prices from the SPPUC incorporate the expected
cost and schedule for the WSlI'. The price forecast is as follows:
ElselllYear
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Rate per CCF
$1.65
$1.95
$2.28
$2.76
$3.14
$3.41
$3.57
$3.55
$3.57
$3.59
Interconnections with Neighboring Systems. The City maintains interconnections with four
neighboring water distribution systems: Mountain View, the Stanford University campus,
Purissima Hills Water District, and East Palo Alto. These interconnections are available for use
in cases of water distribution system emergencies.
Emergency Wells. The City maintains five existing deep wells, which could supply a
portion of the service area's needs on an emergency basis. It is anticipated that these existing
wells, plus the three new wells the City plans to build over the next five years, could provide a
near-normal water supply during all extended SPPUC water supply interruption.
-23-
Water Wells, Regional Storage and Distribution System Study. Due to tile critical need to
ensure sufficient water supplies are provided under emergency conditions, in accordance with
City Council Direction, the City is accelerating the implementation of the recommendations of
the Water Wells, Regional Storage and Distribution System Study, completed in 1999, over the
next five fiscal years. This study identified system deficiencies and recommended capital
improvements to improve the operation and reliability of tile City's water distribution system,
particularly during emergency situations. The City's five existing wells will be rehabilitated or
rebuilt. Three new wells will also be constructed. A new reservoir and pump station at EI
Camino Park as well as an augmentation to an existing pump station at Mayfield will be
constructed to allow the City to supply near-normal levels of water supply during SFPUC water
supply interruptions. Five booster pump stations have been rehabilitated in the Foothills to
improve water conveyance efficiency. These planned improvements are projected to maintain
the City's water supply capacity at nearly normal llsage levels on a continuous basis for the
duration of many long-term emergency scenarios, some lasting 90 days or longer. In addition,
the wells could be used as supplemental supplies in protracted drought conditions when
conservation efforts and SFPUC supplies were not sufficient to meet demands.
Recycled Water Proj ect
The City completed a Water Reclamation Master Plan (Master Plan) for the Palo Alto
Regional Water Quality Control Plant (RWQCP) in 1992 and an accompanying Final Program
Environmental Impact Report (PEIR) in 1995. The Master Plan and the PEIR evaluated the
development of a regional water reuse system that could ultimately provide service to the entire
RWQCP service area. Benefits of a regional water reuse system include reduced effluent
discharge from the RWQCP into San Francisco Bay and reduced reliance on potable 'Vater
deliveries from the Hetch Hetchy system. The Master Plan includes a phased approach to the
expansion of treatment, distribution, storage and USe of recycled water. Phase 1 of the regional
recycled water system has been in operation since 1980. It currently serves the Palo Alto Golf
Course, Greer Park, the Emily Renrel Marsh, the Duck Pond, and the RWQCP. Construction of
Phase 2, the Mountain View Recycled Water project, is almost complete and the project is
scheduled to be online in the next few months. The Palo Alto Recycled Water Project, which
would expand the recycled water distribution system to serve additional customers in Palo
Alto, is Phase 3 of the RWQCP's ongoing expansion of its regional recycled water system.
The City is currently investigating the feasibility of constructing the Phase 3 project. The
City completed a market survey in June 2006 to update the cost estimate and potential users for
the project. Subsequently, the City completed a Recycled Water Facility Plan in December Z008,
which provided further detail regarding potential project cost and potential recycled wa.ter use.·
The project would primarily serve irrigation customers within the City, with an initial yield of
approximately 900 acre feet per year of recycled water. The Facility Plan identified a target
recycled water use area, the Stanford Research Park, and a pipeline alignment for the project
that would connect to the Phase 2 project. The projected capital cost estimate for the Phase 3
project is $33 million.
The City is preparing the project level environmental document for tile project and has
involved stakeholders from the community and the potential end use customers and
landowners in the Stanford Research Park. One of the issues identified in the environmental
review phase is the salinity of the recycled water, which may negatively impact vegetation that
would be irrigated with the recycled water.
Another issue is the high cost of the project. The City is investigating many funding
options for the project, including state and federal grant and loan programs. The City is
currently seeking federal authorization for a grant award of $8.25 million under the Bureau of
Reclamation Wastewater and Groundwater Study and Facilities Act of 1992 (Title 16). The City
-24-
is also applying for a low interest State Revolving Fund (SRF) loan from the State Water
Resources Control Board for the project. Under this program, eligible projects can apply for
loans with interest rates that are roughly half of the State general obligation bond rate. If the
Ci ty is unsuccessful in obtaining an SRF loan, it is possible that the City could finance the
Project with a traditional debt issuance. If the City is successful in obtaining an SRF loan, it
would be subordinate to the current bond issuance. At this time, the City Council has not
decided to go forward with the Phase 3 Recycled Water Project A decision to proceed could be
made as soon as the fall of 2009, but many details regarding completion of the environmental
document, potential state and federal funding, salinity management, and recycled water rate
design remain to be determined.
If the project did proceed, potable water sales volumes would decrease and less potable
water supplies would be purchased from the SFPUe Since wholesale water costs are only a
portion of the total water utility cost, the remaining water utility costs would be borne by fewer
customers resulting in upward pressure on retail potable water rates. Recycled water retail rates
have not been developed, but are typically set to an amount equal to about 75% of potable
water retail rates. Providing a discount for recycled water users may result in a small upward
impact on potable water rates, but this is not expected to be a large impact at this time.
Water Conservation Policies and Procedures
The City Council adopts an Urban Water Management Plan (UWMP) every five years.
The latest UWMP was adopted in December 2005. The 2005 UWMP contains the Urban Water
Shortage Contingency Plan, which describes what the City would do in case of a water supply
shortage. The plan describes a set of activities that would need to be done to implement various
stages of a water supply shortage. There are fOllr water shortage stages culminating in Stage IV,
a critical water shortage where water supplies are reduced by 35% to 50%. The actions taken to
respond to the water shortage stages include outreach campaigns, water audit programs,
stepped-up incentive programs for customers to install water efficient appliances,
implementation of water use restrictions, modifications of water rate structures or rationing
programs, and the use of groundwater as a supplemental supply. In a water shortage situation,
the City would select the appropriate mix of actions to respond to the severity of the water
shortage.
The City has had extensive experience implementing programs to reduce customer use
of water in water shortage situations. In the last extended water shortage from 1988 through
1992, the City reduced water consumption by over 35% from pre-drought consumption levels.
Water consumption has not retllmed to the levels that existed prior to that water shortage and
the City believes that future water reductions are unlikely to be as dramatic in a future drought.
Historical I'roduction and Deliveries
The follOWing table sets forth a five-year history of water purchased from the SFPUe
and delivered to customers in the Water System's service area.
Water Supply
Water Deliveries
• Estimated
Table 1
WATER SUPPLY AND DELIVERIES
(in hundreds of cubic feet)
FiBcal Years 2004-05 through 2008-09
2004-05
5,896,965
5,331,324
2005-06
5,802,911
5,208,903
-25-
2006-07
6,361,100
5,480,603
2007-08
6,205,790
5,526,644
2008-09
5,787,545 *
5,533,352 *
Source: City of Palo Alto, Utilities Department.
Environmental Issues Relating to the Water System
The U tilitie~ Department reports that no environmental issues exist that are anticipated
to materially affect the Water System.
Capital Improvement Program Summary
The City currently projects that it will undertake capital improvements to the Water
System for the nextkn fiscal years in the aggregate amount of approximately $85,800,000. The
City intends to use a portion of the proceeds of the 2009 Bonds to finance a portion of these
projects through fiscal year 2012, together with certain engineering, design and related costs
previously incurred with respect to Water System improvements, for a total of approximately
$31,150,000. See "FINANCING PLAN." The City currently intends to finance the remaining
projects with available Water Fund revenues on a pay-as-you-go basis, and not through the
issuance of additional bonds or other debt instruments. The following table displays these
projects and highlights those that are intended to be financed from the proceeds of the 2009
Bonds.
-26-
Table 2
TEN YEAR CAPITAL IMPROVEMENT PROGRAM SUMMARY
FiscalYeu
Project ~ ~ 2Q1.Q:lJ Zll1!.1.:l Z!ll.2d.> :mu,lf! ~ ~16 WklZ ~917-=-t~ ~ 10Yr_Tptal
Existing Well RehabilitatiOn 51,500,000 $1,7S0))OO $1,750))00 $5,000,000
E1 Camino Park Reservoir and Pump Station $2,5(0))00 $7.500,000 $7,500,000 $17,500,000
Reservoir, Pump Station &: Well Land. A;;:quisition $B,2Jl(WOO 58,200,000
Bl Ca.m.ino Park Well $400))00 $1,oo0,{)00 <---$31,150,000 $1,400,000
Maymld Pllrnp Station 1750,000 $4,500,000 15,250,000
Comrnu."1ity Garden Well Site 1400,000 $1,0(0))00 $l,400,000
Eleanor P1ll:dee P1ll:k Well 1400,000 $1,000,000 $1400,000
SUB.TOTAL $9,000 000 "$7,150'{)00 $14,750,000 $9 250,000 $40,150 0
Water Regulation Station Imptovements $320,000 $710,000 $1,(30))00
Arastradcro CreekAcccss Road Paving 524100 $23,133 $24,183 $25,233 $26,283 $27,333 $28,383 $29,433 130,483 $31,533 $32,583 5206,083
Maintenance (annuaL ongoing)
WGW Utility GIS Data $40))00 $50,000 $6(),000 570))00 $80,000 590))00 51(0))00 $110,000 1120))00 1130))00 $140))00 $6()Q,000
Water Main Replacements Phase 32 $415JIOO $3,750,000 ""165,000
Water Main Repl<lcements Phase 31 $395))00 53,500))00 $4,045,000
Water Main Replacements Phase 30 $375,000 $3,500))00 $3,925,000
Water Main Replacements Phase 29 $355))00 $3,450,000 $3,805,000
Water rv!ain Replacements Phase 28 S340,000 $3,285))00 $3,625,000
Water Main Rep1ace~ts Phase 21 1325))00 $3,130,000 $3,455))00
Waret Main Replacemer.ts Phase 26 $307,000 $2,980))00 $3,287,000
Water Main Replacements Phase 25 $292,000 12,835,000 $3,127,000
Watet Main Replacement,> Phase 33 $435,000 $435,000
Water Main Replacements Phas.e 21 $2,700,000 $2,700,000
Water Main Replacemertts Phase 22 1233,000 $2,500,000 12,73)))00
Water Main Replacements l'hase23 .$240,000 $2,600,000 $2,840,000
Water Main Replacements Phase 24 $292,000 $2,700..000 $2,99:WOO
Seismic Water Tank Valve $250,000 $5&0))00 8800,000
Four S~j R~rvoit Interior and Exttrior Coating 5250,000 11,500,000 $2,050,000
Water System Portable Emergency Generators $134,000 5136))00 113S))OO $140,000 5142.000 $144,000 8834,000
Service and Hydrant Replacement 1146,000 5149,000 1152,000 5155,000 1158,000 $161))00 116>\,000 5167,000 $170,000 $173,000 5176,000 $1,.252,000
Water Meters $197,000 $2(3))00 5209))00 $215,000 $2211000 $227,(0) $2l~))OO $239,000 $245,000 5251))00 $257))00 51,744,000
Distribution System -Customer Design and
Connection Services
Water System Extel\'>ions $343,000 $353,000 1364,000 $373,800 $384,000 $394,200 $4().l400 $414,600 $424,800 $435,000 $445,200 $3,031,000
Full Reimbursement by Customer (Revenues) (5843'{)00) ($853,000) (5864,000) (1673,800) (1884,000) (1894,200) ($904,400) (1914,600) (1924,800) (1935,000) (1945,200) (17,031,000)
Net Subtotal Distribution System -Customer (1500,000) (1500,000) (1500,000) (1500,000) (1500,000) (1500,000) (1$00,000) (1500,000) ($500,000) ($500,000) (15()(),ooO) (14,000,000) DeSi~ and Connedion Services
Net ubtotal Distribution System -System 53,212,100 $6,273,133 $6,135,183 $3,247,233 $3,432,283 $3,619,333 $3,665,3$3 $3,870,433 ",,010,453 54,150,533 54,290,583 $45,650,083
Improvements (out'>ide of Bhr emergency)
'fOTAL NET WATER PRO)'Ec:IS $12,212,100 S13@St133 $20,885.183 512,497,233 13,432,283 $3,619,3)3 $3,665,383 $3,870,433 54,010,483 $4,150,533 $4,290,583 185,s0(),ooo
Source: City of Palo Alto Utilities Department
-27-
Water Rates, Fees and Charges
Rate Setting Process, Water rates are based entirely on the City's costs of purchased water
and operating and maintaining the Water System, Purchased water costs comprise 26% of the
Water System's budget. The City receives annual cost projections from its water wholesaler,
SFPUC. To establish retail rates, these supply costs are added to other expense requirements
related to operation of the water distribution system, including the payment of any outstanding
debt and the funding of reserves,
Historical and Current Rate Increases, The City has historically adjusted water rates as
necessary for each customer class, The most recent increase of 5% was adopted on June 15, 2009
for fiscal year 2010, The following table sets forth a five-year history of water rate increases.
Table 3
HISTORIC WATER RATE INCRllASES FOR ALL CUSTOMER CLASSES
Year
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Source: City of Palo Alto, Utilities Department,
Increase
10,3%
7%
10%
8°1 ...
5%
Water Rate Structure. Water rale schedules are established for residential and non-
residential (commercial and industrial) users. Prior to Fiscal Year 2006-07, water rate structures
consisted of only a variable (volumetric) water usage charge, Since Fiscal Year 2006-07, both
customer classes have both a fixed monthly service charge and a variable water usage charge,
The fixed charge is based on the size of the meter serving the customer. The volumetric
component of the residential rate schedule consists of rate or usage blocks that ascend in price
as consumption increases. The volumetric component of non-residential userS (including public
facilities) does not have usage blocks.
The following tables set forth the Water System rates for the past five fiscal years. Water
Rate Structure (1) shows the volumetric component, and water rate structure (2) sbows the
Fixed Charge Component. Fiscal Year 2oo8-09's rate structure was approved on June 9, 2008.
The rates shown below are per hundred cubic feet (cd) of water usage.
User type and
Monthly Rate Block
Residential:
0-7 cd
over 7 ccf
Industrial/Commercial:
Table 4
WATER RATE STRUCTURE (1)
Volumetric Component
Fiscal Years 2004-05 through 2008-09
(per cd)
2004-05
$3,707/ccf
$4,025/ccf
$4,025/ccf
2005-06
$3.707/cd
$4.025/ccf
$4,025/ccf
2006-07
$4,04/ccf
$4.27/ccf
$4.25/ccf
Source: City of Palo Aiio-;-Utilities Department.
·28-
2007-08
$3,949/ccf
$4.S10/ccf
$4,341/ccf
2008-09
$3.949/ccf
$5.164/ccf
$4.697/ccf
Table 5
WATER RATE STRUCTURE (2)
Fixed Charge Component
In Effect Since Fiscal Year 2007·08
(per meter)
Meter Size
5/S-inch meter
3/4 inch meter
1 inch meter
11/2 inch meter
2-jnch meter
3-lnch meter
4-inch meter
6~inch meter
8-inch meter
lO-lnch meter
Source: City of Palo Alto, Utilities Department.
Monthly Customer
Charge ($)
5.00
5.00
6.50
12.27
19.37
77.65
130.60
260.43
383.67
383.67
Projected Rates. The City's water rates will increase by 5% in fiscal year 2009-10 and are
projected to increase by 7%, 8%, 9% and 9% per year for each of the following 4 years,
respectively. These projected rate increases could change depending on the future projections,
and will largely depend on the future costs of purchased water.
Comparative Monthly Water Rates. The table below shows comparative monthly
residential water bills for a usage rate of 14 hundred cubic feet by water suppliers serving
neighboring County communities for fiscal year 2008-09.
Table 6
COMPARATIVE RATES FOR AVERAGE MONTHLY RESIDENTIAL SERVICE
Fiscal Year 2008-09
Water Provider
Redwood City
Mountain View
Palo Alto
Santa Clara
Menlo Park
Average exduding Palo Alto
Source: City of Palo Alto, Utilities Department.
Average
Monthly Rate [lJ
$50.72
$43.54
$68.79
$32.27
$54.28
$45.20
[11 Represents rate for typical residential users based on consumption of 14 cd plus a service chal'ge for a 5/8"
meter.
Water Demand and Customer Base
On average, the City's water customers consume 11.3 million gallons of water per day.
However, demand rises and falls depending on the season, with the summer months showing
high consumption and the fall and winter months lower consumption. In fiscal year 2008-09, the
Water System sold approximately 5,533,352 cubic feet of water to approximately 19,359 users.
(This amount is lower than water purchased from the SFruc due to water losses in the storage
and transmi",~ion systems, billing period differences and unmetered water uses.)
-29-
The following table sets forth a five-year history of the number of accounts for the Water
System.
Table 7
NUMBER OF ACCOUNTS
As of June 30, 2004-05 through 2008-09
Fiscal
Year
2004-05
2005-06
2006-07
2007-08
2008-09 •
Source: City of Palo Alto, Utilities Department.
"Estimated
Number of
Accounts
19,208
19,347
19,406
19,336
19,359
The following table shows billing amounts, water consumption in hundred cubic feet by
customer type, and water consumption as a percentage of total consumption by type of
customer for active water accounts during fiscal year 2008-09.
Table 8
SUMMARY OF WATER ACCOUNTS AND USAGE BY USER TYPE
Fiscal Year 2008-09'
(Doilars in Thousands)
_...... User Type
Single Family Residence-s---
Aparhnents
Commercial/Industrial
Other
Total
Number of
Accounts
14,727
2,232
2,005
395
19,359
Source: City of Palo Alto, Utilities Department,
·Estimated
Billings
$12,561
4,149
7,863
2,451
$27,024
-30-
Consumption
(in ccf)
2,567,054
841,806
1,614,605
509,887
5,533,352
Consumption
as Percent
of Total
46.4%
15.2%
29.2%
9,2%
100.0%
Largest Water Customers. For 2008, total cd sales were 5.6 million, and total sales
revenues were $27.1 million. The ten largest customers accounted for approximately 18% of
total sales (1.0 mil cd) and 17.7% of total water revenue ($4.8 million). The largest customer
accounts for 5.6% of total sales (317 thousand cd) and 5.6% of total water revenue ($1.5 mil).
The smallest customer accounts for .7% of total sales (41 thousand cd) and .7% of total water
revenue ($191 thousand).
The following tables lists the ten largest customers of the Water System for fiscal year
2007-08:
Primary
Rank Business Activity
1 Government
2 Medical
3 Recreation
4 Education
5 Medica!
6 Retail
7 High Tech
8 High Tech
9 High Tech
10 High Tech
Top Ten Total
System Total
Table 9
TEN LARGEST CUSTOMERS
Fiscal Year 2008-09
Percent
Billings of Tota!
$1,510,714
815,012 3.00
461,530 1.70
443,019 1.63
415,539 1.53
312,234 1.15
235,503 0.87
231,761 0.85
194,127 0.71
191.754 0.71
4,811,192 12.2056
27,177,604
SOUl'ce: City of Palo Alto, Utilities Depat'tment.
Management Discussion of Operations
Consumption Percent
(in cd) of To!al
316,766 5.61
176,849 3.13
100,489 1.78
91,281 1.62
89,410 1.59
62,409 1.11
49,450 0.88
48,251 0.85
42,070 0.75
~Al,Q43 J1..Zl 1,018,018 18.05
5,645,037
Utilities Strategic Plan. The City continues to focus on providing a high quality and
reliable source of water for its residents and businesses. The four key objectives in the Updated
Utilities Strategic Plan that the City Council approved in 2005 are: (1) Enhance customer
satisfaction and utility infrastructure; (2) employ balanced envirorunental solutions; (3) provide
fair and reasonable returns to the City and competitive rates to customers through municipal
ownership, and (4) ensure a safe and engaged workforce. Based on these objectives, seven
separate strategies provide a focus for the Utilities Department to meet these objectives while
providing flexibility to succeed in a changing environment. The Utilities Strategic Plan is
applicable to Water, Gas, Electric, Wastewater Collection, and Fiber Optics operations.
Water Supply. With regard to water supply, the City's wholesale supplier, the SFPUC,
has provided rate projections indicating that the City's wholesale costs will steadily increase
over the next six years. This is due to the construction of seismic upgrades to the SFPUC water
delivery system. These costs will be borne by the City and County of San Francisco as well as
the SFPUC's wholesale customers, including the City.
Sales Revenues. Retail water sales revenue during the past five years grew from $13.3
million in fiscal year 2004-05 to $15.4 million in fiscal year 2008-09. This represents an annual
growth rate of 3% over this period. Water rates did not change in fiscal year 2005-06. In fiscal
year 2009-10, water retail sales revenue is projected to increase 5% to recover rising wholesale
purchase costs and distribution operating costs, including debt service on the 2009 Bonds.
Between fiscal year 2009-10 and fiscal year 2013-14, retail water rates are projected to by 7%, 8%,
9% and 9% annually to offset rising wholesale water purchase costs.
-31-
Rate Stabilization Reserves. [NOTE, THIS SECTION NEEDS TO BE UPDATED ONCE
ASD UPDATES THE FINANCIAL TABLE BELOW RE PROJECTED REVENUES AND
EXPENSES.] The Water Fund Rate Stabilization Reserve (W-RSR) balance is budgeted to be $9.2
million in Fiscal Year 2009-10 which is slightly over the maximum guideline level of $8.7
million. It is expected that W-RSR will decrease to $9.3 million in Fiscal Year 2010-11 and meet
the Council established guidelines level for that year. The W-RSR is expected to continue to
decrease to $8.6 million by Fiscal Year 2013-14, which is below the maximum and above the
minimum guideline levels for the W-RSR. See" AVAILABLE RESERVES" for a discussion of the
minimum and maximum guideline levels established for each reserve fund.
Capital Improvements. To improve the operation and reliability of the City's water
distribution system, the City's Capital Improvement Program will be accelerated over the next
five years. See "THE WATER SYSTEM-Capital Improvement Program Summary" above.
The projects identified will ensure that water is available during emergencies and plays
a vital role in development of the City's emergency response plans. Emergency Planning was
identified as one of the Council's top four priorities for 2006 and 2007. These projects also
supports Comprehensive Plan Goal N-10, Protection of Life and Property from Natural
Hazards, Including Earthquake, Landslide, Flooding and Fire.
-32-
Balance Sheet
The following table sets forth the balance sheets of the Water System for the last five
fiscal years. These numbers are excerpted from the audited financial statements of the City
which were prepared in accordance with generally accepted accounting principles.
Table 10
BALANCE SHEET
Fiscal Years Ended June 30, 2005 through 2009
(Dollars in Thousands)
2004-05 2005-06 2006-07 2007-08 2008-09
ASs,ll,TS
CURRENT ASSETS:
Cash and Investments 20,868 17,872 20,201 24,424
Accounts Receivable (Net) 3,112 3,191 3,490 4,233
Interest Receivable 239 220 251 272
TOTAL CURRENT ASSETS 24,219 23,942 28,929
NON-CURRENT ASSETS:
Property, Plant and Equipment (net) 48,685 52,960 56,636 59,426
TOTAL ASSETS 72,904 74,463 80,.578 88,355
LIABILITIES
Accounts Payable and Accrued Liabilities 11,583 11,601 11,068 11,449
Accrued Salaries and Benefits 207 58 192 81
TOTAL LIABILITIES 11,790 11,260 11,.530
EUNPllOUITY
Contributed Capital 8,614 8,614
Retained Earnings 52,.500 54,190 69,318 76,825
TOTAL FUND EQUITY 61,114 62,804 69,318 76,825
TOTAL LIABILITIES AND FUND EQUITY 72,904 74,463 80,578 88,355
Source: CitY'(;ip.lo Alto Audited Financial Statements, 2005-2008. Figures lor 2009 are unaudited.
-33-
Historical Operating Results
The following table is a summary of operating results and debt service coverage of the
Water System for the last five fiscal years. These results have been derived from the audited
financial statements of the City for the four fiscal years ended June 30, 2008. The data for the
fiscal year ended June 30, 2009, is unaudited. See APPENDIX C-"COMPREHENSIVE
ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30,
2008."
Table 11
SUMMARY STATEMENTOF HISTORICAL REVENUES, EXPENSES
AND CHANGES IN RETAINED EARNINGS
Fiscal Years 2004-05 through 2008-09
(Dollars in Thousands)
OPERATING REVENUES:
Sales of Utilities:
Customers
City Departments
Service Coru"lcction Olarge & Miscellaneous
Other Operating Revenues
Total OperaUng Revenues
OPERATING EXPENSES:
Purchase of Utilities
Administration and General
Engineering (Operating)
Resource Martagement
Operations and Maintenance
Rent
Depreciation and Amortization
Total Operating Expenses
Operating Income (Loss)
OPERATING INCOME
NON-OPERATING REVENUES
(EXPENSES):
Return on [nvestment
Contributions
Loss 011 Disposal of Fixed Assets
Net Non-operating Revenues (Expenses)
INCQ.\1E (LOSS) BEFORE OPERATING
TRANSFERS
Operating Transfers In
Operating Transfers (Out)
Net Revenue
1995 Bonds (Water System Portion)
Net Revenues Available for Debt Service
2002 Bonds (Water System Portion)
Debt SeIvice Coverage
Source: City of Palo Alto
2004-05 2005-06
$19,630 $19,506
1,017 924
154 228
240 179
21,041 20,837
6,719 6,472
2,362 2,776
189 195
372 464
3,080 2,875
1,368 1,506
916 995
15,006 15,283
6,035 5,554
738 251
(15) (148)
723 103
6,758 5,657
29 20
(3,987)
1,690
24,370 70,479
·34·
2006-07
$21,826
1,088
315
266
23,495
7,805
2,247
262
396
2,702
1,781
1,132
16,325
7,170
626
1,168
8,338
1,153
(2,977)
6,514
40,918
2007-08
$24,558
1,298
409
245
8,363
2,741
359
350
3,561
1,788
1,134
18,296
8,214
1,844
(109)
1,735
10,356
200
(3,049)
7,507
36,514
2008-09
Projected Operating Results and Debt Service Coverage
The following table is a summary of the projected operating results of the Water System
for the fiscal years ending June 30, 2010, through June 30, 2014. The financial forecast represents
the City's estimate of projected financial results based upon its judgment of the most probable
occurrence of certain important future events. Actual operating results achieved during the
projection period may vary from those presented in the forecast and such variations may be
material.
Table 12
SUMMARY STATEMENT OF REVENUES, EXPENSES AND FUND BALANCES
Fiscal Years 2007-08 through 2013-14
(Dollars In Thousands)
2008 2009 2010 21111 2012 2013 2Q14
OPERATING REVENUES
Sates of Water 25,856 26,606 28,810 30,835 33,323 36,345 39,656
Connection Fees 409 886 920 931 942 886 897
Other Opel'ating Revenues (&
Operating Transfers In?) 445 97 97 97 97 97 97
Total Operating Revenues 26,710 27,589 29,827 34,362 37,328
NON-OPBRA TlNG
REVENUES
Interest I Return on Investment 1,844 1m5 1,161 646 574 561 550
Transfers from Rate SlabiIb:ation
Fund 3,166 4,069 110 545
Total Non·operating Revenues 5,010 5,()84 684 1~106
TOTAL GROSS REVENUES 31,720 32,673 30,988 32,509 35,046 38,434 41,224
OPERATING EXPENSES
Purcliase of Water 8,363 8,701 10,354 12,067 14,028 16.907 19,059
Admin & General I Enginecrlng
J Resource Mgmt I O&M 7,011 9,423 9,801 10,193 10,600 11,024
Rent 1,788 1,919 1,977 2,036 2,097 2,160
Total Operations &
Maintenance 17,162 20,043 22,132 24,296 26,725 30,091 32,749
NON-OPERATING EXPENSES
General Fund I Other Transfl'ts 3,049 3,798 749 749 749
TOTAL MAINTENANCE AND
OPERATION COSTS 20,211 23,841 ~ .. 22,881 27,474 30,840
NET REVENUES 8,832 8,107 7,'572 7,594
2002 DEBT SERVICE 778 778 778 778 778 77B 778
2009 DEBT SERVICE 952 2,376 2,372 2,374 2,375
TOTAL DEBT SERVICE
COVERAGE RATIO 14.79x 11.35x 4,69x 2,37x 2.40x 2.41x 2.45x
NET REVENUES AFl1lR DEBT
SERVICE 10,731 8,054 6,377 4,310 4,422 4A42 4,573
RESERVE BALANCE AS OF
YEAREND
Plant Replacement 1,595 1,000 1,000 1,000 1,000 1,000 1,000
Rate Stabilization 13,111 9,042 9,248 9,284 9,174 8,629 8,605
Tolal Reserve Balances 14,706 10,042 10,248 10,284-10,174 9,629 9,605
Source: City 01 Palo Alto
-35-
AVAILABLE RESERVES
Set forth below is information, including historical balances, policies and minimum,
maximum and target guidelines with respect to each of the Available Reserves.
The City's Rate Stabilization Reserves For Its Enterprise Funds
Utility Reserve Policy. Based upon a comprehensive review of utility reserves, the City
Council adopted a utility reserve policy in 1993 that defined the role of reserves, established a
rate stabilization reserve for each utility fund, and identified reserve guidelines. Rate
stabilization reserves were created to cover a number of contingencies, induding the need to
supplement rates to cover distribution expenses and commodity supply costs.
The 1993 reServe policy declared that reserves should be established to finance
"extraordinary one-time contingencies." The policy further stated that reserves should not be
used to solve long-term financial problems; rather, rates should finance current operating,
capital and financial obligations which are of an ongoing nature. In addition, reserves should
not be funded to cover major catastrophic disasters; the City maintains insurance for that
purpose and other governmental resources can be made available in case of disaster. Finally, if
current operating costs exceed current revenues, reserves should be used to cover increased
operating costs in the short run, while allowing rates to gradually increase over a reasonable
period to meet such cost levels. Thus, the underlying goal of the reserves is to provide rate
stability.
Based upon a Council approved methodology, reserve level guidelines (minimum and
maximum) are set annually to allow reserves to adjust up or down without unduly falling
below the minimum or above the maximum. On occasion, reserves have exceeded the
maximum level for a short time. Reserve levels are then adjusted in subsequent years, usually
through rate changes. The decision to set aside more or less than the minimum or maximum is
based upon an assessment of the uncertainties and financial risk facing the utilities. The City
notes that reserve levels in excess of "maximum" levels are considered to be consistent with its
reserve guidelines.
The City Council is notified in the Midyear Financial Report, as well as in the Fourth
Quarter Financial Report, of any existing or potential issues known at that time with respect to
the reserves. In the absence of direction from the City Council to immediately address
disposition of a reserve surplus, the disposition will be addressed in the following year's budget
cycle. Disposition may include a rate reduction, customer rebate, application of the surplus in
satisfaction of a financial obligation or, if justified, maintenance of the reserve in its surplus
position for a specific period of time. The City's policy is to require City Council action to use
the reserve; as a result, utility managemt.'I1t is held accountable for operating efficiently and the
City Council makes the decisions regarding the use of reserves.
Since 1993, deregulation of the electric and gas industries has progressed rapidly. In
1997, the City Council approved several policies related to electric deregulation, including
recovery of stranded costs and providing customer choice of supplier and marketing sales to
customers residing outside the City's service territory. See " AVAILABLE RESERVES-
Calaveras-Stranded Costs Reserve" below. in 1998, Council split the Gas and Electric Fund Rate
Stabilization Reserves (RSRs) into Supply and Distribution RSRs when the retail rates in those
funds were unbundled into supply and distribution components of the rate. In 1999, the City
took similar action by approving a .Direct Access Plan for the Gas System. In 2001, 2003, 2007,
and in 2009 Council made various revisions to the guidelines for the Electric and Gas Supply
and Distribution RSRs and Water and Wastewater RSRs.
-36-
Available Reserve Balances History. The table below sets forth a summary of the amounts
on hand in the Available Reserves for the prior three fiscal years, debt service of the outstanding
bonds with a claim on Available Reserves, and resulting debt service coverage ratios.
Table 13
AVAILABLE RESERVE BALANCES
Fiscal Years 2007·2009
(Dollars in Tbousands)
Rate Stabilization Reserve I'und 2006-07 2007-08 2008-09
Water System
Electric System (Distribution)
Gas System (Distribution)
Electric System (Supply)
Gas System (Supply)
Calaveras Reserve (for rate increase to
pay debt service)
Total:
Debt Service
Debt Service Coverage Ratio
Source: City 01 Palo Alto.
Rate Stabilization Reserve for the Water System
-~ $ 13,I:l1
12,281 8,109
3,868 4,734
64,542 47,309
2,801 7,399
$160,798 $151,059
780 780
The Water System rate stabilization reserve fund is maintained on the basis of the
following guidelines;
Minimum Guideline Level:
Maximunl Guideline Level:
15 percent of budgeted sales revenue for
that year plus estimated annual net sales
revenue decline due to abnormal weather
twice the minimwn level
The table below sets forth actual sales revenue, policy guidelines and actual levels of the
Water System rate stabilization reserve as of June 30 for the last five fiscal years:
Tahle14
RATE STABILIZATION RESERVE FOR THE WATER SYSTEM
Fisc.1 Years 2005·2009
(Dollars in Thousands)
2004-05 2005·06 2006-07 2007-08
Actual Sales Revenue $20,771 $20,524 $23,044 $25,975
Minimum Level 7,106 7,435 7,108 4,942
Maximum Level 14,211 14,869 14,215 12~156
Actual Reserve Level 5,217 4,143 16,276 13,111
Source: City of Palo Alto.
2008-09
See also APPENDIX C-"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE
CITY FOR THE FISCAL YEAR ENDED JUNE 30, 200S."
-37-
Rate Stabilization Reserves for the Electric System
Beginning in 1993, the Electric System had a single Rate Stabilization Reserve that was
funded from rate revenues. For fiscal year 2008-09, the balance in the Electric System Rate
Stabilization Reserve was approximately $ as of June 30.
Following electric deregulation in 1997, the City Council unbundled electric rates into
the four cost components of Distribution, Power Supply, Transition Cost Recovery and Public
Benefits. The unbundling of rate charges addressed, among other things, a need for the Electric
System to account for its distribution business separately from its supply business in a
competitive environment. Because of this need to recover costs and capture revenues for
specific business activities, the rate stabilization reserve for the Electric System was replaced
with separate reserves for distribution services and supply services. The City Council also
established a Public Benefits Reserve in the Electric Fund to reserve revenues collected but
unspent for Public Benefit programs; however, the Public Benefits Reserve is not pledged as an
Available Reserve pursuant to the Indenture.
At the time Council created the Electric Supply Rate Stabilization Reserves (E-SRSR) in
1998, the minimum reserve level guideline was set at 30 percent of the budgeted commodity
sales revenue. The maximum guideline level was twice the minimum and the target was the
midpoint between the minimum and maximum. In 2001, Council revised the guidelines for the
E-RSR so that the minimum reserve level guideline was set at 40 percent of the budgeted supply
purchase cost. The maximum guideline level was twice the minimum and the target was the
midpoint between the minimum and maximum. In 2003, Council revised the guidelines so that
the maximum reserve level guideline was set at 103 percerit of the supply purchases costs for
Electric Supply. As before, the minimum guideline level was twice the maximum guideline
level. In 2007, Council again revised the guidelines so that the minimum reserve level guideline
was set at 50 percent of the supply purchase cost for the E-SRSR. The maximum guideline level
was twice the minimum guideline level.
Similarly for the Electric Distribution Rate Stabilization Reserves, (E-DRSR) the
minimum reserve level guideline was set at 15 percent of the distribution sales revenue in 1998.
The maximum guideline level was twice the minimum and the target was the midpoint
between the minimum and maximum. In 2003, Council revised the guidelines of the E-DRSR so
that the minimum reserve level guideline was set at 19 percent of the distribution sales revenue.
As before, the maximum guideline level was twice the minimum and the target was the
midpoint between the minimum and maximum. In 2007, Council again revised the guidelines
for the E-DRSR setting the minimum guideline level to 20% of sales revenue and the maximum
guideline level to 50% of sales revenue. And finally in 2009, in the Council's most recent
revision to the guidelines, E-DRSR minimum and maximum guidelines were set at 15% and
30% of sales respectively for Fiscal Year 2009-10 and beyond.
The current target guidelines for the Electric System Supply Rate Stabilization Reserve
are set forth below:
Minimum Guideline Level: 40% of budgeted purchase costs
M!'!ximum Guideline Level: twice the minimum level
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The current target guidelines for the Electric System Distribution Rate Stabilization
Reserve are set forth below:
Minimum Guideline Leyel: 15% of budgeted distribution sales revenue
Ma~iIDum Guideline Level: twice the minimum level
The table below sets forth actual sales revenue, policy guidelines and actual levels of the
Electric System Distribution Rate Stabilization Reserve and Supply Rate Stabilization Reserve as
of June 30 for the past five years:
Table 15
RATE STABILIZATION RESERVE FOR THE ELECTRIC SYSTEM
Fiscal Years 2005-2009
Actual Sales Revenue
Minimum Level
Maximum Level
Actual Reserve Level
Source: City of Palo Alto,
(Dollars in Thousands)
2004-05
$74,822
24,321
48,641
57,718
2005-06
$84,961
32,669
65,338
76,823
2006-07
$85,417
33,900
67,799
71,111
2007-08
490,833
35,913
75,147
61,277
2008-09
See also APPENDIX C-"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE
CITY FOR THE FISCAL YEAR ENDED JUNE 30,2008."
Rate Stabilization Reserves for the Gas System
In 1998, the City Council separated its Single rate stabilization reserve for the Gas System
into two separate reserves as Supply and Distribution for the same deregulation-related reasons
as it had done previously with the Electrical System.
At the time City Council created the Gas Supply Rate Stabilization Reserves (G-SRSR) in
1998, the minimum reserve level guideline was set at 20 percent of the budgeted commodity
sales revenue, The maximum guideline level was twice the minimum and the target was the
midpoint between the minimum and maximum, In 2001, Council revised the guidelines for the
G-RSR so that the minimum reserve level guideline was set at 20 percent of the budgeted
supply purchase cost. The maximum guideline level was twice the minimum and the target was
the midpoint between the minimum and maximum. In 2003, Council revised the guidelines so
that the maximum reserve level guideline was set at 75 percent of the supply purchases costs for
Gas Supply. As before, the minimum guideline level was twice the maximum guideline leveL In
2007, Council again revised the guidelines so that the minimum reserve level guideline WaS set
at 35 percent of the supply purchase cost for the G-SRSR. The maximum guideline level was
twice the minimum guideline leveL And finally in 2009, in the Council's most recent revision to
the guidelines, G-SRSR minimum and maximum guidelines were set at 25 percent and 50
percent of gas supply purchase costs respectively,
Similarly for the Gas Distribution Rate Stabilization Reserves, (G-DRSR) the minimum
reserve level guideline was set at 20 percent of the distribution sales revenue in 1998. The
maximum guideline level was, twice the minimum and the target was the midpoint between the
minimum and maximum. In 2007, Council again revised the guidelines for the G-DRSR setting
the minimum guideline level to 20 percent of sales revenue and the maximum guideline level to
,50 percent of sales revenue. And finally in 2009, in the Council's final revision to the guidelines,
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G-DRSR minimum and maximum guidelines were set at 15 percent and 30 percent of sales
respectively.
The current target guidelines for the Gas System Supply Rate Stabilization Reserve are
set forth below:
Minimum Guideline Level 20% of budgeted purchase costs
Maximum Guideline Ley.o.!.: twice the minimum level
The current target guidelines for the Gas System Distribution Rate Stabilization Reserve
are set forth below:
Minimum Guideline Level: 20% of budgeted sales revenue
Maximum G\c!id!l!ine Level: twice the minimum level
Based on the guidelines applicable in fiscal year ___ , the Gas System guidelines and
actual reserve levels are set forth below:
Table 16
RATE STABILIZATION RESERVE FOR THE GAS TREATMENT SYSTEM
Fiscal Years 2005·2009
(Dollars in Thousands)
2004·05 2005-06 2006·07 2007·08
Actual Sales Revenue $36,433 $41,457 $48,100
Minimum Level 8,393 10,572 13,145 13,150
Maximum Level 16,786 21,145 26,289 29,606
Actual Reserve Level 7,844 6,669 8,406 12,133
---------------~ ............. -
Source: City of Palo Alto.
2008-09
See also APPENDIX C-"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE
CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2008."
Calaveras-Stranded Costs Reserve
In 1983, the City Council established the Calaveras Reserve in the Electric Fund to help
defray a portion of the annual debt service costs associated with the Calaveras Hydroelectric
Project, which wa~ put in service at that time. As originally established, the Calaveras Reserve
. policy did not provide for a target balance and depletion of the reserve was anticipated by 2002.
California Assembly Bill 1890 was adopted in 1996, which provided for the deregulation
of California's electric industry effective January 1, 1998. A key element of deregulation was the
provision for Direct Access, which would allow electric customers to choose their electric
commodity supplier. The City, along with other California utilities, were faced with the
prospect of losing customers and load to Direct Access and being saddled with expensive
generation assets purchased or built to serve these customers. In response to such risk, Pacific
Gas and Electric Company and other investor-and municipally-owned utilities established
stranded cost surcharges to collect funds from ratepayers to cover the amount that these
uneconomic assets were projected to cost above their market value in the future (Le., "stranded
cost").
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Council changed the purpose of the Calaveras Reserve in 1996 and authorized
collections from electric ratepayers to cover the amount that certain electric assets' costs were
projected to be higher than their market value in the future (Le., stranded cost). In addition,
Council approved a new Calaveras Reserve policy linking the reserve balance to an amount
sufficient to cover potential stranded costs. The assets identified as stranded included the
Seattle City Light Exchange contract, the Calaveras Hydroelectric Project, and the California-
Oregon Transmission Project (COTP). In 1999, Council ceased collecting funds for these
stranded costs and established the Calaveras Reserve Target and Guidelines with a schedule to
draw down the funds and manage electric rates through the end of FY 2032-33.
In 1997, Council revised the reserve target level to cover above-market, or "stranded,"
costs to $93 million by December 31, 2001 to be collected from a stranded cost surcharge
imposed on electric rates. When the Calaveras Reserve balance reached $71 million in 1999,
stranded costs were deemed fully collected. At that time, Council authorized the cessation of
the collection of the stranded cost surcharge and established the Calaveras Reserve Target and
Guidelines with a schedule to drawdown the funds and manage electric rates through transfers
from the Calaveras Reserve to the Electric Supply Rate Stabilization Reserve (E-SRSR) through
the end of Fiscal Year (FY) 2032-33, when the Calaveras Reserve would be exhausted.
In 2001, the California electric industry faced an energy crisis triggering wholesale
power price spikes and rolling blackouts throughout the state. The crisis was blamed on poor
deregulation market design and market manipulation by energy suppliers. As a result, Direct
Access was suspended in California for the investor-owned utilities and subsequently, the City
suspended its Direct Access program. Further, as a result of changing market conditions and the
assignment of certain electric assets, the estimate of the City's stranded cost is lower now than
when stranded cost collections stopped in 1999. Since then, electric market prices have
increased significantly, reducing the stranded cost associated with the Calaveras Hydroelectric
Project.
On June 15, 2009, the Council adopted new guidelines to manage the Calaveras Reserve
through changes to the existing Calaveras Reserve Target and Guidelines as follows:
• Eliminate the existing Calaveras Reserve drawdown schedule;
• Require the calculation of the stranded costs for the electric supply portfolio during the
annual budget process for the upcoming budget year(s) and set the minimum transfer
from the Calaveras Reserve to the Electric Supply Operating Budget equal to this
amount;
• Require the calculation of the stranded costs for the long-term (until 2032 when
Calaveras debt is paid off) of the electric supply portfolio during the annual budget
process and ensure that the Calaveras Reserve balance will be sufficient to cover this
amount;
• Calculate stranded cost based on the above market cost of the Calaveras Hydroelectric
Project and the California Oregon Transmission Project; and
• To the extent that there are funds available in excess of long-term stranded cost needs,
staff will work with the UAC to identify and recommend projects for Council
consideration and approval. Such projects shall be to the benefit of electric ratepayers.
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The approximate balance of the Calaveras Reserve for the last five fiscal years is set forth
below:
Table 17
CALAVERAS-STRANDED COSTS RESERVE
Fiscal Years 2005-2009
(Dollars in Thousands)
2004-05 2005-06 2006-07 2007·08
Balance 72,963 73,163 71,180 70,397
Source: City of Palo AUo Audited Financial Statements.
2008-09
See also APPENDIX C-"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE
CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2008."
CONSTITUTIONAL LIMITATIONS ON TAXES AND WATER RATES AND CHARGES
Article XIIIA
Article XilIA of the State CQnstitution provides that the maximum ad valorem tax on real
property cannot exceed 1% of the "full cash value," which is defined as "the county assessor's
valuation of real property as shown on the 1975-76 tax bill under 'full cash value' or, thereafter,
the appraised value of real property when purchased, newly constructed, or a change in
ownership has occurred after the 1975 assessment", subject to exceptions for certain
circumstances of transfer or reconstruction and except with respect to certain voter approved
debt. The "full cash value" is subject to annual adjustment to reflect increases, not to exceed 2%
per year, or decreases in the consumer price index or comparable local data, or to reflect
reduction in property value caused by damage, destruction Or other factors.
Article XIIIA requires a vote of two-thirds of the qualified electorate to impose special
taxes, while generally precluding the imposition of any additional ad valorem, sales or
transaction tax on real property. As amended, Article XIIIA exempts from the 1% tax limitation
any taxes above that level required to pay debt service on certain voter-approved general
obligation bonds for the acquisition or improvement of real property. In addition, Article XIIIA
requires the approval of two-thirds of all members of the State Legislature to change any State
laws resulting in increased tax revenues.
Under California law, any fee which exceeds the reasonable cost of providing the service
for which the fee is charged is a "special tax," which under Article XIIIA must be authorized by
a two-thirds vote of the electorate. Accordingly, if a portion of the District's water or
wastewater user rates or Capacity Fees were determined by a court to exceed the reasonable
cost of providing service, the District would not be permitted to continue to collect that portion
unless it were authorized to do so by a two-thirds majority of the voles cast in an election to
authorize the collection of that portion of the rates or fees. The reasonable cost of providing
wastewater services has been determined by the State Controller to include depreciation and
allowance for the cost of capital improvements. In addition, the California courts have
determined that fees such as capacity fees will not be special taxes if they approximate the
reasonable cost of constructing the water or wastewater capital improvements contemplated by
the local agency imposing the fee. See "THE WATER SYSTEM-Water Rates, Fees and
Charges."
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Article XIIIB
Article XIIIB of the California Constitution limits the annual appropriations of proceeds
of taxes by State and local government entities to the amount of appropriations of the entity for
the prior fiscal year, as adjusted for changes in the cost of living, changes in population and
changes in services rendered by the entity. User fees and charges are considered proceeds of
taxes only to the extent they exceed the reasonable costs incurred by a govemmental entity in
supplying the goods and services for which such fees and charges are imposed.
To the extent that assessments, fee and charges collected by the City are used to pay the
costs of maintaining and operating the Water System and payments due on the 2009 Bonds
(including the funding of the Reserve Account), the City believes that such moneys are not
subject to the annual appropriations limit of Article XIIlB.
Articles XUIC and XUIO
On November 5, 1996, the voters of the State approved Proposition 218, a constitutional
initiative, entitled the "Right to Vote on Taxes Act" ("Proposition 218"). Proposition 218 added
Articles XIIIC and xmo to the California Constitution and contained a number of interrelated
provisions affecting the ability of local governments, including the City, to levy and collect both
existing and future taxes, assessments, fees and charges.
Section 1 of Article XIIIC requires majority voter approval for the imposition, extension
or increase of general taxes and Section 2 thereof requires two thirds voter approval for the
imposition, extension or increase of special taxes. These voter approval requirements of Article
XIIIC reduce the flexibility of the City to raise revenues by the levy of general or special taxes
and, given such voter approval requirements, no assurance can be given that the City will be
able to enact, impose, extend or increase any such taxes in the future to meet increased
expenditure requirements.
Section 3 of Article XIIIC expressly extends the initiative power to give voters the power
to reduce or repeal local taxes, assessments, fees and charges, regardless of the date such taxes,
assessments, fees or charges were imposed. Section 3 expands the initiative power to include
reducing or repealing assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the initiative power. This
extension of the initiative power is not limited by the terms of Article XIIIC to fees imposed
after November 6, 1996, the effective date of Proposition 218, and absent other legal authority
could result in the reduction in any existing taxes, assessments or fees and charges imposed
prior to November 6, 1996.
"Fees" and "charges" are not expressly defined in Article XIIIC or in SB 919, the
Proposition 218 Omnibus Implementation Act enacted in 1997 to prescribe specific procedures
and parameters for locai jurisdictions in complying with Article XIIIC and Article XIIIO ("SB
919"). However, on July 24, 2006, the California Supreme Court ruled in Bighorn-Desert View
Water Agency v. Virji/ (Kelley) (the "Bighorn Decision") that charges for ongoing water delivery
are property-related fees and charges within the meaning of Article XIlID and are also fees or
charges within the meaning of SeCtion 3 of Article XIIIC. The California Supreme Court held
that such water service charges may, therefore, be reduced or repealed through a local voter
initiative pursuant to Section 3 of Article xmc.
In the Bighorn Decision, the Supreme Court did state that nothing in Section 3 of Article
XIIlC authorizes initiative measures that impose voter-approval requirements for future
increases in fees or charges for water delivery. The Supreme Court stated that water providers
may determine rates and charges upon proper action of the governing body and that the
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governing body may increase a charge which was not affected by a prior initiative or impose an
entirely new charge.
The Supreme Court further stated in the Bighorn Decision that it was not holding that the
initiative power is free of all limitations and was not determining whether the initiative power
is subject to the statlltory provision requiring that water service charges be set at a level that will
pay debt service on bonded debt and operating expenses. Such initiative power could be sl\bject
to the limitations imposed on the impairment of contracts under the contract clallse of the
United Slates Constitution. Additionally, SB 919 provides that the initiative power provided for
in Proposition 218 "shall not be construed to mean that any owner or beneficial owner of a
municipal security, purchased before or after [the effective date of Proposition 218] assumes the
risk of. or in any way consents to, any action by initiative measure that constitutes an
impairment of contractual rights" protected by the United States Constitution. No assurance
can be given that the voters of the City will not, in the future, approve initiatives which repeal,
reduce or prohibit the future imposition or increase of assessments, fees or charges, including
the City's water service fees and charges, which are the source of Net Revenues pledged to the
payment of debt service on the 2009 Bonds, the applicable potion of the 2002 or any additional
Parity Bonds.
Notwithstanding the fact that water service charges may be subject to reduction or
repeal by voter initiative undertaken pursuant to Section 3 of Article XIIIC, the City has
covenanted to levy and charge rates which meet the requirements of the Indenture in
accordance with applicable law.
Article XmD defines a "fee" or "charge" as any levy other than an ad valorem tax, special
tax, or assessment imposed upon a parcel or upon a person as an incident of property
ownership, including a user fee or charge for a property-related service. A "property-related
service" is defined as "a public service having a direct relationship to a property ownership." In
the Bighorn Decision, the California Supreme Court held that a public water agency's charges for
ongoing water delivery are fees and charges within the meaning of Article XIIID. Article XmD
requires that any agency imposing or increasing any property-related fee or charge must
provide written notice thereof to the record owner of each identified parcel upon which such fee
or charge is to be imposed and must conduct a public hearing with respect thereto. The
proposed fee or charge may not be imposed or increased if a majority of owners of the
identified parcels file written protests against it. As a result, the local government's ability to
increase such fee or charge may be limited by a majority protest.
The City'S water charge is a commodity charge based on the volume of water consumed.
The City has ratified prior water rate measures and otherwise complied with the applicable
notice and protest procedures of Article XmD for its current water rates and charges. There has
not been nor is there any pending challenge to any of the City's water fees and charges
approved since the effective date of Proposition 218. While the City Attorney is of the opinion,
based upon the judicial precedent in place during the period of these rate increases, that a
reviewing court could reasonably uphold the validity of those increases, neither the City nor the
City Attorney can predict with certainty the outcome of a challenge to the increases in the City's
water rates and charges that were not approved in accordance with the notice and hearing
requirements of Article XIIID jf one were brought.
In addition, Article XmD also includes a number of limitations applicable to existing
fees and charges induding provisions to the effect that (i) revenues derived from the fee or
charge shall not exceed the funds required to provide the property-related service; (ii) such
revenues shall not be used for any purpose other than that for which the fee or charge was
imposed; (iii) the amount of a fee or charge imposed upon any parcel or person as an incident of
property ownership shall not exceed the proportional cost of the service attributable to the
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parcel; and (iv) no such fee or charge may be imposed for a service unless that service is actually
used by, or immediately available to, the owner of the property in question. Property-related
fees or charges based on potential or future use of a service are not permitted.
Article XIIID establishes procedural requirements for the imposition of assessments,
which are defined as any charge upon real property for a special benefit conferred upon the real
property. Standby charges are classified as assessments. Procedural requirements for
assessments under Article XIIID include conducting a public hearing and mailed protest
procedure, with notice to the record owner of each parcel subject to the assessment. The
assessment may not be imposed if a majority of the ballots returned oppose the assessment,
with each ballot weighted according to the proportional financial obligation of the affected
parcel. To provide guidance to City staff regarding the conduct of Proposition 218 "property-
related fee" protest proceedings, the City Council adopted Resolution No. 4930 on January 16,
2007, establishing additional procedures for submitting protests against proposed increases to
water rates, including the provision of notice of a proposed change in water fees to all owners of
record on each identified parcel and all water customers of the City as reflected in the billing
records of the City at the time the notice is given, and additional procedures for the tabulation
of protests against proposed increases to water rates, including guidelines for determining
when a valid protest has been submitted.
Existing, new or increased assessments are subject to the procedural prOVISIOns of
Proposition 218. However, certain assessments existing on November 6, 1996, are classified as
exempt from the procedures and approval process of Article XIIID. Expressly exempt
assessments include (i) an assessment imposed exclusively to finance capital costs or
maintenance and operation expenses for sewers, water, flood control and drainage systems, but
subsequent increases are subject to the procedures and approval requirements; (ii) an
assessment imposed pursuant to a petition signed by all affected landowners (but subsequent
increases are subject to the procedural and approval requirements); (iii) assessments, the
proceeds of which are used exclusively to pay bonded indebtedness, where failure to pay
would violate the U.S. Constitution's prohibition against the impairment of contracts; and (iv)
any assessment which has previously received approval by a majority vote of the voters (but
subsequent increases are subject to the procedural and approval requirements).
On July 14, 2008, the California Supreme Court ruled in Silicon Valley Taxpayers
Association, Inc. v. Santa Clara County Open Space Authority (the "SCCOSA Decision") that the
Santa Clara County Open Space Authority's county-wide assessment which was designed to
fund the acquisition and maintenance of unspecified open-space lands in the County was
invalid under Proposition 218. The Court held that deference should not be accorded to local
agencies when Proposition 218 legislative acts are challenged. Under Proposition 218, courts
must make an independent review of whether the assessment and formation of an assessment
district meet the "special benefit" and proportionality requirements of Article XIIID. Further,
while an assessment will not be invalidated because it confers a benefit upon the public at large,
the "special benefit" must affect the assessed property in a distinct and particular manner not
shared by other parcels and the public at large. Specifically, in the SCCOSA Decision the
assessment did not meet the requirements of a "special benefit" and the assessment was not
proportional to the special benefits conferred. Fin<)lly, the Court held that the Santa Clara Open
Space Authority did not meet the proportionality requirement of Article xmD because it did
not specifically identify the improvements to be financed by the assessment and failed to
sufficiently connect any costs of and benefits received from the open space assessment to the
specific assessed parcels.
The City and the City Attorney are of the opinion that current water fees and charges
that are subject to Proposition 218 comply with the provisions thereof and that the City will
continue to comply with the rate covenant set forth in the Installment Purchase Agreement in
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conformity with the provisions of Article XmD of the California State Constitution. The City
and the City Attorney are also of the opinion that current water capacity fees are not subject to
Proposition 218. Should it become necessary to increase the water fees and charges above
current levels, the City would be required to comply with the requirements of Article XIIlD in
connection with such proposed increase. To date, there have been no legal challenges to water
rate increases implemented by the City pursuant Ie Pl'oposltion 218 or otherwise. It is unclear
whether under existing standards, rates and charges may be established at levels which would
permit deposits to a Rate Stabilization Fund or maintenance of uncommitted cash reserves,
The interpretation and application of Proposition 218 will ultimately be determined by
the courts or through implementing legislation with respect to a number of the matters
described above, and it is not possible at this time to predict with certainty the outcome of such
determination or the nature or scope of any such legislation.
RISK FACTORS RELATING TO THE 2009 BONDS
Payment of principal of and interest on the 2009 Bonds depends primarily upon the
revenues derived from operation of the Water System and, if necessary, from moneys on
deposit in the Available Reserves. Some of the events which could affect the revenues received
by the Water System, as well as issues that could affect the availability of moneys in the
Available Reserves, are set forth below. The following discussion of risks is not meant to be an
exhaustive list of the risks associated with the purchase of the 2009 Bonds and the order in
which the risks are discussed does not necessarily reflect the relative importance of the various
risks.
Limited Obligations
The 2009 Bonds are limited obligations of the City and are not secured by a legal or
equitable pledge or charge or lien upon any property of the City or any of it. income or receipts,
except the Net Revenues. The obligation of the City to pay debt service on the 2009 Bonds from
Net Revenues does not constitute an obligation of the City to levy or pledge any form of
taxation or for which the City has levied or pledged any form of taxation.
The City is obligated under the Indenture to make debt service payments solely from
Net Revenues or from moneys on deposit in the Available Reserves. There is no assuranCe that
the City can succeed in operating the Systems such that the Net Revenues in the future will be
sufficient for that purpose. See also "Balance of the Available Reserves" and "Right to Vote on
Taxes Act" below.
System Expenses
There can be no assurance that the City's expenses for the Systems will be 'consistent
with the descriptions in this Official Statement. Changes in technology, changes in quality
standards, loss of large customers, increased or decreased development, increases in the cost of
operation, or other expenses could require increases in rates or charges in order to comply with
the City's rate covenant in the Indenture.
Limited Recourse on De'fault
Failure by the City to pay debt service on the 2009 Bonds constitutes an event of default
under the Indenture and the Trustee is permitted to pursue remedies at law or in equity to
enforce the City's obligation to make such payments. Although the Trustee ,has the right to
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accelerate the total unpaid principal amount of the debt service on the 2009 Bonds, there is no
assurance that the City would have sufficient funds to pay the accelerated amounts. See also
"Proposition 218" below.
Limitations on Remedies
The ability of the City to comply with its covenants under the Indenture and to generate
Net Revenues sufficient to pay principal of and interest with respect to the 2009 Bonds may be
adversely affected by actions and events outside of the control of the City and may be adversely
affected by actions taken (or not taken) by voters, property owners, taxpayers or persons
obligated to pay assessments, fees and charges. See "Proposition 218" below. Furthermore, the
remedies available to the owners of the 2009 Bonds upon the occurrence of an event of default
under the Indenture are in many respects dependent upon judicial actions which are often
subject to discrction and delay and could prove both expensive and time consuming to obtain.
In addition to the limitations on remedies contained in the Indenture, the rights and
obligations under the Indenture may be subject to bankruptcy, insolvency, reorganization,
arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting
creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in
appropriate cases and to limitations on legal remedies against cities in the State of California.
The opinion to be delivered by Bond Counsel concurrently with the issuance of the 2009 Bonds
will be subject to such limitations and the various other legal opinions to be delivered
concurrently with the issuance of the 2009 Bonds will be similarly qualified. See "APPENDIX
D-Proposed Form of Bond Counsel Opinion." If the City fails to comply with its covenants in
the Indenture or fails to pay principal of and interest due on the 2009 Bonds, there can be no
assurance of the availability of remedies adequate to protect the interest of the holders of the
2009 Bonds.
Balance of the Available Reserves
Although the City has covenanted to maintain the Available Reserves at an aggregate
balance equal to five times maximum annual debt service on all ou tstanding bonded
indebtedness secured by Net Revenues of any of the Systems, each Available Reserve is
primarily intended as a rate stabilization reserve for the applicable City utility System. As a
result, extraordinary circumstances may arise that would cause the City to diminish Available
Reserves below "minimum" guideline levels or, in the aggregate, below five times Maximum
Annual Debt Service. Although the City has covenanted in the Indenture to replenish the
Available Reserves to required levels, it will do so only from rates and charges paid by the
customers of the various utility systems, which may adversely affect the City's ability to
replenish the Available Reserves in a timely fashion.
In addition, certain provisions of the California Constitution may require the City to
repay any advance from an Available Reserve that is not directly related to the System which
the advance benefits. See "CONSTII'UTIONAL LIMITATIONS ON TAXES AND WATER
RATES AND CHARGES-Articles XIIIC and XIIID."
Initiatives
In recent years several initiative measures have been proposed or adopted which affect
the ability of local governments to increase taxes and rates. There is no assurance that the
electorate Or the State legislature will not at some future time approve additional limitations
which could affect the ability of the City to implement rate increases which could reduce Net
Revenues and adversely affect the security for the 2009 Bonds. See "Proposition 218" below.
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Bankruptcy
The rights and remedies provided in the Indenture may be limited by and are subject to
the provisions of federal bankruptcy laws, to other laws or equitable principles that may affect
the enforcement of creditOl's' l'ights, to the exercise of judicial discretion in appropriate cases
and to limitations on legal remedies against public agencies in the State of CaJifomia, The
various opinions of counsel to be delivered with respect to the 2009 Bonds and the Indenture,
including the opinion of Bond Counsel, will be similarly qualified, If the City were to file a
petition under Chapter 9 of the Bankruptcy Code, the Owners of the 2009 Bonds and the City
could be prohibited from taking any steps to enforce their rights under the Indenture,
Tax Exemption of the 2009 Bonds
The City has covenanted in the Indenture that it will take all actions necessary to assure
the exclusion of interest with respect to the 2009 Bonds that are Tax-Exempt Bonds from the
gross income of the Owners of the 2009 Bonds that are Tax-Exempt Bonds to the same extent as
such interest is permitted to be excluded from gross income under the Internal Revenue Code of
1986, If the City fails to comply with the foregoing tax covenant, the interest component of the
Installment Payments evidenced by the 2009 Bonds that are Tax-Exempt Bonds may be
includable in the gross income of the Owners thereof for federal lax purposes, See "TAX
MATTERS!'
Additional Obligations
The Indenture permits the issuance of Bonds secured by Net Revenues on a parity basis
or a subordinate basis to the 2009 Bonds, Such additional Bonds would increase debt service
payable from Net Revenues and could adversely affect debt service coverage with respect to the
2009 Bonds, In such event, however, the Rate Covenant will remain in effect. See "SECURITY
FOR THE 2009 BONDS-Rate Covenant."
Seismic Considerations
The City, like much of California, is subject to seismic activity that could result in
interference with operation of the Systems, There are several major active fault zones
transecting the County that could cause "strong ground motion" at the site of the various
facilities constituting the Systems during their useful life, Those major fault zones, listed in
order of proximity to the City, are the San Andreas, Hayward, Calaveras and San Gregorio
faults, If there were to be an occurrence of severe seismic activity in the area of the City, there
could be an interruption in the service provided by the Systems resulting in a temporary
reduction in the amount of Net Revenues available to pay the principal of and interest on the
2009 Bonds when due.
Relevance to Available Reserves. Because Proposition 218 declares that revenues derived
from a "fee" or "charge" may not exceed the funds required to provide the "property-related
service" and may not be used for any purpose other than that for which the fee or charge was
imposed, the City may be required to repay any advance from an Available Reserve that is not
directly related to the System which the advance benefits, For example, if the City requires an
advance from the Rate Stabilization Reserve for the Sewer System to pay the portion of debt
service on the 2009 Bonds attributable to the Water System, the City may be required to repay
the Sewer System reserve, Proposition 218 expressly does not apply to revenues of the Electric
System or the Gas System and, therefore, does not apply to their Available Reserves.
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Investment of City Funds
Gross Revenues collected by the City will be held and invested by the City in accordance
with the provisions of the Indenture. Otherwise, however, moneys held by the City, including
Enterprise moneys, will be invested in accordance with the City's adopted investment policies.
For more information about the City's investment policy as well as information about recent
investment performance of the City's pooled investment funds, see APPENDIX B-"GENERAL
AND ECONOMIC INFORMATION ABOUT THE CITY."
LEGAL MATTERS
Approval of Legal Proceedings
The legality of the sale, execution and delivery of the 2009 Bonds is subject to the
approval of Jones Hall, A Professional Law Corporation, San Francisco, California, acting as
Bond Counsel. A proposed form of such legal opinion is attached heret.o as Appendix D. Quint
& Thimmig LLP, San Francisco, California, is acting as disclosure counsel to the City in
connection with the issuance of the 2009 Bonds.
Payment of the fees and expenses of Jones Hall and of Quint & Thimmig LLP are
contingent upon issuance of the 2009 Bonds.
Absence of Litigation
At the time of delivery of and payment for the 2009 Bonds, the City will certify that there
is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any
court, regulatory agency, public board or body, pending or, to the knowledge of the City,
threatened against the City affecting the existence of the City or the titles of its officers to their
respective offices or seeking to restrain or to enjoin the sale or delivery of the 2009 Bonds, the
application of the proceeds thereof in accordance with the Indenture, or the collection or
application of any Net Revenues provided for the payment of the 2009 Bonds, or in any way
contesting or affecting the validity or enforceability of the 2009 Bonds, the Indenture, any action
of the City contemplated by any of the said documents, or the collection or application of any
revenues provided for the payment of the 2009 Bonds, or in any way contesting the
completeness or accuracy of this Official Statement or any amendment or supplement thereto,
or contesting the powers of the City or its authority with respect to the 2009 Bonds or any action
of the City contemplated by any of those documents.
Tax Matters
2009 Bonds Issued as Tax-Exempt Bonds. In the opinion of Jones Hall, A Professional Law
Corporation, San Francisco, California, Bond Counsel, subject, however to certain qualifications
set forth below, under existing law, the interest on the 2009 Bonds is excluded from gross
income for federal income tax purposes, and such interest is not an item of tax preference for
purposes of the federal alternative minimum tax imposed on individuals and corporations.
The opinions set forth in the preceding paragraph are subject to the condition that the
City comply with all requirements of the Internal Revenue Code of 1986 (the "Code") that must
be satisfied subsequent to the issuance of the 2009 Bonds in order that such interest be, or
continue to be, excluded from gross income for federal income tax purposes. The City has
covenanted to comply with each such requirement. Failure to comply with certain of such
-49-
requirements may cause the inclusion of such interest in gross income for federal income tax
purposes to be retroactive to the date of issuance of the 2009 Bonds.
If the initial offering price to the public (excluding bond houses and brokers) at which a
2009 Bond is sold is less than the amount payable at maturity thereof, then such difference
constitutes "original issue discount" for purposes of federal income taxes and State of California
personal income taxes. If the initial offering plice to the public (excluding bond houses and
brokers) at which each 2009 Bond is sold is greater than the amount payable at maturity thereof,
then such difference constitutes "original issue premium" for purposes of federal income taxes
and State of California personal income taxes. De minimis original issue discount and original
issue premium is disregarded. Owners of 2009 Bonds with original issue discount or original
issue premium, including purchasers who do not purchase in the original offering, should
consult their own tax advisors with respect to federal income tax and State of California
personal income tax consequences of owning such 2009 Bonds.
In the further opinion of Bond Counsel, interest on the 2009 Bonds is exempt from
California personal income taxes.
Owners of the 2009 Bonds should also be aware that the ownership or disposition of, or
the accrual or receipt of interest on, the 2009 Bonds may have federal or state tax consequences
other than as described above. Bond Counsel expresses no opinion regarding any federal or
state tax consequences arising with respect to the 2009 Bonds other than as expressly described
above.
A copy of the proposed form of opinion of Bond Counsel is attached hereto APPENDIX
D-NPROPOSED FORM OF BOND COUNSEL OPINION."
2009 Bonds Issued as Build America Bonds. In the opinion of Bond Counsel, subject,
however to certain qualifications set forth below, under existing law, the interest on the 2009
Bonds is not excluded from gross income for federal income tax purposes.
In the further opinion of Bond Counsel, interest on the 2009 Bonds is exempt from
California personal income taxes.
Owners of the 2009 Bonds should also be aware that the ownership or disposition of, or
the accrual or receipt of interest on, the 2009 Bonds may have federal or state tax consequences
other than as described above. Bond Counsel expresses no opinion regarding any federal or
state tax consequences arising with respect to the 2009 Bonds other than as expressly describc:.>d
above.
A copy of the proposed form of opinion of Bond Counsel is attached hereto APPENDIX
D-NPROPOSED FORM OF BOND COUNSEL OPINION."
CONTINUING DISCLOSURE
The City has covenanted for the benefit of the holders and beneficial owners of the 2009
Bonds to provide certain financial information and operating data relating to the City (the
"Annual Report") by no later than each March 1 following the end of the City's fiscal year
(which fiscal year currently ends on June 30), commencing March 1, 2010, with the Annual
Report for the 2008-09 Fiscal Year, and to provide notices of the occurrence of certain
enumerated events, if material. The City will file, or cause to be filed, the Annual Report with
the Municipal Securities Rulemaking Board (the "MSRB") with a copy to the Underwriter. The
-50-
City will file, or cause to be filed, the notices of material events with the MSRB, with a copy to
the Underwriter. The specific nature of the information to be contained in the Annual Report or
the notices of material events is set forth in APPENDIX E-"FORM OF CONTINUING
DISCLOSURE CERTIFICATE," These covenants have been made in order to assist the
Underwriter in complying with S.E,C, Rule lSc2-12(b)(S).
The City has never failed to comply, in all material respects, with an undertaking under
the Rule.
RATINGS
Moody's Investors Service, Inc. ("Moody's") has assigned its municipal bond rating of
"_" to the 2009 Bonds, and Standard & Poor's Ratings Services, A Division of the McGraw-
Hill Companies ("Standard & Poor's"), has assigned its municipal bond rating of " " to the
2009 Bonds.
Such ratings reflect only the views of such organizations and an explanation of the
significance of such ratings may be obtained from Moody's and Standard & Poor's. There is no
assurance that such ratings will continue for any given period of time or that such ratings will
not be revised downward or withdrawn entirely by such organizations, if in their judgment
circumstances so warrant. Any such downward revision or withdrawal of such ratings may
have an adverse effect on the market price of the 2009 Bonds.
UNDERWRITING
The 2009 Bonds were sold pursuant to competitive sale held on September _, 2009, and
were awarded to _ (the "Underwriter"). The 2009 Bonds are being purchased by
the Underwriter at a purchase of which represents the aggregate principal
amount of the 2009 Bonds plus an original issue premium of $ and
less an Underwriter's discount
MISCELLANEOUS
Insofar as any statements made in this Official Statement involve matters of opinion or
of estimates, whether or not expressly stated, they are set forth as such and not as
representations of fact. No representation is made that any of the statements will be realized.
Neither this Official Statement nor any statement which may have been made verbally or in
writing is to be construed as a contract with the owners of the 2009 Bonds.
During the initial offering period for the 2009 Bonds, copies of the Indenture may be
obtained, upon written request, from the City. After issuance of the 2009 Bonds, copies of such
documents may be obtained from the Trustee.
-51-
The execution and delivery of this Official Statement have been duly authorized by the
City Council of the City.
CITY OF PALO ALTO
By -~~-~ .... ""'C"~~
Director of Administ1'ative Selvices
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APPENDIX A
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
[TO COME]
Appendix A
APPENDIXB
GENI,lRAL AND ECONOMIC INFORMATION ABOUT THE CiTY
General
The City is located in northern Santa Clara County (the "County"), approximately 35 miles south
of the City of San Francisco. The City has a current population of approximately 64,500. It is part of the
San Francisco Bay metropolitan area. Partly due to the presence of Stanford University, which is adjacent
to the City, the City is considered the birthplace of the high technology industry that has made the
County famous worldwide as Silicon Valley. The GSO-acre Stanford Research Park indudes prestigious
and innovative high-tech leaders such as Hewlett-Packard, SAP America, Varian Medical Systems,
VMware, Tibco Software, Space Systems Lora\, the Electric Power Research Institute and
Communications and Power Industries. The City is also a major employment center, induding U.S.
Department of Veteran Affairs' Palo Alto Health Care System, Stanford Hospitals and Clinics, Lockheed
Martin Missiles and Space, Palo Alto Medical Foundation, Stanford Shopping Center, the law offices of
Wilson Sonsini Goodrich and Rosati, and the Xerox Palo Alto Research Center.
The City was incorporated in 1894. Its first Charter was granted by the State of California in 1909,
and the City continues to operate as a charter city. Municipal operations are conducted under the
Council-Manager form of government. The nine Council Members are elected at large for four-year,
staggered terms. The Mayor and Vice Mayor are elected annually at the first Council meeting in January.
The Mayor presides over all Council meetings. The City Manager is responsible for the operation of all
municipal functions, except the offices of the City Attorney, City Clerk, and City Auditor. These officials
are appOinted by, and report directly to, the City Council.
Population
The following table shows a historical comparison of the respective populations of the City, the
County and the State of California since 1970.
Sources.:
CITY OF PALO ALTO, 8ANT A CLARA COUNTY,
AND 8T ATE OF CALIFORNIA
Population Companson
City of Percent Santa Clara Percent State of Percent
Year Palo Alto Change Coun!}' Chanfle California Change
1970 56,040 1,064,714 19,953,134
1980 55,225 -1.5% 1,295,071 2.2% 23,667,902 1.9%
1990 55,900 1.2 1,497;577 15.6 29,758,213 25.7
2000 58,598 4.8 1,682,585 12.4 33,873,086 13.8
2001 60,270 2.9 1,701,385 1.1 34,430,970 1.6
2002 60,326 0.1 1,715,329 0.8 35,063,959 1.8
2003 60,323 0.0 1,726,183 0.6 35,652,700 1.7
2004 60,487 0.3 1,738,654 0.7 36,199,342 1.5
2005 61,464 0.3 1,753,041 0.8 36,676,931 1.3
2006 62,108 1.0 1,771,610 1.1 37,086,191 1.1
2007 62,267 0.3 1,798,242 1.5 37,472,074 1.0
2008 63,098 1.3 1,829,480 1.7 37,883,992 1.1
2009 64,484 2.2 1,857,621 1.5 38,292,687 1.1
U.S. Department of Commerce, Bureau of the Census (1980, 1990 lmd 2000); Slate of Calilornia, Department
of Finance, 1l-4 Population Ilstimates for Cities, Counties and the State, 2001-2009, with 2000 Benchmark.
Sacramento, CaHfOlniaJ May 2009.
AppendixB
Pagel
History
The earliest record of settlement in Palo Alto was dated 1769. The City is named for the tree by
the banks of the San Francisquito Creek bordering Menlo Park. Many of the Spanish names in the Palo
Alto area represent the local heritage and descriptive terms and former residents. In 1895, Leland
Stanford came to the town of Mayfield (in what is now sOllth Palo Alto), interested in founding his
university there, and creating a train stop near his schooL However, he had one condition: alcohol be
banned from the town. Mayfield rejected his requests for reform. This prompted Stanford to drive the
formation of Palo Alto in 1895. Stanford set up his university, Stanford University, and train stop. On J lily
2, 1925, Palo Alto voters approved the annexation of Mayfield and the two communities were officially
consolidated on July 6, 1925.
Budgetary Polides and Processes
The City Manager submits to the City Council a proposed operating budget for the fiscal year
commencing the following July 1. The operating budget includes proposed expenditures and the means
of financing them. Public hearings are conduded to obtain public comments. The adopted budget is
legally enacted through passage of a budget ordinance for all funds except for agency funds. The City
Manager is authorized to reallocate funds from a contingent account maintained in the General Fund in
conformance with the adopted poliCies set by the City Council. Additional appropriations to departments
in the General Fund, or to total appropriations for all other budgeted funds, or transfers of appropriations
between funds, require approval by the City Council. Expenditures may not legally exceed budgeted
appropriations at the department level for the General Fund, and at the fund level for special revenue
and debt service funds. Formal budgetary integration is employed as a management control device
during the year in all funds except agency funds and certain debt service funds. Budgets for
governmental funds are adopted on a basis consistent with generally accepted accounting principles for
all funds, except that General Fund encumbrances are treated as budgetary expenditures when incurred
and stores (materials, parts and supplies) transactions inCluded in the General Fund are not budgeted.
Expenditures for the City's Capital Projects Fund are budgeted and managed on a project length basis
and budget to actual comparisons for these expenditures have been excluded from the accompanying
financial statements.
Ad Valorem Property Taxes
Taxes are levied for each fiscal year on taxable real and personal property which is situated in the
County of Santa Clara as of the preceding March 1. For assessment and collection purposes, property is
classified either as "secured" or "unsecured," and is listed accordingly on separate parts of the
assessment roll. The "secured roll" is that part of the assessment roll containing State-assessed property
and property the taxes on which are a lien on real property sufficient, in the opinion of the County
Assessor, to secure payment of the taxes. Other property is assessed on the "unsecured roll."
Assessed Valuations
The valuation of property in the City is established by the Santa Clara County Assessor. Assessed
valuations are reported at 100% of the full value of the property, as defined in Article XIIlA of the
California Constitution. Prior to 1981-82, assessed valuations were reported at 25% of the full value of
property.
The California State Legislature adopted two types of State-reimbursed exemptions beginning in
the tax years 1969-1970. The first currently provides a credit of $7,000 of the full value of an owner-
occupied dwelling for which application has been made to the County Assessor. Revenue estimated to be
lost to local taxing agencies due to the above exemptions has in the past been reimbursed from State
sources. Reimbursement is based upon total taxes due upon such exemption values and therefore is not
reduced by any estimated amount of actual delinquencies.
Pursuant to legislation adopted in 1979 (Statutes of 1979, Chapter 1150), business inventories are
entirely exempt from taxation in fiscal year 1980-81, and each fiscal year thereafter. This law further
provides a formula for reimbursement by the State to cities, counties, spedal districts and school districts
. for the amount of tax revenues lost by reason of such exemption, as adjusted for percentage changes in
Appendix B
Page 2
the population and the cost of living. Under prior State law, the State paid 50% of the taxes that were
levied against business inventories. Under Chapter 1150, the State pays, as a subvention, an amount equal
to 100% of taxes that would otherwise be due (excluding taxes to pay for voter approved indebtedness)
from business inventories commencing with the 1980-81 fiscal year. To compute amounts payable by the
State, 1979-80 was established as the base year for business inventory subventions; thereafter, the
subventions due are increased based upon increases in population and inflation rather than expanded
business inventories.
In addition, certain classes of property such as churches, colleges, not-for-profit hospitals and
charitable institutions are exempt from property taxation and do not appear on the tax rolls. No
reimbursement is made by the State for such exemptions.
The following table provides a five-year record of assessed valuations for the City.
Fiscal
Year
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
CITY OF PALO ALTO
ASSESSED VALUATIONS OF TAXABLE PROPERTY
2002-03 through 2007-08
(In Thousands)
Secured Public Unsecured Total Assessed
Valuation Utility Valuation Value
$13,141,986 $3,859 $1,612,179 $13,806,217
13,780,439 3,956 1,582,368 14,170,217
15,018,545 4,150 1,354,310 14,974,966
16,480,816 4,084 1,361,117 16,250,145
17,854,262 3,923 1,391,284 17,609,613
19,180,057 3,174 1,536,584 18,922,488
Source: City of Palo Alto, Certified Annual Financial Report 2007-08
The following two tables set out the amounts of property tax collected in the City and the ten
largest property-taxpayers in the City, respectively.
Fiscal
Year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
CITY OF PALO ALTO
PROPERTY TAX LEVIES AND COLLECTIONS
2001-02 through 2007-08
Gross
Tax Levy
$13,231
13,821
13,707
16,657
18,731
21,466
23,084
(In Thousands)
Current Tax
Collections
$13,231
13,821
13,707
16,657
18,731
21,466
23,084
Percentage of
Current Levy
Collected
100%
100
100
100
100
100
100
Delinquent
Tax Collections
Total
Collections
$13,231
13,821
13,707
16,657
18,731
21,466
23,084
Source: County of Santa Clara Assessor's Office, as published in the City of Palo Alto, Cedified Annual Financial
Report 2007-08
AppendixB
Page 3
CITY OF PALO ALTO
TEN LARGEST PROPERTY OWNERS
Fiscal Year ending June 30, 2008
Company
Leland Stanford Jr. University
Space Systems/Lorallne.
"Vhisman Ventures, LLC
Harbor Investments Partners
Western Pacific Housing Inc
EOP-Embarcadero Place, LLC
505 Hamilton A venue Partners L.P.
Pacific Hotel Dev Venture L.P.
Palo Alto Town & Country Village Inc
California Pacific Comm. Corp.
(In Thous.nds)
Type of Business
University and Ancillary
Satellite Design & Manufacturing
Offices, Banks and Clinics
Offices, Banks and Clinics
Housing Development
Offices, Banks and Clinics
Offices, Banks and Clinics
Offices, Banks and Clinics
Mall, Shopping Center
Offlees, Banks and Clinics
Source: City of Palo Alto, Certified Annual Financial Report W07-08
Employment
Assessed
Property Valuation
$2,968,746
169,513
100,470
65,791
60,Da'l
45.000
38,583
38,143
37,031
35,953
The City is home to a strong mix of large, medium and small finns. The City employment
opportunities are much sought after and indude: education at Stanford University, high technology at
the Stanford Research Park, and health care at two medical facilities of national stature. Numerous
institutions that have more than 1,000 employees indude: the University, the Veterans Affairs Palo
Health Care facility, the Medical Foundation, Hewlett Packard/Compaq, the Palo Alto Unified School
District, and the City.
The largest employers in the City of Palo Alto as of June 30, 2008 are as follows:
HPLabs
CITY OF PALO ALTO
TEN LARGEST EMPLOYERS
2007-08
Employer
Veteran's Affairs Palo Alto Health Care System
V A Palo Alto Health Care
Hewlett-Packard Company
Palo Alto Medical Foundation
Space Systems Loral
Wilson Sonsini Goodrich Rosati
Packard Children's Hospital
City of Palo Alto
Roche Palo Alto
Number of Employees
7,500
3,500
2,900
2,001
2,000
1,700
1,500
1,300
1,100
1,000
Source: www.RelerenceUSA.com & Palo Alto Weekly, as published in City 01 Palo Alto Certified Annual Financial
Report 2007-08
Due to the nature of local industry, with its heavy emphasis on electronics, aerospace and
research, Santa Clara has attraded many professional people and industrial workers possessing skills
well above the average.
The Santa Clara Labor Market, as defined by the State Employment Development Department,
includes all cities within Santa Clara County. This area is a highly developed industrial, research, and
educational center of employment for a labor force that ranks well above the average in educational
attainment and income. The following table presents the annual average wage and salary employment
figures by industry classification for the San }ose-Sunnyval.,..Santa Clara Metropolitan Statistical Area for
the years 2004 through 2008.
AppendlxB
Page 4
According to the California Employment Development Department, the County's unemployment
rate was 6,0% in 2008, up from 4,7% in 2007, The following table sets forth certain information regarding
employment in the City from calendar year 2002 through 2008.
SAN lOSE-SUNNYVALE-SANTA CLARA MSA
(Sail Benito and Santa Clara Counties)
Industry Employment & Labor Force -by Annual Average
March 2008 Benchmark
2004 2005 2006 2007 ------
Civilian Labor Force 850,100 844,500 854,300 876,SOO
Civilian Employment 794,500 798,600 815,300 834,800
Civilian Unemployment 55,600 45,900 38,900 41,700
Unemployment Rate 6.5% 5.4% 4.6% 4.8%
Agricultural 6,700 6,300 6,200 6,700
Natural Resources and Mining 100 200 300 300
Construction 43,000 44,500 46,800 47,200
Manufacturing 167,200 164,900 163,700 166,700
Trade, Transportation and Utilities 130,900 132,800 137,100 139,700
Information 32,600 35,300 37,500 39,600
Financial Activities 35,400 36,300 37,100 37,200
Professional and Business Services 165,600 165,800 172,000 178,300
Educational and Health Services 95,000 96,800 100,400 103,200
Leisure and Hospi tali ty 70,900 72,800 75,200 76,800
Other Services 25,000 24,600 24,800 25,100
Government 96,300 95,900 . 96,400 97,200
Total All Industries 868,700 876,300 897,400 917,900
Source: California BmpJa:ment Development Department, Labor Market Infounation Division.
Note: Totals may not a d due to independent rounding.
Year
2003
2004
2005
2006
2007
2008
CITY OF PALO ALTO
Average Annual Civilian Labor Force
Employment and Unemployment
Calendar Years 2002-2008
Labor Force
32,000
30,SOO
29,900
29,900
30,400
31,200
32,000
Unemployment
Number
1,400
1,400
1,000
800
700
800
1,D00
Source: California Employment Development Department
Construction Activity
Rate
3.7%
4.5%
3,4%
2,8%
2.3%
2.5%
3.2%
2008
905,200
850,100
55,100
6.1%
6,100
300
44,200
168,000
138,500
41,700
34,800
178,700
107,500
78,200
25,300
97,800
921,200
"Single Family Housing:' includes detached, semi-detached, rowhouse and townhouse units.
Rowhouses and townhouses are included when each unit is separated from the adjacent unit by an
unbroken ground-to-roof party or fire wall. Condominiums are included in single-family when theyare
of zero·lot-line or zero-property-line construction; when units are separated by an air space; or, when
units are separated by an unbroken ground-to-roof party or fire wall. "Multi-Family Housing:' includes
duplexes, 3-4-unit structures and apartment-type structures with five units or more. Multi-family housing
AppendixB
PageS
also includes condominium units in structures of more than one living unit that do not meet the above
single-family housing definition. "Residential Alterations and Additions," means alterations, additions,
and conversions to residential structures, excluding spedal installation permits for electrical, plumbing,
heating, air-conditioningt Of similar mechanical work,. or installation of fire escapes, elevators, signs, etc.
"New Commercial," includes new hotels and 111otels, office and bank buildings, stores and other
mercfUltile buildings, parking garages, service stations, and amusement and recreational buHdings, "New
Industrial," includes manufacturing plants and affiliated buildings. "Other New Nonresidential,"
includes churches and religious buildings, hospitals and institutional buildings, schools and educational
buHdings, residential garages, public works and utilities buildings, and miscellaneous nonresidential
structures. HNonresidential Alterations and AddiHons/' means alterations; additions, and conversions to
nonresidential structures, excluding special installation permits for electrical, plumbing, heating, air
conditioning, or similar mechanical work, or installation of fire escapesJ elevators and signs, etc.
CITY OF PALO ALTO
Building Permits and Valuation
(Dollars in Thousands)
2004 200S 2006 2007 2008
Permit Valug!iQo:
New Single-family $ 28,337 $ 46,957 $ 78,044 $ 82,769 $ 50,213
New Multi-family 22,125 13,911 28,338 81,679 27,827
Res. Alterationsl Additions 32,993 36,943 30,770 34,756 33,897
Total Residential 83,455 97,811 137,152 199,204 111,937
Total Nonresidential 48,393 131,289 168,817 133,547
Total All Building $131,848 $229,101 $303,%9 $332,751
New Dwellinill.!ni!§:
Single Family 58 82 147 195 102
Multiple Family 149 83 117 294 125
Total 207 165 264 489
Sources: Construction Industry Research Board: "Building Permit Summary./I
Note: Totals may not add due to indepl.)fident rounding.
Income
The following table, based on data reported in the annual publication "Survey of Buying Power"
published by Sales and Marketing Management, summarizes the median household effective buying
income for the City, the County of Santa Clara, the State of California and the nation for the years 2004
through 2008.
AppendixB
Page 6
Source: •
Year
2004
2005
2006
2007
2008
CITY, COUNTY, STATE AND UNITED STATES
Effective Buying Income
Total EHective Median Household
Duying Income Effective
Area (OOO's Omitted) BuyIng Income
Ci ty of Palo Alto $ 2,877,945 $73,411
County of Santa Clara 47476338 62614
California 705,108,410 43,915
United States 5,692,909,567 39,324
City of Palo Alto $ 2,733,365 $74,484
County of Santa Clara 46,910,278 63,293
California 720,798,106 44,681
United States 5,894,663,364 40,529
City of Palo Alto $ 2,839,023 $77,184
County of Santa Clara 49,261,000 65,458
California 764,120,962 46,275
United States 6,107,092,244 41,255
City of Palo Alto $ 3,000,778 $79,273
County of Santa Clara 52,377,985 67,498
California 814,894,438 48,203
United States 6,300,794,040 41,\'92
City of Palo Alto $ 3,088,305 $80,515
County of Santa Clara 53,987,635 68,929
California 832,531,445 48,952
United States 6,443,994,426 42,303
"Survey Buying Power:' Sales and Marketing Management (2004); C1aritas, Inc, (2005-2008),
In 2005, Sales and Marketing Management ceased publishing the HSurvey of Buying Power" report;
howcvcr/ subsequent years' data has been obtained from Claritas, Inc., who had previously prepared the
data each year for the "Survey of Buying Power."
Commercial Activity
Taxable sales in the City of Palo Alto exceed $1,9 billion annuany. The County Planning
Department reports that taxable sales per capita in Santa Clara are the highest of any city in Santa Clara
County. The following summary shows Ihe annual volume of taxable sales within the City since 2003.
During 2007, relail sales totaled nearly $1,300,000 and lotal taxable sales reached over $1,900,000.
AppendixB
Page 7
The following table shows annual sales tax revenues for the City for the last five years.
CITY OF PALO ALTO
Taxable Transactions
2003 2004 2005 2006 2007 (I)
Apparel stores 115,793 127,235 129,903 134,920"
General merchandise 250,904 276,625 284,186 289,288 301,192
I'oods stores 34,571 34,120 33,726 33,495 31,781
Eating and drinking places 197,266 202,651 208,128 224,276 234,084
Home furnishings and appliances 58,394 59,936 64,308 68,273 75,510
Building materials 16,543 20,159 23,619 26,258 24,437
Automotive Group 201,196 196,341 203,998 202,441 187,342
Service stations 40,983 49,511 56,548 60,078 63,418
All other retail stores 227,027 239,684 248,882 250,153 224,463
Total Retail Outlets 1,142,677 1,200,847 1,250,630 128,465 1,277,147
All other outlets 380,460 419,867 458,491 551,068 629,859
Total All Outlets 1,523,137 1,620,714 1,709,121 1,835,233 1,907,006
Source: California State Board of Equalization, Taxable Sales in California Reports 2003-2007.
(1) Latest available full-year data.
Education
The Palo Alto Unified Sehool District provides publie schooling from kindergarten through high
school. The Stanford University is the semnd largest university campus in the world. The University
comprises the Schools of lingineering, Law, Medicine,. Education, Business, Earth Sciences and
Humanities and Science. Stanford University's teaching hospital and clinks are known for excellence.
Community Facilities
The City has some of the most outstanding heall:hcare faeilities in California. Most prominent in
the community is Stanford Hospital & Clinics, which is part of Stanford University Medical Center. With
611 beds for in-patient treatment, emergeney care and major surgeries, Stanford Hospital is well known
for its cancer treatment, oncology an transplant services.
Medical groups affiliated with Stanford Hospital & Clinies are Stanford Family Practice, Stanford
Medical Group and Menlo Medical Clinic, and also includes the Stanford University School of Medicine
and the Lueile Packard Children's Hospital.
The Veterans Affairs Palo Alto Health Care System provides the main campus in Palo Alto, a
second campus in Menlo Park and a third campus in Livermore.
The Palo Alto Health Care System has 913 operating beds induding three nursing homes and a
lOO-bed homeless domiciliary on the Menlo Park campus. The Health Care System is affiliated with the
Stanford University Sehool of Medidne.
The Palo Alto Medical I'oundation is a full-service health-care clinic and research institute.
Nearly 250 physicians provide a range of diagnostic and treatment serviees in primary care and most
medical specialties.
The City's Parks and Recreation Department oversees 34 parks and playgrounds covering nearly
one-third of its 26 square miles open space. The City's San Francisco Bay location and natural
environment offer the opportunity to enjoy bird and aquatic life in a natural habitat. There is One golf
course located in the City, a recently renovated 18-hole championship length course.
AppendixB
PageS
Transporlation
The City is served by the Bayshore Freeway (U.S. Highway 101), which runs southeast from San
Francisco to Los Angeles and Is the major freeway connecting San Francisco and San Jose; Highway 84 -
the Dumbarton Bridge "nd Highway 92, the Hayward-San Mateo Bridge; and Interstate 280, which rUlls
north/south to San Francisco and State Highway 82. These freeways link the City to all parts of northern
California.
Air transportation is available at both the San Francisco International Airport, approximately 40
miles to the north, and the San Jose Airport, approximately 20 miles to the south. Rail service is provided
by Union Pacific Railroad, on a north/south track linking San Jose and San Francisco, and Cal Train
commuter service to Gilroy and San Francisco.
Within the City, commuter rail transportation is conveniently located and the Palo Alto stop is
one of the most used in the CalTrain system. Alternative transportation options include numerous bike
paths throughout the City and an internal shuttle service is also available.
Utilities and Water Supply
The City is the only municipal utility in California that operates city-owned utility services that
include electric, fiber optic, natural gas, water and wastewater services. Since 1896, the City has been
providing quality services to the citizens and businesses of the City.
Agriculture •
The City still supports a thriving agriculture industry, ranging from crops and wine to Leland
Stanford's horse farm and training facilities, the Dixon Stables, Portola Valley Training Center, and Webb
Ranch are just a few of the equestrian facilities that live up to the area's rich history. Just a few miles away
off Highway 280, traditional ranches such as Hidden Villa continue to grow and distribute quality
products. OrganiC grocery stores, such as Whole Foods Market, Piazza's Market and Trader Joe's share
the market place with traditional grocery oUllets and fresh fruit and vegetable stands.
Local greenhouses and florists prOVide a diverse selection to help residents and business heautify
their yards and homes. The area also ieatures a number of machinery and equipment oullets to make
agriculture related job feasible.
Government and Services
The City was incorporated in 1894. Its first Charier was granted by the State of California in 1909,
and the City continues to operate as a charter cUy. Municipal operations are conducted under the
Council-Manager form of government. The nine Council Members are elected at large for four-year,
staggered terms. The Mayor and Vice Mayor are elected annually at the first Council meeting in January.
The Mayor presides over all Council meetings. The City Manager is responsible for the operation of all
municipal functions, except the offices of the City Attorney, City Oerk, and City Auditor. These officials
are appointed by, and report directly to, the City Council.
The City prOvides a full range of municipal services and maintains municipal electric, water, gas,
wastewater collection, wastewater treatment, storm drainage, and refuse utilities for the benefit of City
residents and businesses. The City's parks, recreation and cultural facilities are numerous, and include 35
parks, a golf course, four community centers, a Cultural Center, a Community Theater, a Children's
Theater, and a Junior Museum. The City offers a wide array of social, recreational and cultural events,
including human services for seniors and youth, subsidized child care, classes, concerts, exhibits, team
sports and special events. The City and the Palo Alto Unified School District have an agreement to jointly
fund the costs of maintaining and rehabilitating school athletic fields, recognizing the significant
recreational use of these facilities by the community. In addition, the City offers a high level of library
and public safety services. The City has six libraries and eight fire stations providing services throughout
the community.
Appendix Il
Page 9
APPENDIXC
COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY
FOR THE FISCAL YEAR ENDED JUNE 30, 2008
AppendixC
APPENDlXD
PROPOSED FORM OF BOND COUNSEL OPINION
[Letterhead of Jones Hall, A Professional Law Corporation]
City of Palo Alto
250 Hamilton Avenue
Palo Alto, California 94301
[Closing Da Ie]
OPINION: $, ____ ' City of Palo Alto Water Revenue Bonds, 2009 Series A
Members of the Council:
We have acted as bond counsel in connection with the issuance by the City of Palo Alto (the
"City") of the $[Principal Amount] City of Palo Alto Water Revenue Bonds, 2009 Series A (the "Bonds"),
pursuant to the charter of the City and the provisions of Chapter 12.28 (commencing with Section
12.28.010) of Ihe Palo Alto Municipal Code (the "Bond Law"), an Indenture of Trust, dated as of October
1,2009, by and between the City and U.S. Bank National Association, as trustee (the "Indenture"), and a
resolution of the City (the "Resolution") of the City Council of the City adopted on July 27, 2009. We have
examined the law and such certified proceedings and other papers as we deem necessary to render this
opinion.
As to questions of fact material to our opinion, we have relied upon representations of the City
contained in the Indenture and in the certified proceedings and certifications of public officials and others
furnished to us without undertaking to verify the same by independent investigation.
Based upon the foregoing, we are of the opinion, under existing law, as follows:
1. The City is duly created and validly existing as a municipal corporation and chartered city
with the power to enter into the Indenture, perform the agreements on its part contained therein, and
issue the Bonds.
2. The Indenture has been duly approved by the City, and constitutes a valid and binding
obligation of the City enforceable upon the City in accordance with its terms.
3. Pursuant to the Bond Law, the Indenture creates a valid lien on the Net Revenues of the City's
Water System (as defined in the Indenture) pledged by the Indenture for the security of the Bonds, on a
parity with the portion of the City's Utility Revenue Bonds, 2002 Series A attributable to improvements to
the Water System and currently outstanding in the amount of $ (as of Juue 30, 2009), subject
only to a pledge of such Net Revenues (along with other net revenues of other City utilities not pledged
for the security of the Bonds) to payment of debt service on the City's outstanding Utility Revenue Bonds,
1995 Series A, currently outstanding in tl,e amount of $5,320,000 (as of June 30,2009) as described in the
Indenture.
4. The Bonds have been duly authorized, executed and delivered by the City, and are valid and
binding special obligations of the City, payable solely from the sources provided therefor in the
Indenture.
5. [If the 2009 Bonds are issued as Tax-Exempt Bonds:] The interest on the Bonds is excluded from
gross income· for federal income tax purposes and is not an item of tax preference for purposes of the
. Preliminary, subject to change.
AppendixD
Page 1
federal alternative minimum. tax imposed on individuals and corporations. TIH~ opinions set forth in the
preceding sentence are subject to the condition that the City comply with all requirements of the Internal
Revenue Code of 1986 that must be satisfied subsequent to the issuance of the Bonds in order that interest
thereon be, or continue to be, excluded from gross income for federal income tax purposes. The City has
covenanted to comply with each such requirement. Failure to comply with certain of such requirements
may cause the inclusion of interest on the Bonds in gross income for federal incOlue tax purposes to be
retroactive to the date of issuance of the Bonds. vVe express no opinion regarding other federal tax
consequences arising with respect to the Bonds.
5, [If the 2009 Bonds are issued as Build America Bonds:] The interest on the Bonds is not
excluded from gross income for federal income tax purposes, We express no opinion regarding other
federal tax consequences arising with respect to the Bonds.
6, The interest on the Bonds is exempt from personal income taxation imposed by the State of
California.
The rights of the owners of the Bonds and the enforceability of the Bonds and the Indenture may
be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting
creditors' rights heretofore or hereafter enacted and may also be subject to the exercise of judicial
discretion in appropriate cases,
Respectfully submitted,
A Professional Law Corporation
Appendix D
Page 2 \
APPENDIXE
FORM OF CONTINUING DISCLOSURE CERTIFICATE
This CONTINUING DISCLOSURE CERTIFICATE (the "Disclosure Certificate") is executed and
delivered by the CITY OF PALO ALTO (the "City") in connection with the issuance by the City of its
:;:;:;_:-;,;:-;:;* aggregate principal amount of City of Palo Alto Water Revenue Bonds, 2009 Series A (the
"Bonds"). The Bonds are being issued pursuant to an indenture of trust, dated as of October 1, 2009 (the
"Indenture"), by and between the City and U.S. Bank National Association, as trustee (the "Trustee"). The
City covenants and agrees as follows:
Section 1. Purposg . .Q.Ul)e Disclosure Certificate. This Disclosure Certificate is being executed and
delivered by the City for the benefit of the holders and beneficial owners of the Bonds and in order to
assist the Participating Underwriter in complying with S.E.C. Rule 15c2-12(b)(5).
Section 2. Definitjons. In addition to the definitions set forth in the Indenture, which apply to any
capitalized term used in this Disclosure Certificate unless otherwise defined in this Section 2, the
follOwing capitalized terms shall have the following meanings:
"Annual Report" shall mean any Annual Report provided by the City pursuant to, and as
described in, Sections 3 and 4 of this Disclosure Certificate.
"Beneficial Owner" shall mean any person which (a) has the power, directly or indirectly, to vote
or coment with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds
through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for
federal income tax purposes.
"Dissemil1fltion Agent" shall mean the City or any successor Dissemination Agent designated in
writing by the City and which has filed with the City a written acceptance of such designation. In the
absence of such a designation, the City shall act as the Dissemination Agent.
"EMMA" or "Electronic Municipal Markel Access" means the centralized on-line repository for
documents filed with the MSRB, such as official statements and disclosure information relating to
municipal bonds, notes and other securities as issued by state and local governments.
"Lisled Events" shall mean any of the events listed in Section 5(a) of this Disclosure Certificate.
"MSRB" means the Municipal Securities Rulemaking Board, which has been designated by the
Securities and Exchange Commission as the sale repository of disclosure information for purposes of the
Rule, or any other repository of disclosure information which may be designated by the Securities and
Exchange Commission as such for purposes of the Rule in the future.
"Participating Underwriter" shall mean any of the original underwriters of the Bonds required to
comply with the Rule in connection with offering of the Bonds.
"Rule" shall mean Rule 1Sc2-12(b)(S) adopted by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as the same may be amended from time to time.
Section 3. Provision of Annual Reports.
(a) Delivery of Annual Report to MSRB. The City shall, or shall cause the Dissemination Agent to,
not later than eight months after the end of the City's fiscal year (which currently ends on June 30),
commencing with the report for the 2008-2009 Fiscal Year, which is due not later than March 1, 2010,
provide to the Participating Underwriter and to file with EMMA, in a readable pdf or other electronic
format as prescribed by the MSRB, an Annual Report that is comistent with the requirements of Section 4
• Preliminary, subject to change.
AppendixE
Pagel
of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate
documents comprising a package, and may cross-refe~ence other information as provided in Section 4 of
this Disclosure Certificate; provided that the audited financial statements of the City may be submitted
separately from the balance of the Annual Report and later than the date required above for the filing of
the Annual Report if they are not available by that date.
(b) C/Iflllge of Fiscal Yenr. If the City's fiscal year changes, it ~hall give notice of Stich change in the
same manner os for a Usted Event under Section 5(d).
(c) Delivery of Annual Report to Dissemination Agent. Not later than fifteen (15) Business Days prior
to the date specified in subsection (a) for providing the Annual Report to EMMA, the City shall provide
the Annual Report to the Dissemination Agent (if other than the City). If by such date, the Dissemina tion
Agent has not received a copy, of the Annual Report, the Dissemination Agent shall notify the City.
(d) Report of NOlI-Compliance. If the City is unable to provide an Annual Report by the date
required in subsection (a), the Dissemination Agent shall send a notice to EMMA in substantially the
form attached as Exhibit A.
(e) Annual Compliance Certification. The Dissemination Agent shall, if the Dissemination Agent is
other than the City, file a report with the City certifying that the Annual Report has been provided
pursuant to this Disclosure Certificate, stating the date it was provided.
Section 4. Content of Annual Reports. The Annual Report shall contain or incorporate by
reference the follOWing:
(a) Audited financial statements of the City for the preceding fiscal year, prepared in accordance
with the laws of the State and including all statements and information prescribed for inclusion therein
by the Controller of the State. If the City's audited financial statements are not available by the time the
Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited
financial statements in a format similar to the financial statements contained in the final Official
Statement, and the audited financial statements shall be filed in the same manner as the Annual Report
when they become available.
(b) To the extent not included in the audited final statement of the City, the Annual Report shall
also include operating data with respect to the City for preceding fiscal year, substantially similar to that
provided in the corresponding tables and charts in the official statement for the Bonds, as follows:
(i) Discussion of any changes in the rate and fee structure with respect to the Water
System in the most recently completed fiscal year which could have a material affect
on the Net Revenues of the Water System;
(il) Identification of any withdrawals by the City from the Available Reserves during the
most recently completed fiscal year for the purpose of paying debt service on the
Bonds;
(iii) Identification with respect to each of the Available Reserves (A) the balance as of the
end of the most recently completed fiscal year, and (B) any material changes in the
applicable reserve policy; and
(iv) Description of any Parity Bonds or subordinate debt issued during the most recently
completed fiscal year.
(c) Any or all of the items listed above may be included by specific reference to other documents,
including official statements of debt issues of the City or related public entities, which are available to the
public on the MSRB's Internet web site Or filed with the Securities and Exchange Commission. The City
shall dearly identify each such other document so included by reference.
If the document included by reference is a final official statement, it must be available from
EMMA.
(d) In addition to any of the information expressly required to be provided under paragraph (b)
of this Section 4, the City shall provide such further information, if any, as may be necessary to make the
AppendixE
Page 2
specifically required statements, in the light of the circumstances under which they are made, not
misleading.
Section 5.lli:}:>Qr(ing of Significant Eyents.
(a) Listed Events. Pursuant to the provisions of this Section 5, the City shall give, 01' cause to be
given, notice of the oCCurrence of any of the following events with respect to the Bonds, if material:
(il Principal and interest payment delinquencies.
(li) Non-payment related defaults.
(iii) Unscheduled draws on debt service reserves reflecting financial difficulties.
(iv) Unscheduled draws on credit enhancements reflecting financial difficulties.
(v) Substitution of credit or liquidity providers, or their failure to perform.
(vi) Adverse tax opinions or events affecting the tax-exempt status of the security.
(vii) Modifications to rights of security holders.
(viii) Contingent or unscheduled bond calls.
(ix) Defeasances.
(x) Release, substitution, or sale of property securing repayment of the securities.
(xi) Rating changes.
(b) Determination of Milterlalily of Listed Events. Whenever the City obtains knowledge of the
occurrence of a Listed Event, the City shall as soon as possible determine if such event would be material
under applicable federal securities laws.
(c) Notice to DissemifUltion Agent. If the City has determined that knowledge of the occurrence of a
Listed Event would be material under applicable federal securities laws, the City shall promptly notify
the Dissemination Agent (if other than the City) in writing. Such notice shall instruct the Dissemination
Agent to report the occurrence pursuant to subsection (d).
(d) Notice of Listed Events. The City shan file, or cause the Dissemination Agent to file, a notice of
the occurrence of a Listed Event, if material, with EMMA, in a readable PDF or other electronic format as
prescribed by EMMA, with a copy to the Participating Underwriter. Notwithstanding the foregoing,
notice of Listed Events described in subsections (a) (viii) and (ix) (defeasances) need not be given under
this subsection any earlier than the notice (if any) of the underlying event is given to Bondholders of
affected Bonds.
Section 6. Identifying Information for Filings with EMlvIA .. AI! doctunents provided to EMMA
under this Disclosure Certificate shall be accompanied by identifying information as prescribed by the
MSRB.
Section 7. Termination of Reporting Obligation. The City'S obligations under this Disclosure
Certificate shall terminate upon the defeasance, prior redemption or payment in fulJ of al! of the Bonds. If
such termination occurs prior to the final maturity of the Bonds, the City shan give notice of such
termination in the Same manner as for a Listed Event under Section 5.
Section 8. Dj~s.~plinatlon Agent.
(a) Appointment of Dissemination Agent. The City may, from time to time, appoint or engage a
Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may
discharge any such agent, with or without appointing a successor Dissemination Agent. If the
Dissemination Agent is not the City, the Dissemination Agent shall not be responsible in any manner for
the content of any notice Or report prepared by the City pursuant to this Disclosure Certificate. The initial
Dissemination Agent shall be the City.
(b) Compensation of Dissemination Agent. The Dissemination Agent shall be paid compensation by
the City for its services provided hereunder in accordance with its schedule of fees as agreed to between
the Dissemination Agent and the City from time to time and all expenses, legal fees and advances made
or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination
Agent shall not be deemed to be acting in any fidUciary capacity for the City, Holders or Beneficial
AppendixE
Page 3
Owners, or any other party. 'lhe Dissemination Agent may rely and shall be protected in acting or
refraining from acting upon any direction from the City Or an opinion of nationally recognized bond
counsel. The Dissemination Agent may at any time resign by giving written notice of such resignation to
the City.
Section 9. Alnendment; \"'aiver. Notwithstanding any other provision of this Disclosure
Certificate, the City may omend this Disclosure Certificate (and the Dissemination Agent shall agree to
any amendment so requested by the City that does not impose any greater duties or risk of liability on the
Dissemination Agent), and any provision of this Disclosure Certificate may be waived, provided that the
following conditions are satisfied:
(a) Change in Circumstances. If the amendment or waiver relates to the provisions of Sections 3(a),
4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in
legal requirements, change in law, or change in the identity, nature, or status of an obligated person with
respect to the Bonds, or the type of business conducted;
(b) Compliance flS of Issue Date. The undertaking, as amended or taking into account such waiver,
would, in the opinion of a nationally recognized bond counsel, have complied with the requirements of
the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or
interpretations of the Rule, as well as any change in circumstances; and
(c) Consent afHolders; Non-impairment Opinion. The amendment or waiver either (i) is approved by
the Bondholders in the same manner as provided in the Indenture for amendments to the Indenture with
the consent of Bondholders, or (ii) does not, in the opinion of nationally recognized bond counsel,
materially impair the interests of the Bondholders or Beneficial Owners.
U this Disclosure Certificate is amended or any provision of this Disclosure Certificate is waived,
the City shall describe such amendment or waiver in the next following 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 relates 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(d), and (ii) the Annual Report for the year in which
the change is made should present a comparison (in narrative form and abo, 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 former accounting principles.
Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to
prevent the City from disseminating any other information, using the means of dissemination set forth in
this Disclosure Certificate or any other means of communication, or including any other information in
any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this
Disclosure Certificate. If the City chooses to include any information in any Annual Report or notice of
occurrence of a Listed Event in addition to that which is specifically required by this Disclosure
Certificate, the City shall have no obligation under this Disclosure Certificate to update such information
or include Hin any future Annual Report or notice of occurrence of a Listed Event.
Section 11. Default. In the event of a failure of the City to comply with any provision of this
Disclosure Certificate, any Bondholder or Beneficial Owner 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 Certificate. The sole remedy under this Disclosure
Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an
action to compel performance.
Section 12. Duties. Immunities and Liabilities of Dissemination Agent. The Dissemination Agent
shall have only such duties as are specifically set forth in this Disclosure Certificate, and the City agrees to
indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless
against any loss, expense and liabilities which it may incur arising out of or in the exercise or
performance of its powers and duties hereunder, including the costs and expenses (including attorneys
fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's
AppendixE
Page 4
negligence or willful misconduct. The obligations of the City under this Section shall survive resignation
or removal of the Dissemination Agent and payment of the Bonds.
Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City,
the Dissemination Agent, the Participating Underwriters and Holders and Beneficial Owners from time
to time of the Bonds/ and shall create no rights in any other person or entity.
Date: [Closing Date]
CITY OF PAID ALTO
By __________________________ ___
Name Title _______________ _
AppendixE
PageS
Name of Obligor:
Name of Issue:
Date of Issuance:
EXHIBIT A
NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD
OF FAILURE TO FILE ANNUAL REPORT
City of Palo Alto, California
City of Palo Alto Water Revenue Bonds, 2009 Series A
[Closing Date)
NOTICE IS HEREBY GIVEN that the City of Palo Alto has not provided an Annual Report with
respect to the above-named Bonds as required by the Continuing Disclosure Certificate dated October
_,2009, furnished by the City in connection with the Bond Issue. The City anticipates that the Annual
Report will be filed by ____ _
Dated: ______ _
cc: Trustee
CITY OF PALO ALTO, CALIFORNIA, as
Dissemination Agent
By _____________ _
Name Title ---------
Appendix E
Page 6
APPENDIXF
DTC AND THE BOOK-ENTRY ONLY SYSTEM
Tlte following descriptioll of the procedures and record keepirlg with respect 10 heneficiol oWllership
interests in tile 2009 Bonds, p"yment of principol, redemption premium, if any, and interest with respect to the
2009 Bonds to DTC, its ParUcipnnts or Beneficial Owners, confirmation mId tmnsfers of beneficiol ownership
interests in the 2009 Bonds and other reloled transactiolls by and between DTC, its Participants and lire Beneficial
Owners is based solely on the understanding of the City of such procedures and record keeping from information
provided by DTe. Aerordingfy, no representations con be made conceming these matters and neither DTC, its
Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but
should instead confirm the some with DTC or its Participants, as the case may be. Tire City, the Trustee and the
Underwriter understund that the current "Rules" applicahle to DTC are on file with the Seeuritie.s and Exchange
Commission and that the current "Procedures" of DTC to be followed in dealing with PartiCipants are (111 file with
DTC.
The Depository Trust Company ("mC"), 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
me. One fully-registered Bond certificate will be issued for each maturity of the Bonds, each in the
aggregate principal amount of such maturity, and will be deposited with me.
mc, the world's largest 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 "dearing corporation" within the meaning of the New York
Uniform· Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17 A
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 DTe. 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. mc is a wholly-owned subsidiary of The
Depository Trust & Clearing Corporation ("DTCC"). mcc is the holding company for DTC, National
Securities Clearing Corporation and Fixed Income Gearing Corporation, all of which are registered
dearing agencies. mTC is owned by users of its regulated subsidiaries. Access to the mc 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 Standard & Poor's highest
rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange
Commission. More information about mc can be found at www.dta:.com and www.dtc.org.
Purchases of the Bonds under the mc system must be made by or through Direct Participants,
which will receive a credit for the Bonds on mcs 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 certificates 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 mc are
registered in the name of me s partnership nominee, Cede & Co., Or such other name as may be
requested by an authorized representative of me. The deposit of the Bonds with mc and their
registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial
AppendixF
Pagel
ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect
only the identity of the Direct Participants to whose accounts such Bonds are credited, which mayor may
not be the Beneficial Owners. The Direct and Indi=t 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 Di=t Participants and Indirect Participants to Beneficial
Owners will be govemed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time. Beneficial Owners of the 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 Trust Agreement. For
example, Beneficial Owners of the 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 iIl
each issue to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to
the 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 Issuer 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 the Bonds are credited on the record date (identified in a listing attached to the Omnibus
Proxy).
Payments of principal of, premium, if any, and interest 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 City, 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 cllstOlners in
bearer form or registered in "street name," and will be the responsibility of such Participant and not of
DTC, the Trustee, the City or the Authority, subject to any statutory or regulatory requirements as may be
in effect from time to time. Payments of principal of, premium, if any, and interest on the Bonds by Cede
& Co (or such other nominee as may be requested by an authorized representative of DTC) is the
responsibility of the City, 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.
DTC may discontinue providing its services as depository with respect to the Bonds at any time
by giving reasonable notice to the City, the Authority or the Trustee. Under such circumstances, in the
event that a successor depository is not obtained, Bond certificates are required to be printed and
delivered.
The Authority may decide to discontinue use of the system of book-entry transfers through DTC
(or a successor securities depository). In that event, Bond certificates will be printed and delivered.
The foregoing information concerning DTC and DTC's book-entry system has been provided by
DTC, and neither the Authority nor the Trustee takes any responsibility for the accuracy thereof.
NEITHER THE AUTHORITY NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR
OBLIGATION TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS WITH
RESPECT TO THE PAYMENTS OR THE PROVIDING OF NOTICE TO DTC PARTICIPANTS,
INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS OR THE SELECTION OF BONDS FOR
REDEMPTION.
AppcndixF
Page 2
Neither the Authority nor the Trustee can give any assurances that DTC, DTC Participants,
Indirect Participants or others will distribute payments of principal of, premium, if any, and interest on
the Bonds paid to DTC or its nominee, as the registered Owner, or any redemption or other notice, to' the
Beneficial Owners or that they will do so on a timely basis or that DTC will serve and act in a manner
described in this Official Statement-
In the event that the book-entry system is discontinued as described above, the requirements of
the Trust Agreement will apply.
The City, the Authority and the Trustee cannot and do not give any assurances that DTC, the
Participants or others will distribute payments of principal, interest or premium, if any, evidenced by 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 Neither the Authority nor the Trustee are responsible or
liable for the failure of DTC or any Participant to make any payment or give any notice to a Beneficial
Owner with resped to the Bonds or an error or delay relating thereto.
Appendix F
Page 3
ATTACHMENT B
..... PRELIMINARY SUBJECT TO CHANGE .. •••
City of Palo Alto
Water Revenue Bonds -2009 Series A
Ratings Assumption: Underlying Triple A
(Interest Rates as of June 2009)
Sources and Uses of Funds
(Prepared by Stone & Youngberg)
Sources:
Bond Proceeds:
Uses:
Par Amount
Net Original Issue Discount
Total Sources
Project Fund
Other Fund Deposits:
Debt Service Reserve Fund (1)
Capitalized Interest (2)
Delivery Date Expenses:
Cost of Issuance (3)
Underwriter's Discount (4)
Other Uses and Funds:
Notes:
Miscellaneous
Total Uses
Tax-Exempt
Bonds
$ 34,980,000
(125,9631
$ 34,854,037
$ 30,965,000
2,364,795
948,420
3,313,215
225,000
349,800
574,800
1,022
$ 34,854,037
Taxable
BABs (5)
$ 36,850,000
$ 36,850,000
$ 30,965,000
3,308,250
1,796,438
5,104,688
225,000
552,750
777,750
2,563
$ 36,850,000
(1) Debt Service Reserve Fund (DSRF) sized as the lesser of 10% of Par, Maximum Annual Debt
Service, and 125% of Average Annual Debt Service. Assumes DSRF annual eamings of 3%.
(2) Capitalized Interest through June 1, 2010.
(3) Cost of Issuance estimated; includes financial advisor, bond counsel, disclosure counsel, rating,
trustee, printing and other costs associated with the financing.
(4) Assumes Underwriter's Discount of 1.0% for Tax-Exempt financing and 1,5% for Taxable financing,
(5) BABs" "Direct Pay Build America Bonds" under the American Recovery and Reinvestment Act of 2009