HomeMy WebLinkAboutStaff Report 1891City of Palo Alto (ID # 1891)
City Council Staff Report
Report Type: Action ItemsMeeting Date: 7/18/2011
July 18, 2011 Page 1 of 4
(ID #1891)
Summary Title: Refinancing 2002 Utility Revenue Bonds
Title: Resolution of the Council of the City of Palo Alto Authorizing the Issuance
and Sale of Utility Revenue Refunding Bonds, Approving Indenture of Trust,
Official Notice of Sale, Notice of Intention to Sell and Official Statement, and
Authorizing Official Actions Related There to
From:City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the City Council approve the attached resolution (Attachment A), to:
1)Authorize staff to refinance the outstanding 2002 Utility (Water and Gas) Revenue
Bonds through the issuance of Utility Revenue (Refunding) Bonds in the not to exceed
amount of $18,050,000
2)Approve the Indenture of Trust, Official Notice of Sale, Notice of Intention, and
Preliminary Official Statement; and authorize official actions related thereto
Background
In 2002 the City issued Water and Gas Utility Revenue bonds in the amount of $26.1 million for
select water and gas system capital improvements for a reservoir, water pump and booster
station improvements; well land acquisition; and gas distribution system improvements. The
financing of these projects represented a departure from the City’s traditional pay-as-you-go
approach for water and gas capital work.
Discussion
The principal amount remaining on the 2002 Utility Revenue Bonds is $18.05 million, and the
City’s new Financial Advisor, Public Financial Management, Inc. (PFM), has determined that
annual Water and Gas debt service costs can be reduced by refinancing these revenue bonds.
Savings are estimated to be $147,000 annually over the next fifteen years with Water and Gas
funds sharing this estimated savings by 45 percent and 55 percent, respectively. At this time,
net present value (NPV)savings are estimated at $1.56 million or 8.64 percent of refunding
bonds. The NPV savings of 8.64 percent exceeds the typically used threshold of 3.0 percent to
determine a refinancing, so staff recommends moving forward at this time. The City expects
the bond sale to occur during the week of September 5, 2011. It is important to note that
July 18, 2011 Page 2 of 4
(ID # 1891)
potential savings cited in this report are estimates and that final savings are dependent on
prevailing interest rates and underwriter bids on the day of the bond sale.
To maximize the quality of the City’s bond issuance and minimize interest expense, staff will
deliver a ratings presentation to Standard and Poor’s (S&P) and Moody’s during the week of
August 8, 2011. 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 utilities, the ability of the enterprise funds to repay
debt, the status of the City’s utility 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 recent City Council budgetary actions, the overall strength of the combined utility
reserves, the amount of existing utilities debt, and the City’s long term water and gas contracts.
This information is factored into each agency’s credit rating which investors use in buying the
bonds. A high credit rating results in lower interest costs. All the City’s rated Utility bonds have
a triple A rating. As soon as the ratings are received, staff will relay the results to Council.
The most critical factors affecting a credit rating are the guarantees or covenants a borrower
makes to bondholders for paying its debt. The City’s covenant for the proposed utility bonds is
similar in structure to that used for the 2002 Utility Revenue Bonds issued for improvements
(CMR:456:01). The attached (Exhibit D) Indenture of Trust (Section 5.11 and 5.12) outlines the
City’s financial covenants. In general, the first and foremost guarantee the City is making is that
the water and gas systems individually will generate sufficient charges/revenues, combined
with their available Rate Stabilization Reserves, to cover all of their costs and to maintain a
certain ratio of available resources to annual debt service. To further enhance credit
worthiness, there is a second assurance in the attached Indenture. It requires that, in addition
to having sufficient net revenue from the water and gas systems to pay principal and interest
on the bonds, specific utility available reserves, which include includes water, gas, and electric
systems, will be maintained at a level at least five times the maximum annual debt device on all
utility bonded debt.
As a result of refinancing the 2002 bonds, the Water and Gas utilities estimated average annual
debt service will go from $1.72 million to $1.58, a savings of $0.14 million. When combined
with the average annual debt service of $2.17 million on the City’s 2009 Water Utility Revenue
Bonds, these two utilities will have a total $3.75 million (Water $2.88 million and Gas $0.87
million). The annual debt on all utility bonded debt for fiscal year 2010-11 is $5.92 million. At
five times this level, all utility bonded debt would need to maintain at least $29.6 million in
available reserves to meet its indenture requirements. Currently, the utility available reserves
as of March 2011 for annual debt service and the five times the annual debt service stand at 25
times and 5 times, respectively on all utility bonded debt, easily exceeding the debt indenture
requirement. These indenture requirements are the same as the existing indenture
requirements and in the past the City’s Utility reserve policies have provided ample buffer to
meet this requirement. While staff believes that these reserves will not fall below the level
required by the outstanding indentures, it is important that Council and future staff be aware of
the commitment this provision entails.
July 18, 2011 Page 3 of 4
(ID # 1891)
Council approval is required to sell up to $18,050,000 in Utility Revenue (Refunding) Bonds
through a competitive sale process in the week of September 5, 2011. The settlement or
closing of the bond sale will occur around September 19, 2011. The City’s Financial Advisor
(PFM) will assist the City in receiving and evaluating bids received from underwriters for the
bonds and in selecting the optimal bid. Underwriters are investment-banking firms, and the
underwriter selected will resell the bonds to investors, typically institutional investors like
mutual funds and high net worth individuals. The underwriter with a bid resulting in the lowest
interest cost to the City will be selected on the bid day.
Documents Submitted for Council Approval
The Council must approve the attached Resolution before the 2011 Utility Revenue (Refunding)
Bonds can be sold by a competitive sale. By approving this resolution, the City Council
authorizes various City officials to sign and execute various documents. The Resolution also
approves the following documents:
o Preliminary Official Statement containing information material to the offering
and sale of bonds (Exhibit A)
o Official Notice of Sale to the investment community seeking bids to be received
at the offices of PFM during the week of September 5, 2011 (Exhibit B)
o Notice of Intention to Sell Bonds (Exhibit C)
o Indenture of Trust between the City of Palo Alto and US Bank Trust National
Association as Trustee (Exhibit D)
o Escrow Deposit and Trust Agreement Between City of Palo Alto and US Bank
National Association for the refunding of the 2002 Utility Revenue Bonds
(Exhibit E)
Resource Impact
Refinancing of the 2002 Utility Revenue bonds is estimated to reduce annual expenditures by
$147,000. Issuance costs that include bond and disclosure counsel, financial advisor, and rating
agency fees will be paid through the sale of bonds.
Precise debt service payments will not be known until competitive bids are received from the
underwriting firms. At this time, the current interest rate environment is most favorable for
issuing or refinancing debt.
Policy Implications
While there is no Council policy on the methods of refinancing debt, the traditional approach
has been to sell bonds with competitive bids in the open bond market.
July 18, 2011 Page 4 of 4
(ID # 1891)
Timeline
Week of Aug. 08, 2011 Ratings presentations to Moody’s and Standard and Poor’s
Week of Aug. 22, 2011 Ratings commitments received
Week of Aug. 29, 2011 Premarketing calls to underwriters
Week of Sept. 05, 2011 Bids received and bonds priced. Bonds awarded to winning bidder
Week of Sept. 19, 2011 Pre-close and close bond issue.
Environmental Review
The adoption of the attached resolution and documents does not constitute a project under the
California Environmental Quality Act; therefore, no environmental assessment is required.
Attachments:
·Attachment A: Resolution of the Council of the City of Palo Alto Authorizing the Issuance
and Sale of Utility Revenue Refunding Bonds and Approving Related Documents (PDF)
·Exhibit A: Preliminary Official Statement (PDF)
·Exhibit B: Official Notice of Sale (PDF)
·Exhibit C: Notice of Intention To Sell (PDF)
·Exhibit D: Indenture of Trust between the City of Palo Alto and US Bank Trust National
Association as Trustee (PDF)
·Exhibit E: Escrow Deposit and Trust Agreement between City of Palo Alto and US Bank
National Association (PDF)
Prepared By:Tarun Narayan, Senior Financial Analyst
Department Head:Lalo Perez, Director
City Manager Approval: James Keene, City Manager
Not Yet Approved
Resolution No.______
Resolution of the Council of the City of Palo Alto Authorizing the
Issuance and Sale of Utility Revenue Refunding 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 of the 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 powers, 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 financing or
refinancing the acquisition, construction, extension or improvement of any utility enterprise
system or facility of the City.
SECTION 3. Outstanding Bonds. 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”) pursuant to an Indenture of Trust, dated as of January 1, 2002, between the
City and the Trustee, to finance improvements to the City’s gas and water systems.
SECTION 4. 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 utility revenue refunding bonds (the “Bonds”) under the Law to realize interest savings for the
benefit of the affected utility systems of the City, to (i) refinance the 2002 Bonds, (ii) establish a
debt service reserve fund for the Bonds, and (iii) pay certain costs of issuing the Bonds.
SECTION 5. 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 attached as Exhibit A and also 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 6. Authorization of Sale.
Not Yet Approved
2
The Council approves the competitive sale of the Bonds with bids to be received on such
date and time as recommended by the City’s Financial Advisor and agreed to by the Director of
Administrative Services. 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 extend the maturity of the 2002 Bonds, and the net
present value savings achieved by the refunding of all or selected maturities of the 2002 Bonds is
at least 3% of the principal amount of the 2002 Bonds being refunded.]
SECTION 7. Indenture of Trust. The Bonds shall be issued pursuant to an
Indenture of Trust dated as of September 1, 2011 (the "Indenture"), by and between the City and
U.S. Bank National Association, as trustee (the "Trustee"). 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. Escrow Agreement. The 2002 Bonds shall be refunded pursuant to an
Escrow Deposit and Trust Agreement dated as of September 1, 2011 (the "Escrow Agreement"),
by and between the City and U.S. Bank National Association, as escrow bank (the "Escrow
Bank"). The Escrow Agreement, in substantially the form on file with the City Clerk, is hereby
approved, and the Authorized Officials are hereby separately authorized to execute the Escrow
Agreement when finalized, following the sale of the Bonds and the structuring of the escrow for
the 2002 Bonds, and the City Clerk is hereby authorized and directed to attest said Authorized
Official’s signature.
SECTION 9. 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, Public Financial Management (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 Attorney, 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 directed to execute and deliver copies of the final Official Statement to the
purchaser of the Bonds, at the time of delivery of the Bonds.
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
Council's determination that the preliminary Official Statement has been deemed nearly final
within the meaning of the Rule.
SECTION 10. 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
Not Yet Approved
3
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 11. 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.
SECTION 12. Exemption from CEQA. The City Council finds that this resolution
is not a project under Section 21065 of the California Environmental Quality Act (CEQA).
SECTION 13. Effective Date. This resolution shall be effective upon the date of its
adoption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST: APPROVED:
_________________________________ ______________________________
City Clerk Mayor
APPROVED AS TO FORM:
______________________________ ______________________________
Senior Asst. City Attorney City Manager
JONES HALL,
A Professional Law Corporation ______________________________
Director of Utilities
_________________________________ ______________________________
William H. Madison Director of Administrative Services
Bond Counsel
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PRELIMINARY OFFICIAL STATEMENT DATED AUGUST __, 2011
NEW ISSUE—BOOK-ENTRY ONLY RATINGS:
Moody’s: “____”
S&P: “___”
See “RATINGS” herein.
In the opinion of Jones Hall, A Professional Law Corporation, San Francisco, California, Bond Counsel, subject, however to the qualifications set forth below, under existing
law, the interest on the 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, provided, however, that, for the purpose of computing the alternative minimum tax imposed on
corporations (as defined for federal income tax purposes), such interest is taken into account in determining certain income and earnings. In the further opinion of Bond
Counsel, interest on the Bonds is exempt from California personal income taxes. See “LEGAL MATTERS—Tax Matters” herein.
$_______*
CITY OF PALO ALTO
(Santa Clara County, California)
Utility Revenue Refunding Bonds, 2011 Series A
Dated: Date of Delivery Due: June 1, as shown below
The City of Palo Alto, a chartered city and municipal corporation (the “City”), is issuing its Utility Revenue Refunding Bonds, 2011 Series A (the “Bonds”), pursuant to an
Indenture of Trust, dated as of September 1, 2011 (the “Indenture”), by and between the City and U.S. Bank National Association, as trustee (the “Trustee”), the Charter of
the City and Chapter 12.28 of the Palo Alto Municipal Code.
The Bonds are being issued to (a) refund, on a current basis, the City’s outstanding City of Palo Alto Utility Revenue Bonds, 2002 Series A (the “2002 Bonds”), (b) establish a
debt service reserve account for the Bonds, and (c) pay certain costs of issuing the Bonds. See “REFUNDING PLAN” herein. The 2002 Bonds were issued to finance
improvements to the City’s municipal water utility system (the “Water System”) and to finance improvements to the City’s municipal natural gas utility system (the “Gas
System”).
The Bonds are special obligations of the City and are secured by amounts held from time to time 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 certain net revenues (the “Net Revenues”) generated by the Water System and the Gas System (each, a
“System”) securing subseries of the Bonds related to each System. The subseries of the Bonds secured by the Net Revenues of the Water System are issued on a parity, as to
payment and security, with the City’s outstanding Water Revenue Bonds, 2009 Series A (the “2009 Bonds”), issued to finance certain improvements to the Water System. The
City has agreed to advance moneys from certain rate stabilization reserve funds (the “Available Reserves”), if necessary, to pay debt service on the Bonds. The 2009 Bonds
constitute additional claims on the Available Reserves as well as certain other rate stabilization reserve funds. See “SECURITY FOR THE BONDS” herein.
The City’s Utility Revenue Bonds, 1995 Series A (the “1995 Bonds”), are currently outstanding in the principal amount of $4,595,000 (as of June 1, 2011) and are secured by a
lien on net revenues of the City’s entire “Enterprise,” which consists of the Water System, the Gas System, the City’s municipal sanitary sewerage and sewage disposal
system (the “Sewer System”), the City’s municipal storm and surface water system (the “Storm Drain System”) and the City’s electric utility (the “Electric System”). The lien
of the 1995 Bonds on the Net Revenues of the Water System is senior to the lien on Net Revenues securing the subseries of the Bonds related to the Water System and senior
to the 2009 Bonds. The lien of the 1995 Bonds on the Net Revenues of the Gas System is senior to the lien on Net Revenues securing the subseries of the Bonds related to the
Gas System. The 1995 Bonds are also secured by certain net revenues derived from the Storm Drain System, the Sewer System and the Electric System which are not pledged
for the payment of the Bonds or the 2009 Bonds.
The Bonds will be issued in fully registered form only and, when executed and delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust
Company, New York, New York (“DTC”). DTC will act as securities depository for the Bonds. Beneficial ownership interests in the Bonds may be purchased in book-entry
form only. Payments of principal and interest (and premium, if any) will be paid by the Trustee to DTC for subsequent disbursements to DTC Participants who will remit
such payments to the beneficial owners of the Bonds. See “THE BONDS—Book-Entry Only System” herein. The Bonds will be issued as fully registered bonds in
denominations of $5,000 or any integral multiple of $5,000. Interest is payable on each June 1 and December 1, commencing December 1, 2011.
The Bonds are subject to optional and mandatory redemption prior to maturity. See “THE BONDS—Redemption” herein.
Additional bonds and other indebtedness payable from the Net Revenues of a System may be issued on a parity with the applicable subseries of the Bonds (and on a parity
with the 2009 Bonds with respect to Net Revenues of the Water System), subject to the conditions contained in the Indenture. See “SECURITY FOR THE BONDS—
Limitations on Net Revenue Pledges” herein.
NEITHER THE GENERAL FUND, THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY, THE STATE OF CALIFORNIA OR ANY OF ITS
POLITICAL SUBDIVISIONS IS PLEDGED FOR THE PAYMENT OF THE BONDS.
MATURITY SCHEDULE
CUSIP† Prefix: _______
Maturity Maturity
Date Principal Interest Price or CUSIP† Date Principal Interest Price or CUSIP†
(June 1) Amount Rate Yield Suffix (June 1) Amount Rate Yield Suffix
Bids for the purchase of the Bonds will be received by the City on _________, September __ 2011, until 10:00 A.M., Pacific time, as provided in the Official Notice of Sale. The Bonds will be
sold pursuant to the terms of sale set forth in the Official Notice of Sale, dated August __, 2011.
This cover page contains information for general reference only. It is not a summary of this issue. Potential purchasers of the Bonds are advised to read the entire Official
Statement to obtain information essential to making an informed investment decision.
The Bonds will be offered when, as and if issued and received by the Underwriter subject to the approval of legality by Jones Hall, A Professional Law Corporation, San
Francisco, California, Bond Counsel. Certain disclosure matters will be passed upon for the City by Quint & Thimmig LLP, San Francisco, California, Disclosure Counsel.
Certain matters will be passed upon for the City by Molly S. Stump, Esq., the City Attorney. It is expected that the Bonds, in book-entry form, will be available for delivery
on or about September __, 2011.
Dated: September ___, 2011
*Preliminary, subject to change.
† Copyright 2011, American Bankers Association. CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by the CUSIP Service Bureau,
operated by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP
Services Bureau. CUSIP numbers have been assigned by an independent company not affiliated with the City and are included solely for the convenience of the registered owners of the
Bonds. The City is not responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the Bonds or as included herein. The CUSIP
number for a specific maturity is subject to being changed after the issuance of the Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part
or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Bonds.
No dealer, broker, salesperson or any other person has been authorized to give any information or
make any representation with respect to the 2011 Bonds, other than as contained in this Official Statement,
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 2011
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 2011 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 2011 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 definitive 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 2011 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 2011 Bonds, the Underwriter may over-allot or effect
transactions which stabilize or maintain the market price of the 2011 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 2011 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 2011 Bonds have not been registered under the Securities Act of 1933, as amended, in reliance
upon an exemption contained in that act. The 2011 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 Securities Litigation Reform
Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of
the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the
terminology used such as “plan,” “expect,” “estimate,” “project,” “budget” 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” and “THE GAS 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, performance 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.
The City maintains a website. Unless specifically indicated otherwise, the information presented on
such website is not incorporated by reference as part of this Official Statement and should not be relied upon
in making investment decisions with respect to the Bonds.
CITY OF PALO ALTO
250 Hamilton Avenue
Palo Alto, CA 94301
(650) 329-2100
http://www.cityofpaloalto.org/
CITY COUNCIL MEMBERS
Sid Espinosa, Mayor
Yiaway Yeh, Vice Mayor
Patrick Burt, Council Member
Karen Holman, Council Member
Larry Klein, Council Member
Gail A. Price, Council Member
Gregory Scharff, Council Member
Greg Schmid, Council Member
Nancy Shepherd, Council Member
CITY STAFF
James Keene, City Manager
Pamela Antil, Assistant City Manager/Chief Operation Officer
Lalo Perez, Director of Administrative Services
Joe Saccio, Assistant Director of Administrative Services
Tarun Narayan, Senior Financial Analyst, Administrative Services
Molly S. Stump, City Attorney
Donna Grider, City Clerk
Utilities Department
Valerie Fong, Director 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, Assistant 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
Public Financial Management, Inc.
San Francisco, California
Trustee and Escrow Bank
U.S. Bank National Association
San Francisco, California
TABLE OF CONTENTS
INTRODUCTION.........................................................................1
THE 2011 BONDS.......................................................................4
Bond Terms...............................................................................4
Transfer and Exchange.........................................................4
2011 Bonds Mutilated, Destroyed, Stolen or Lost......5
Redemption................................................................................5
Book-Entry-Only System......................................................7
REFUNDING PLAN....................................................................7
Purposes of the Bonds............................................................7
Estimated Sources and Uses of Funds.............................7
Annual Debt Service...............................................................8
SECURITY FOR THE 2011 BONDS......................................9
Pledge of Net Revenues..........................................................9
Limitations on Net Revenue Pledge...............................11
Rate Covenant........................................................................11
Available Reserves...............................................................12
Parity and Subordinate Bonds........................................12
Reserve Account....................................................................14
THE CITY AND CITY UTILITIES......................................14
The City....................................................................................14
City Utilities...........................................................................14
Management of the Utilities Department....................15
Enterprise Staffing and Technology..............................17
Enterprise Management Policy.......................................17
Rates and Billing..................................................................18
Reserve Policies.....................................................................18
Annual Financial Statements and Significant
Accounting Policies ...........................................................18
THE WATER SYSTEM...........................................................19
History......................................................................................19
Service Area............................................................................20
Water Storage and Distribution System......................20
Sources of Water Supply....................................................20
Recycled Water Project.......................................................23
Water Conservation Policies and Procedures............24
Historical Production and Deliveries...........................25
Environmental Issues Relating to the Water
System ....................................................................................25
Capital Improvement Program Summary..................25
Water Rates, Fees and Charges........................................27
Water Demand and Customer Base..............................29
Management Discussion of Operations.......................31
Balance Sheet..........................................................................32
Historical Operating Results............................................33
Projected Operating Results and Debt Service
Coverage................................................................................34
THE GAS SYSTEM ..................................................................35
History......................................................................................35
Service Area............................................................................36
Gas Distribution System....................................................36
Sources of Gas Supply.........................................................36
Gas Conservation Policies and Procedures................37
Historical Production and Deliveries...........................38
Environmental Issues Relating to the Gas System...38
Capital Improvement Program Summary..................39
Gas Rates, Fees and Charges............................................39
Gas Demand and Customer Base...................................40
Management Discussion of Operations.......................42
Balance Sheet..........................................................................43
Income Statements................................................................44
Projected Operating Results and Debt Service
Coverage................................................................................45
AVAILABLE RESERVES.......................................................46
The City’s Rate Stabilization Reserves For Its
Enterprise Funds ................................................................46
Rate Stabilization Reserve for the Water System.....47
Rate Stabilization Reserves for the Electric
System ....................................................................................48
Rate Stabilization Reserves for the Gas System........49
Calaveras-Stranded Costs Reserve................................50
CONSTITUTIONAL LIMITATIONS ON TAXES
AND WATER RATES AND CHARGES...........................52
Article XIIIA...........................................................................52
Article XIIIB............................................................................53
Articles XIIIC and XIIID.....................................................53
RISK FACTORS RELATING TO THE 2011 BONDS..56
Limited Obligations............................................................56
System Expenses...................................................................56
Limited Recourse on Default............................................56
Limitations on Remedies...................................................57
Balance of the Available Reserves..................................57
Initiatives.................................................................................57
Bankruptcy..............................................................................58
Tax Exemption of the 2011 Bonds.................................58
Additional Obligations.....................................................58
Seismic Considerations......................................................58
Investment of City Funds...................................................59
LEGAL MATTERS..................................................................59
Approval of Legal Proceedings.......................................59
Absence of Litigation..........................................................59
Tax Matters............................................................................59
CONTINUING DISCLOSURE..............................................61
FINANCIAL ADVISOR...........................................................61
RATINGS.....................................................................................61
VERIFICATION OF ARITHMETICAL AND
MATHEMATICAL COMPUTATIONS............................61
UNDERWRITING.....................................................................62
MISCELLANEOUS..................................................................62
APPENDIX A - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE OF TRUST
APPENDIX B - GENERAL AND ECONOMIC INFORMATION ABOUT THE CITY
APPENDIX C - COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE
FISCAL YEAR ENDED JUNE 30, 2010
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
Utility Revenue Refunding Bonds
2011 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 $___________* Utility Revenue Refunding Bonds, 2011 Series A (the “2011
Bonds”).
Certain capitalized terms used in this Official Statement and not otherwise defined
have the meanings set forth under “SECURITY FOR THE 2011 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 entirety by
reference to the full Indenture, copies of which are available for inspection at the offices of the
City.
Authority for Issuance. The 2011 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 September 1, 2011 (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 18, 2011, authorizing the issuance of the 2011
Bonds.
Payments of Principal and Interest. Principal of the 2011 Bonds is payable on each June 1
in the years set forth on the cover of this Official Statement. Interest on the 2011 Bonds is
payable on each June 1 and December 1 each year, beginning on December 1, 2011. See “THE
2011 BONDS—Bond Terms.”
Purposes. The 2011 Bonds are being issued to (a) refund, on a current basis, the City’s
outstanding City of Palo Alto Utility Revenue Bonds, 2002 Series A, currently outstanding in
the principal amount of $18,050,000 (the “2002 Bonds”), (b) establish a debt service reserve
account for the 2011 Bonds, and (c) pay certain costs of issuing the 2011 Bonds. See
“REFUNDING PLAN.” The 2002 Bonds were issued to finance improvements to the City’s
municipal water utility system (the “Water System”) and to finance improvements to the
City’s municipal natural gas utility system (the “Gas System”).
Pledge of Net Revenues. The 2011 Bonds are special obligations of the City and are
secured by amounts held from time to time 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
certain net revenues (the “Net Revenues”) generated by the Water System and the Gas System
(each, a “System”) securing subseries of the 2011 Bonds related to each System. The subseries
of the 2011 Bonds secured by the Net Revenues of the Water System are issued on a parity, as
to payment and security, with the City’s outstanding Water Revenue Bonds, 2009 Series A (the
“2009 Bonds”), issued to finance certain improvements to the Water System. The City has
agreed to advance moneys from certain rate stabilization reserve funds (the “Available
Reserves”), if necessary, to pay debt service on the 2011 Bonds. The 2009 Bonds constitute
* Preliminary, subject to change.
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additional claims on the Available Reserves as well as certain other rate stabilization reserve
funds.
The City’s Utility Revenue Bonds, 1995 Series A (the “1995 Bonds”), are currently
outstanding in the principal amount of $4,595,000 (as of June 1, 2011) and are secured by a
lien on net revenues of the City’s entire “Enterprise,” which consists of the Water System, the
Gas System, the City’s municipal sanitary sewerage and sewage disposal system (the “Sewer
System”), the City’s municipal storm and surface water system (the “Storm Drain System”)
and the City’s electric utility (the “Electric System”). The lien of the 1995 Bonds on the Net
Revenues of the Water System is senior to the lien on Net Revenues securing the subseries of
the 2011 Bonds related to the Water System and senior to the 2009 Bonds. The lien of the 1995
Bonds on the Net Revenues of the Gas System is senior to the lien on Net Revenues securing the
subseries of the 2011 Bonds related to the Gas System. The 1995 Bonds are also secured by
certain net revenues derived from the Storm Drain System, the Sewer System and the Electric
System which are not pledged for the payment of the 2011 Bonds or the 2009 Bonds.
See “SECURITY FOR THE 2011 BONDS.”
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 and the Gas System, listed below (collectively, the
“Systems”). As additional security for the 2011 Bonds, the City will, if necessary, advance
funds to pay debt service on the 2011 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 2011 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 2009 Bonds and on the City’s Utility Revenue and
Refunding Bonds, 1999 Series A (the “1999 Bonds”), which are currently outstanding in the
principal amount of $12,715,000 (as of July 1, 2011). 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 2011 BONDS—Other Claims on Available
Reserves.”
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Limitations on Net Revenue Pledge. The debt service on the 2011 Bonds is payable from
Net Revenues generated by the Water System with respect to the subseries of 2011 Bonds
relating to the Water System, from Net Revenues generated by the Gas System with respect to
the subseries of 2011 Bonds relating to the Gas System and from moneys advanced from the
Available Reserves. See “SECURITY FOR THE 2011 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 2011 Bonds. The 2011 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 of the Water System and the Net Revenues of the Gas System, as
described above.
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 of the Water System is senior to the lien on Net
Revenues securing the subseries of the Bonds related to the Water System and senior to the
2009 Bonds. The lien of the 1995 Bonds on the Net Revenues of the Gas System is senior to the
lien on Net Revenues securing the subseries of the Bonds related to the Gas System. See
“SECURITY FOR THE 2011 BONDS—Limitations on Net Revenue Pledge.”
Parity Bonds. The subseries of the Bonds secured by the Net Revenues of the Water
System are issued on a parity, as to payment and security, with the 2009 Bonds. Additional
bonds and other indebtedness payable from the Net Revenues of a System may be issued on a
parity with the applicable subseries of the Bonds (and on a parity with the 2009 Bonds with
respect to Net Revenues of the Water System), subject to the conditions contained in the
Indenture. See “SECURITY FOR THE 2011 BONDS—Parity and Subordinate Bonds.”
Rate Covenant. The City covenants in the Indenture that it will fix, prescribe, revise and
collect Charges for each System during each Fiscal Year which (together with other funds
transferred from stabilization reserve funds for such 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 of such System estimated by the City
to become due and payable in such Fiscal Year;
(b) the Debt Service on the Sub-Series of Series A Bonds issued for such System;
(c) all other payments required for compliance with this Indenture and the
instruments pursuant to which any Parity Bonds relating to such System shall have
been issued; 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 of such System
or the Net Revenues of such System.
In addition, the City covenants in the Indenture that it will fix, prescribe, revise and
collect Charges for such System during each Fiscal Year which, when added to the balance then
on hand in Available Reserves for such System, are sufficient to yield Net Revenues of such
System at least equal to one hundred twenty-five percent (125%) of the amounts payable
under the preceding clause (1)(b) in such Fiscal Year for Bonds which have a lien on such Net
Revenues.
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See “SECURITY FOR THE 2011 BONDS—Rate Covenant.”
Reserve Account. To further secure the payment of the principal of and interest on the
2011 Bonds, the Indenture establishes the Reserve Account to be held by the Trustee. The
Indenture defines the Reserve Requirement to be equal to the least of (i) Maximum Annual
Debt Service on the 2011 Bonds, (ii) 10% of the principal amount of the 2011 Bonds, and (iii)
125% of Average Annual Debt Service on the 2011 Bonds. See APPENDIX A—SUMMARY OF
CERTAIN PROVISIONS OF THE INDENTURE OF TRUST and “SECURITY FOR THE 2011
BONDS—Reserve Account.”
THE 2011 BONDS
Bond Terms
General. The 2011 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 2011 Bonds is payable on
each June 1 and December 1, commencing June 1, 2010.
Registered Form. The 2011 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 2011 Bonds will not receive physical
certificates representing the 2011 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 2011 Bonds, principal of and premium, if any, and interest evidenced and represented
by the 2011 Bonds will be paid the Trustee 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 2011 Bonds. See “THE 2011 BONDS—Book-Entry-Only System.”
Principal of and premium, if any, on the 2011 Bonds will be payable at maturity or
prepayment upon surrender thereof at the principal corporate trust office of the Trustee.
Manner of Payment. Interest on the 2011 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 2011 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 2011 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 2011 Bonds will be payable in lawful money of the United
States of America.
So long as Cede & Co., is the registered holder of the 2011 Bonds, references to the
holders or owners or registered holders or owners of the 2011 Bonds means Cede & Co. and
not the beneficial owners of the 2011 Bonds.
Transfer and Exchange
Any 2011 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
-5-
authorized attorney, upon surrender of the 2011 Bond for cancellation, accompanied by
delivery of a written instrument of transfer in a form approved by the Trustee, duly executed.
Whenever any 2011 Bond is so surrendered for transfer, the City will execute and the Trustee
will authenticate and deliver to the transferee a new 2011 Bond or 2011 Bonds of like tenor,
maturity and aggregate principal amount. If a notice of redemption of any 2011 Bonds has
been mailed pursuant to the redemption provisions of the Indenture, those 2011 Bonds will not
be subject to transfer.
The 2011 Bonds may be exchanged at the Trust Office of the Trustee, for 2011 Bonds of
the same tenor and maturity and of other authorized denominations.
2011 Bonds Mutilated, Destroyed, Stolen or Lost
If any 2011 Bond becomes mutilated, the City, at the expense of the Owner of that
2011 Bond, will execute, and the Trustee will authenticate and deliver, a new 2011 Bond of like
maturity and principal amount in exchange and substitution for the 2011 Bonds so mutilated,
but only upon surrender to the Trustee of the 2011 Bond so mutilated. The Trustee will cancel
every mutilated 2011 Bond so surrendered, and will deliver those canceled 2011 Bonds to, or
upon the order of, the City.
If any 2011 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 2011 Bond of like maturity and principal
amount in lieu of and in substitution for the 2011 Bond so lost, destroyed or stolen. (If any
such 2011 Bond matures or is called for redemption, instead of issuing a substitute 2011 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 2011 Bond issued and
the reimbursement of any expenses incurred by the City or the Trustee. Any 2011 Bond issued
in lieu of any 2011 Bond alleged to be lost, destroyed or stolen will constitute an original
contractual obligation on the part of the City whether or not the 2011 Bond alleged to be lost,
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 2011 Bonds secured by
the Indenture.
Redemption
Optional Redemption. The 2011 Bonds maturing on or before June 1, 20__, are not
subject to optional redemption prior to maturity. The 2011 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 the Series A Bonds to be redeemed), plus accrued interest thereon to the date of
redemption:
Redemption Periods Redemption Prices
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The City shall have the option to redeem one or more subseries of 2011 Bonds, in whole
or in part, in which case the Trustee shall select for redemption those 2011 Bonds whose
maturities correspond to the Debt Service for the subseries of 2011 Bonds being redeemed.
Special Mandatory Redemption from Insurance or Condemnation Proceeds. The 2011 Bonds
are subject to redemption as a whole or in part on any 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 2011 Bonds plus interest accrued thereon to the date fixed for
redemption, without premium.
Notice of Redemption. Unless waived by any Owner of 2011 Bonds to be redeemed,
notice of any redemption of Bonds will 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 not more than 60
days prior to the date fixed for redemption to the Owner of the 2011 Bond or 2011 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 will affect the sufficiency
of the proceedings for the redemption of the 2011 Bonds.
All notices of redemption must be dated and state the following:
(i) the redemption date,
(ii) the Redemption Price,
(iii) if fewer than all Outstanding 2011 Bonds are to be redeemed, the
identification (and, in the case of partial redemption, the respective principal amounts)
of the 2011 Bonds to be redeemed,
(iv) that on the redemption date the Redemption Price will become due and
payable with respect to each such 2011 Bond or portion thereof called for redemption,
and that interest with respect thereto will cease to accrue from and after the redemption
date, and
(v) the place or places where such 2011 Bonds are to be surrendered for
payment of the 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 2011 Bonds or portions
of 2011 Bonds which are to be redeemed on that date.
So long as the 2011 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 2011 Bonds.
Purchase in Lieu of Optional Redemption. In lieu of optional redemption, amounts in the
Redemption Account of the Debt Service Fund may be used for the purchase of 2011 Bonds at
public or private sale as and when and at such prices (including brokerage and other charges,
but excluding accrued interest, which is payable from the Debt Service Fund) as the City may
determine, but not to exceed the principal amount of such 2011 Bonds plus the redemption
premium applicable on the next ensuing optional redemption date.
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Book-Entry-Only System
While the 2011 Bonds are subject to the book-entry system, the principal, interest and
any redemption premium with respect to a 2011 Bond will be paid by the Trustee to The
Depository Trust Company, New York, New York (“DTC”), which in turn is obligated to remit
such payment to its DTC Participants for subsequent disbursement to Beneficial Owners of
the 2011 Bonds, as described in APPENDIX F—DTC AND THE BOOK-ENTRY ONLY
SYSTEM.
REFUNDING PLAN
Purposes of the Bonds
The 2011 Bonds are being issued to (a) refund, on a current basis, the 2002 Bonds, (b)
establish a debt service reserve fund for the 2011 Bonds, and (c) pay certain costs of issuing
the 2011 Bonds.
A portion of the proceeds from the sale of the Bonds will be deposited into an escrow
fund (the “Escrow Fund”) to be created and maintained by U.S. Bank National Association, as
escrow bank (the “Escrow Bank”), under an escrow deposit and trust agreement by and
between the City and the Escrow Bank. The moneys deposited in the Escrow Fund will be
invested in U.S. Treasury Securities so that the interest thereon and the maturing principal
thereof will be sufficient to redeem the outstanding 2002 Bonds in full on December 1, 2011, at
a redemption price equal to 101% of the principal amount of the 2002 Bonds, together with
interest accrued to such redemption date. The mathematical accuracy of the calculation as to
the sufficiency of cash and U.S. Treasury Securities in the Escrow Fund to meet the payment
and redemption requirements of the 2002 Bonds will be verified by _____________ (the
“Verification Agent”). See “VERIFICATION OF MATHEMATICAL COMPUTATIONS.”
Estimated Sources and Uses of Funds
The following table sets forth the estimated sources and uses of funds for the 2011
Bonds:
Sources of Funds:
Principal Amount of 2011 Bonds
Less: Original Issue Discount
Total Sources
Uses of Funds:
Deposit to Escrow Fund (1)
Deposit to Reserve Account
Costs of Issuance Fund (2)
Total Uses
(1) Amounts deposited in the Escrow Fund will be applied to the purchase of U.S. Treasury Securities which will
bear interest at such rates and mature on such dates as to provide for the redemption of the 2002 Bonds on
December 1, 2011.
(2) Represents amounts to pay the Underwriter’s discount, fees of rating agencies, the Trustee, bond counsel,
disclosure counsel, the financial advisor, printing and other miscellaneous costs of issuing the 2011 Bonds.
-8-
Annual Debt Service
Set forth below is the annual debt service on the 2011 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 Total
(June 1) Principal Interest Debt Service
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
TOTALS
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Set forth below is the combined annual debt service on the 2011 Bonds secured by the
Net Revenues of the Water System and the debt service on the 2009 Bonds (assuming no
optional redemption).
Bond Year
Ending
(June 1) 2009 Bonds 2011 Bonds Total
2012 $ 2,562,430.00
2013 2,562,390.00
2014 2,564,602.50
2015 2,562,521.26
2016 2,565,921.26
2017 2,562,721.26
2018 2,566,883.76
2019 2,566,602.50
2020 2,566,382.50
2021 2,563,272.50
2022 2,562,812.50
2023 2,564,767.50
2024 2,563,902.50
2025 2,565,217.50
2026 2,563,477.50
2027 2,563,682.50 — 2,563,682.50
2028 2,565,597.50 — 2,565,597.50
2029 2,563,502.50 — 2,563,502.50
2030 2,566,322.50 — 2,566,322.50
2031 2,563,492.50 — 2,563,492.50
2032 2,564,252.50 — 2,564,252.50
2033 2,563,170.00 — 2,563,170.00
2034 2,564,947.50 — 2,564,947.50
2035 2,563,990.00 — 2,563,990.00
TOTALS $61,542,862.54
SECURITY FOR THE 2011 BONDS
Pledge of Net Revenues
General. The 2011 Bonds are special obligations of the City and, pursuant to the
Indenture, there is pledged, for the benefit of the Owners of the 2011 Bonds, the Net Revenues
of each System which are necessary to pay Debt Service on the Sub-Series of Bonds issued for
such System.
“Net Revenues” means, with respect to a System, for any period of computation, the
amount of the Gross Revenues received from such System during such period, less the amount
of Maintenance and Operation Costs of such System becoming payable during such period.
“Gross Revenues” means, 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 a System or otherwise arising from a System during such period, including but not limited
to (a) all Charges received by the City for use of such System, (b) all receipts derived from the
investment of funds held by the City or the Trustee under this Indenture, (c) transfers from any
stabilization reserve funds of a System into the Revenue Fund of such System, and (d) all
moneys received by the City from other public entities whose inhabitants are served by such
System pursuant to contracts with the City.
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“Maintenance and Operation Costs” means the reasonable and necessary costs spent or
incurred by the City for maintaining and operating a System, calculated in accordance with
sound accounting principles, 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 such System in good repair and working order, and including all reasonable and
necessary administrative costs of the City attributable to such 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 engineers, 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 this Indenture, but excluding depreciation, replacement and obsolescence charges
or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar
nature.
“Charges” 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 a particular
System furnished by the City.
Flow of Funds. 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 Revenue Fund and will be accounted for through and held in trust in the Revenue
Fund, and the City shall only have such beneficial right or interest in any of such money as in
this Indenture provided. 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.
All Gross Revenues shall be held in trust by the City in the Revenue Fund and shall be
applied, transferred, used and withdrawn only for the purposes hereinafter authorized in this
Article.
Operating Costs. The City shall first pay from the moneys in the Revenue Fund the
budgeted Maintenance and Operation Costs as such Costs become due and payable.
Debt Service Fund. On or before the third Business Day prior to each Interest Payment
Date, the City shall transfer from the 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) on
or before the third Business Day prior to each Principal Payment Date, 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 earnings 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 transfer 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.
Reserve Account. After making the payments, allocations and transfers provided for
in above, if the balance in the Reserve Account is less than the Reserve Requirement, the
deficiency shall be restored by transfers from the first moneys which become available in the
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 the Indenture.
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Surplus. As long as all of the foregoing payments, allocations and transfers are made
at the times and in the manner set forth above, any moneys remaining in the Revenue Fund
may at any time be treated as surplus and applied as provided in the Indenture.
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 2011 Bonds. The owners of the 2011 Bonds cannot 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 2011 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 Water System Subseries of
2011 Bonds and to the 2009 Bonds 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 of the Water System is senior to the lien on the Net Revenues of the Water
System securing the Water System Subseries of 2011 Bonds and to the 2009 Bonds. The pledge
of Net Revenues to the Gas System Subseries of 2011 Bonds 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 of the Gas System is senior to the lien on the Net Revenues
of the Gas System securing the Gas System Subseries of 2011 Bonds. It should be noted,
however, that unlike the 2011 Bonds, the 1995 Bonds are also secured by net revenues of the
Sewer System, the Storm Drain System and the Electric 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 of the Water System that is prior
to the lien securing the Water System Subseries of 2011 Bonds. The Indenture provides that no
additional bonds can be secured by a pledge of Net Revenues of the Gas System that is prior to
the lien securing the Gas System Subseries of 2011 Bonds.
Rate Covenant
The City has covenanted in the Indenture to fix, prescribe, revise and collect Charges for
each System during each Fiscal Year which (together with other funds transferred from
stabilization reserve funds for such 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 of such System estimated by the City
to become due and payable in such Fiscal Year;
(b) the Debt Service on the Sub-Series of Series A Bonds issued for such System;
(c) all other payments required for compliance with this Indenture and the
instruments pursuant to which any Parity Bonds relating to such System shall have
been issued; 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 of such System
or the Net Revenues of such System.
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In addition, the City has covenanted in the Indenture to fix, prescribe, revise and collect
Charges for such System during each Fiscal Year which, when added to the balance then on
hand in Available Reserves for such System, are sufficient to yield Net Revenues of such
System at least equal to one hundred twenty-five percent (125%) of the amounts payable
under the preceding clause (1)(b) in such Fiscal Year for Bonds which have a lien on such Net
Revenues.
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 (5.0) times maximum annual debt service on all outstanding bonded
indebtedness secured by Net Revenues of any of the Systems (the “Available Reserves
Targeted Level”); provided that:
(1) any depletion of the Available Reserves which causes the balance therein to fall
below the Available Reserves Targeted Level shall be restored from Net Revenues of the
System which caused such depletion to take place;
(2) the covenant contained above shall not require the City to charge Charges for
services provided by any System which exceed the reasonable costs of providing said
services, or otherwise violate applicable law; and
(3) testing of the amount of Available Reserves shall not be required to occur more
frequently than twice in any Fiscal Year.
Transfers. In addition, the City has covenanted to transfer from Available Reserves, to
the applicable Revenue Fund, as needed, amounts sufficient to enable the City to pay all
Maintenance and Operation Costs of the applicable System, and all Debt Service, 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
are secured by a lien on net revenues of the Wastewater 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 2009 Bonds.
Parity and Subordinate Bonds
In addition to the 2011 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) The City shall be in compliance with all covenants set forth in this Indenture.
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(b) The Net Revenues of the System for which such Parity Bonds are being issued,
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
such System’s rate stabilization fund, plus, at the option of the City, any or all of the amount
described in the following paragraph, 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 such System.
The following may be added to Net Revenues for the purpose of issuing or incurring
Parity Bonds hereunder: an allowance for earnings arising from any increase in the Charges
which has become effective prior to the incurring 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 or such twelve
(12) month period, all as shown in the written report of an Independent Consultant engaged by
the City.
(c) The Net Revenues of the System for which such Parity Bonds are being issued,
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, 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 such
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:
(i) An allowance for Net Revenues from any additions to or improvements or
extensions of the System to be made with the proceeds of such Parity Bonds, 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 or extension is
respectively to be in operation, all as shown in the written report of an Independent
Consultant engaged by the City;
(ii) An allowance for earnings arising from any increase in the Charges which has
become effective prior to the incurring 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 or such twelve (12) month period, all as shown in the written report of an
Independent Consultant engaged by the City; and
(iii) Funds then on hand in Available Reserves for the System for which such
Parity Bonds are being issued.
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Reserve Account
General. The Indenture provides for establishment of a Reserve Account. On the date of
issuance of the 2011 Bonds, the City intends to satisfy the Reserve Requirement with a cash
deposit made from a portion of the proceeds of the 2011 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 2011 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, Tesla, Tibco Software,
Space Systems Loral, 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.
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 City Council Members
are elected at large for four-year, staggered terms. The Mayor and Vice Mayor are elected
annually at the first City Council meeting in January. The Mayor presides over all City 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. For general, economic and demographic information
regarding the City, see APPENDIX B—GENERAL AND ECONOMIC INFORMATION
ABOUT THE CITY.
City Utilities
The City operates the following 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.
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The City’s Utilities Department 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 2011 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 2011
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 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 2011 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 five utility systems (the
Electric System, the commercial Fiber Optics System, the Gas System, the Water System and
the 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 Fong, 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, where 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 California, 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 City’s Utilities Department. At
PG&E he held positions in Gas and Electric Operations, Gas Transmission, Customer Services,
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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 and renewable
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 collections, which works with customers to ensure proper
and timely payment. 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 1980 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 Consultants 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 Management. 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
commodity 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 long-term forecasting, 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 Director of Utilities, Operations. 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 to 1997, he worked for Pacific Gas and Electric in the Gas and Electric distribution
systems. He joined TCI/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.
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Enterprise Staffing and Technology
The City employs approximately 251 full-time equivalent employees to operate its
utilities. 196 of these employees are represented by Service Employees International Union
(“SEIU”) in all matters pertaining to wages, benefits and working conditions. The current one-
year agreement with this union, which is in the form of a memorandum of understanding,
expires on June 30, 2011. The City and SEIU are negotiating a new one-year agreement.
Management employees receive substantially the same fringe benefit package as the SEIU
members, and are represented by the newly formed Utilities Management and Professional
Association of Palo Alto (“UMPAPA”) and are just initiating negotiations for an agreement.
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, 2008 (the most recent actuarial information available), the total
pension benefit obligation for all City employees was $702,301, net assets available for plan
benefits were $608,720 and the total pension benefit obligation exceeded the City’s net assets
available for plan benefits by $93,581.
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 Systems, 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 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 Electric 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
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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 the authority to set utility rates for each utility system. The City
sets rates to recover costs consistent 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 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.
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 0.10% 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, 2001, 2003, 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.
Annual Financial Statements and Significant Accounting Policies
The City’s annual financial statements will be audited by Macias Gini & O’Connell LLP
(“MGO”), Sacramento, California, in accordance with generally accepted auditing standards
and the standards for financial audits issued by the Comptroller General of the United States.
The MGO audit report will contain 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 former external
auditor was Maze & Associates, Walnut Creek, California. The prior years annual financial
statements up to fiscal year 2010 were audited by Maze and Associates.
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, 2010. Copies of prior reports are available on the City’s website
(http://www.cityofpaloalto.org/depts/asd/financial_reporting.asp) or upon request to the
Administrative Services Department, City of Palo Alto, 250 Hamilton Avenue, Palo Alto, CA
94301.
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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
(ii) 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 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.
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 1950s, 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.
-20-
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 (with a total storage capacity of 10.5 MG).
City water is distributed to approximately 20,000 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 from local reservoirs, and is then pumped across the Hayward fault and through the
Irvington Tunnel. There the SFPUC’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 around 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% Hetch Hetchy 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 SFPUC’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 (ccf) per year1. In Fiscal Year 2007-08, the SFPUC
1 1 ccf equals 748 gallons
-21-
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 SFPUC’s water delivery system.
On October 30, 2008, the SFPUC approved the Water System Improvement Program
(WSIP), 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 improve reliability and meet future customer needs. The WSIP
will be debt funded. The total estimated cost of the WSIP, which includes the SPPUC
infrastructure to serve the City of San Francisco and the 27 wholesale customers, including
inflation and contingencies, is approximately $4.5 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 SFPUC 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 $3.79 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 SFPUC’s Water System
Improvement Program (WSIP) consists of projects that are 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:
• 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 earthquakes.
• 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 SFPUC’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.
-22-
Wholesale water prices have increased over the past five years as the SFPUC 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 Rate per CCF
2006 $1.02
2007 $1.22
2008 $1.30
2009 $1.43
2010 $1.65
The latest forecast of wholesale water prices from the SFPUC incorporate the expected
cost and schedule for the WSIP. The price forecast is as follows:
Fiscal Year Rate per CCF
2011 $1.90
2012 $2.63
2013 $2.91
2014 $3.12
2015 $3.32
2016 $3.79
2017 $4.04
2018 $4.30
2019 $4.30
2020 $4.38
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 an extended SFPUC water supply interruption.
Water Wells, Regional Storage and Distribution System Study. Due to the critical need to
ensure sufficient water supplies are provided under emergency conditions, in accordance with
City Council direction, the City has accelerated the construction of the recommendations of the
Water Wells, Regional Storage and Distribution System Study, completed in 1999. This study
identified system deficiencies and recommended capital improvements to improve the
operation and reliability of the City’s water distribution system, particularly during emergency
situations. The City’s five existing wells will be rehabilitated or rebuilt by December 2011. Two
of the three planned new wells have been completed and a third new well is scheduled for
construction. A new reservoir and pump station at El 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. In
support of the current projects, five booster pump stations have been rehabilitated in the
Foothills to improve water conveyance efficiency and seismic retrofits to existing water storage
and supply facilities will occur between January 2012 through June 2015. These completed
and planned improvements are projected to ensure reliability and maintain the City’s water
supply capacity at nearly normal usage 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
-23-
used as supplemental supplies in protracted drought conditions when conservation efforts
and SFPUC supplies are not sufficient to meet demands.
Recycled Water Project
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 water
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 Renzel 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
2008, which provided further detail regarding potential project cost and potential recycled
water 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 the 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. The Notice of Preparation for the Environment
Impact Statement was released on June 16, 2011.
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 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
City 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 Spring 2012, 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 SFPUC. Since wholesale water costs are
-24-
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 update to the 2010 UWMP was adopted in June 2011. The 2010 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
undertaken during various stages of a water supply shortage. There are four water shortage
stages culminating in Stage IV, which is a critical water shortage where water supplies are
reduced by up to 35% to 50%. Actions taken to respond to water shortage stages include
outreach campaigns, water audit programs, expanded 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 2010 UWMP also includes a plan to meet
the requirement to reduce per capita water usage by 20% by 2020 under the Water
Conservation Act of 2009 (SBx7-7), including proposed water efficiency measures that are
expected to account for approximately 13% of total water demand by 2030. Additionally, the
2010 UWMP describes the 2009 water supply agreement with San Francisco, including the
recently adopted allocation formula for water supply shortages such as droughts.
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 returned 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.
Water conservation programs are primarily administered by the Santa Clara Valley
Water District. They include indoor and landscape audits for both residents and businesses,
rebates and direct install programs for washing machines, toilets and urinals, rebates and
workshops for efficient landscape and irrigation equipment, as well as a custom program for
businesses to encourage the innovative use of water conservation methods in business
processes. Achievements of the water conservation program, compared to the goals set in the
UWMP, are shown below. All savings and achievements are shown as a percentage of total
sales.
Fiscal
Year
Annual
Savings Goal
Savings
Achieved
2007-08 0.34% 0.72%
2008-09 0.34% 0.98%
2009-10 0.34% 1.35%
2010-11 0.90% Not yet available
-25-
Historical Production and Deliveries
The following table sets forth a five-year history of water purchased from the SFPUC
and delivered to customers in the Water System’s service area.
Table 1
WATER SYSTEM
WATER PURCHASES AND SALES
(in hundreds of cubic feet)
Fiscal Years 2005-06 through 2009-10
2005-06 2006-07 2007-08 2008-09 2009-10
Wholesale Water Purchases 5,802,911 6,361,100 6,205,790 5,677,018 5,342,257
Retail Water Sales 5,208,903 5,480,603 5,526,644 5,395,080 4,954,950
Source: City of Palo Alto, Utilities Department.
Environmental Issues Relating to the Water System
The Utilities 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 current and the next five fiscal years in the aggregate amount of approximately
$80 million. The City currently intends to finance the projects with available Water Fund
revenues on a pay-as-you-go basis, except for the Water Recycling Project which expects
potential government grant or external funding, and not through the issuance of additional
bonds or other debt instruments. The following table displays these projects.
-2
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-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 33%
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 proposed rate increase is planned for
implementation on October 1, 2011. The rate change, if approved by Council in September
2011 will increase FY 2012 revenues equivalent to an annual revenue increase of 12.5% over FY
2011 revenues. This is subject to the noticing and public hearing requirements of Proposition
218. The following table sets forth a recent history of water rate increases.
Table 3
WATER SYSTEM
HISTORIC AND PROPOSED WATER RATE INCREASES FOR ALL CUSTOMER CLASSES
Year Increase
2004-05 10.3%
2005-06 0.0%
2006-07 7.0%
2007-08 10.0%
2008-09 8.0%
2009-10 5.0%
2010-11 0.0%
2011-12 12.5% (1)
Source: City of Palo Alto, Utilities Department.
(1) City Council action on the proposed rate increase of 12.5% has been delayed to September 2011 with an
implementation on October 1, 2011.
Water Rate Structure. Water rate schedules are established for residential and non-
residential (commercial and industrial) users. Both customer classes have both a fixed monthly
service charge and a variable water usage charge. During the period of Fiscal Year’s 2003-04
through 2006-07, water rate structures consisted of only a variable (volumetric) water usage
charge, but this practice was revised due to revenue instability. 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.
-28-
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) shows
the Fixed Charge Component. The rates shown below are per hundred cubic feet (ccf) of water
usage.
Table 4
WATER SYSTEM
WATER RATE STRUCTURE (1)
Volumetric Component
Fiscal Years 2006-07 through 2011-12
(per ccf)
User type and
Monthly Rate Block
2006-07
2007-08
2008-09
2009-10
2010-11
Residential:
0-7 ccf $4.04/ccf $3.949/ccf $3.949/ccf $3.949/ccf $3.949/ccf
over 7 ccf $4.27/ccf $4.510/ccf $5.164/ccf $5.624/ccf $5.624/ccf
Industrial/Commercial: $4.25/ccf $4.341/ccf $4.697/ccf $4.946/ccf $4.946/ccf
User type and
Monthly Rate Block
2011-12
Proposed
Residential:
0-6 ccf $3.60/ccf
over 6 ccf $7.64/ccf
Industrial/Commercial: $4.93/ccf
Source: City of Palo Alto, Utilities Department.
Table 5
WATER SYSTEM
WATER RATE STRUCTURE (2)
Fixed Charge Component
In Effect Since Fiscal Year 2007-08
(per meter)
Monthly Customer Charge
(by Meter Size)
Actual
2007-08
through 2010-11
Proposed
2011-12
5/8-inch meter $ 5.00 $ 10.00
3/4 inch meter 5.00 10.00
1 inch meter 6.50 13.00
1 1/2 inch meter 12.27 27.00
2-inch meter 19.37 43.00
3-inch meter 77.65 114.00
4-inch meter 130.60 195.00
6-inch meter 260.43 406.00
8-inch meter 383.67 644.00
10-inch meter 383.67 644.00
Source: City of Palo Alto, Utilities Department.
Projected Rates. The City Council is scheduled to act on the planned FY 2011-12 water
rate increase in September 2011 with the rate increase to take effect on October 1, 2011. The
proposed rate increase will be equivalent to an annual revenue increase of 12.5% in fiscal year
2011-12. Rates are and are projected to increase by 8%, 16%, 8% and 0% per year for each of
the following four years, respectively. These projected rate increases could change depending
-29-
on the future projections, and will largely depend on the future costs of purchased water and
the volume of water sales.
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 communities for fiscal year 2010-11.
Table 6
WATER SYSTEM
COMPARATIVE RATES FOR AVERAGE MONTHLY RESIDENTIAL SERVICE
Fiscal Year 2010-11
Water Provider
Average
Monthly Rate (1)
Mountain View $48.04
Redwood City 60.37
Palo Alto 72.01
Menlo Park 76.44
Millbrae 75.82
Burlingame 95.23
Average excluding Palo Alto $71.18
Source: City of Palo Alto, Utilities Department.
(1) Represents rate for typical residential users based on consumption of 14 ccf plus a service charge for a 5/8”
meter.
Water Demand and Customer Base
On average, the City’s water customers consume 30.2 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 having lower consumption. In fiscal year
2009-10, the Water System sold approximately 495 million cubic feet of water to
approximately 20,000 users. (This amount is lower than water purchased from the SFPUC
due to water losses in the storage and transmission systems, billing period differences and
unmetered water uses.)
The following table sets forth a five-year history of the number of accounts for the
Water System.
Table 7
WATER SYSTEM
NUMBER OF ACCOUNTS
As of June 30, 2005-06 through 2009-10
Fiscal
Year
Number of
Accounts
2005-06 19,645
2006-07 19,726
2007-08 19,942
2008-09 20,031
2009-10 20,156
Source: City of Palo Alto, Utilities Department.
* Estimated
-30-
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 2009-10.
Table 8
WATER SYSTEM
SUMMARY OF WATER ACCOUNTS AND USAGE BY USER TYPE
Fiscal Year 2009-10*
(Dollars in Thousands)
User Type
Number of
Accounts
Billings
Consumption
(in ccf)
Consumption
as Percent
of Total
Single Family Residences 15,333 $12,241 2,342,593 47.3 %
Apartments 2,299 4,030 767,048 15.5
Commercial/Industrial 2,115 7,406 1,422,715 28.7
Other 409 2,194 422,594 8.5
Total 20,156 $25,871 4,954,950 100%
Source: City of Palo Alto, Utilities Department.
*Estimated
Largest Water Customers. For Fiscal Year 2009-10, total consumption was 4,954,950 ccf,
and total operating revenues were $25,850,376. The ten largest customers accounted for
approximately 17.4% of total consumption and 17.1% of total operating revenue. The largest
customer (other than the City) accounted for 3.9% of total consumption and 3.7% of total
operating revenue.
The following table lists the ten largest customers of the Water System for fiscal year
2009-10:
Table 9
WATER SYSTEM
TEN LARGEST CUSTOMERS
Fiscal Year 2009-10
Primary
Rank Business Activity Name
1 Government City of Palo Alto
2 Medical Stanford Hospital & Clinic
3 Medical Veterans Administration Hospital
4 Education Palo Alto Schools
5 Apartment/Hotel Stanford West Management
6 High Tech Hewlett Packard
7 Recreation Golf & Country Club
8 Education Stanford University
9 High Tech DPIX-Bldg 34
10 High Tech Space Sys Loral
Source: City of Palo Alto, Utilities Department.
Total consumption of the top ten customers was 4,954,950 ccf and total operating
revenue was $25,850,376.26. The ten largest account for approximately 17.4% of total
consumption and 17.1% of total operating revenues during fiscal year 2009-10. The largest
customer (other than City) accounts for 3.9% of total consumption and 3.7% of total operating
revenue.
-31-
Management Discussion of Operations
Utilities Strategic Plan. The City continues to focus on providing a high quality and
reliable source of water for its residents. Utilities is in the process of updating the Strategic
Plan last approved in 2005. The five key objectives in the 2011 Utilities Strategic Plan which is
scheduled for Council approval in the Fall of 2011 are: (1) Superior delivery of service; (2)
providing service with respect and concern; (3) productive, effective use of resources; (4)
straight-forward, honest and fair relations; (5) excellence in creative thought and
implementation. Seventeen strategic initiatives were proposed to achieve one or more
objectives and the overall strategic plan. 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. Water sales revenue during the past five years grew from $20.4 million in
fiscal year 2005-06 to $25.7 million in fiscal year 2009-10. This represents a compound annual
growth rate of 6.0% over this period. Annual change in water rates is provided in Table 3. In
fiscal year 2011-12, water sales revenue is projected to increase 12.5% to recover rising
wholesale purchase costs and distribution operating costs, including debt service on the 2011
Bonds. Between fiscal year 2012-13 and fiscal year 2015-16, water rates are projected to
increase by 17%, 16%, 8% and 0% annually to offset rising wholesale water purchase costs.
Rate Stabilization Reserves. The Water Fund Rate Stabilization Reserve (W-RSR) balance
is budgeted to be $10.5 million at the end of Fiscal Year 2009-10. At the end of the five year
planning horizon, W-RSR balance is expected to be $12.7 million in Fiscal Year 2015-16. 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 includes both ongoing
maintenance and infrastructure upgrades as well as retrofits for seismic protection. 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 City 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
WATER SYSTEM
BALANCE SHEET
Fiscal Years Ended June 30, 2006 through 2010
(Dollars in Thousands)
2005-06 2006-07 2007-08 2008-09 2009-10
ASSETS
CURRENT ASSETS:
Cash and Investments $18,092 $20,201 $24,424 $24,846 $59,231
Accounts Receivable (Net) 3,191 3,490 4,233 3,886 3,610
Interest Receivable 220 251 272 272 389
TOTAL CURRENT ASSETS 21,503 23,942 28,929 29,004 63,230
NON-CURRENT ASSETS:
Property, Plant and Equipment: (net) 52,960 56,636 59,426 63,921 72,621
TOTAL ASSETS 74,463 80,578 88,355 92,925 135,851
LIABILITIES
Accounts Payable and Accrued Liabilities 11,601 11,068 11,449 11,074 47,004
Accrued Salaries and Benefits 58 192 81 97 120
TOTAL LIABILITIES 11,659 11,260 11,530 11,171 47,124
FUND EQUITY
Investment in capital assets, net of related debt 43,259 47,226 49,599 54,355 56,705
Restricted for Debt Service 780 780 780 780 3,348
Unrestricted 18,765 21,312 26,446 26,619 28,674
TOTAL FUND EQUITY 62,804 69,318 76,825 81,754 88,727
TOTAL LIABILITIES AND FUND EQUITY 74,463 80,578 88,355 92,925 135,851
Source: City of Palo Alto Comprehensive Annual Financial Statements, 2005-2010.
-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, 2010. See APPENDIX
C—COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL
YEAR ENDED JUNE 30, 2010.
Table 11
WATER SYSTEM
SUMMARY STATEMENT OF HISTORICAL REVENUES, EXPENSES
AND CHANGES IN RETAINED EARNINGS
Fiscal Years 2005-06 through 2009-10
(Dollars in Thousands)
2005-06 2006-07 2007-08 2008-09 2009-10
OPERATING REVENUES:
Sales of Utilities:
Customers $19,506 $21,826 $24,558 $25,086 $24,434
City Departments 924 1,088 1,298 1,468 1,311
Service Connection Charge & Miscellaneous 228 315 409 325 270
Other Operating Revenues 179 266 245 241 244
Total Operating Revenues 20,837 23,495 26,510 27,120 26,259
OPERATING EXPENSES:
Purchase of Utilities 6,472 7,805 8,363 8,444 9,061
Administration and General 2,776 2,247 2,741 3,065 2,953
Engineering (Operating) 195 262 359 333 263
Resource Management 464 396 350 394 486
Operations and Maintenance 2,875 2,702 3,561 4,040 4,257
Rent 1,506 1,781 1,788 1,919 2,107
Depreciation and Amortization 995 1,132 1,134 1,171 1,411
Total Operating Expenses 15,283 16,325 18,296 19,366 20,538
Operating Income (Loss) 5,554 7,170 8,214 7,754 5,721
NON-OPERATING REVENUES
(EXPENSES):
Return on Investment 918 909 1,021 1,155 1,129
Unrealized Gain/Loss on Investment (481) 171 606 633 246
Interest Expense (457) (454) (436) (426) (774)
Capacity Fees 271 542 951 523
Loss on Disposal of Fixed Assets (148) — — (199) (189)
Net Non-operating Revenues (Expenses) 103 1,168 2,142 1,686 412
INCOME (LOSS) BEFORE OPERATING
TRANSFERS
5,657 8,338 10,356 9,440 6,133
Operating Transfers In 20 1,153 200 44 1,122
Operating Transfers (Out) (3,987) (2,977) (3,049) (4,555) (282)
Net Revenue 1,690 6,514 7,507 4,929 6,973
2002 Bonds (Water System Portion) 775 774 776 776 1,806
Net Revenues Available for Debt Service (1) 3,771 7,929 8,471 6,092 9,101
Debt Service Coverage 4.87x 10.24x 10.92x 7.85x 5.04x
Source: City of Palo Alto
(1) Depreciation and amortization, unrealized gain and loss on investments, loss on disposal of fixed asset and
Interest Expense have been added back.
-34-
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, 2011, through June 30, 2015. 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. The City assessed major cost
drivers and expected costs, the short-term risks, reviewed reserve guidelines, and determined
the revenue requirements for the next five years. The forecast attains a gradual increase of
revenue to fund the expected operating expenses over the next five years. The projected
adjustments achieve the goals of ensuring that the balance of the water rate stabilization
reserves is adequate and within the Council-approved reserve guidelines in the long-term
horizon. In the interim years of 2012-13 and 2013-14, the water rate stabilization reserve is
projected to go below the minimum reserve guidelines but recovers to sufficient levels in 2014-
15. Actual operating results achieved during the projection period may vary from those
presented in the forecast and such variations may be material.
-35-
Table 12
WATER SYSTEM
ACTUAL AND PROJECTED REVENUES, EXPENSES AND NET REVENUES
Fiscal Years 2010-11 through 2014-15
(Dollars in Thousands)
2010-11 2011-12 2012-13 2013-14 2014-15
OPERATING REVENUES:
Sales of Water $26,926 $30,794 $35,539 $41,013 $44,174
Service Connection Charge & Capacity Fees 692 767 776 785 795
Other Operating Revenues and Transfers In 156 158 159 161 162
Total Operating Revenues 27,774 31,719 36,474 41,959 45,131
NON-OPERATING REVENUES
Interest / Return on Investment 1,050 595 665 627 976
Federal Government Interest Subsidy 610 605 598 588 577
Total Non-operating Revenues 1,660 1,200 1,263 1,215 1,553
Total Revenues 29,434 32,919 37,737 43,174 46,684
OPERATING EXPENSES
Purchase of Water (1) 10,834 14,790 16,840 17,949 18,986
Administration and
General/Engineering/Resource Mgmt/O&M
10,722 10,604 10,709 10,816 10,923
Interest Expense 1,531 1,507 1,478 1,443 1,405
Rent 2,107 2,128 2,150 2,171 2,193
Depreciation and Amortization 1,300 1,350 1,400 1,450 1,450
Total Expenses 26,494 30,379 32,577 33,829 34,957
Net Revenues 2,940 2,540 5,160 9,345 11,727
Net Revenues Available for Debt Service (2) 5,771 5,397 8,038 12,238 14,582
2002 Utility Revenue Bonds (Water System Portion) 775 96 0 0 0
2009 Water Revenue Bonds (3) 2,206 2,562 2,562 2,565 2,563
2011 Bonds (Water System Portion) (4) 0 738 711 712 712
Total Debt Service 2,981 3,396 3,273 3,277 3,275
Debt Service Coverage 1.94x 1.59x 2.46x 3.73x 4.45x
Net Revenues After Debt Service 2,790 2,001 4,765 8,961 11,307
Reserve Balance As of Year End
Emergency Plant Replacement $ 1,000 $1,000 $1,000 $1,000 $ 1,000
Rate Stabilization 10,978 8,667 3,443 2,927 9,118
Total Reserve Balance $11,978 $9,667 $4,443 $3,927 10,118
Source: City of Palo Alto
(1) Purchase cost increasing due system improvement project by San Francisco Public Utilities Commission.
(2) Depreciation, amortization and interest expense have been added back.
(3) Interest of $360,797 was capitalized for December 1, 2010 and City receives 35% federal government interest
subsidy under “Direct Payment Build America Bonds” under the provisions of the American Recovery and
Reinvestment Act of 2009.
(4) Estimate, subject to change.
THE GAS SYSTEM
History
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Municipal ownership of the gas system began on October 1, 1917, when the City
purchased the Palo Alto Gas Company with the proceeds of a $40,000 bond issue. The
decision to municipalize the Gas System was influenced by controversies related to the rates
charged by the Palo Alto Gas Company and the quality of the product. Furthermore, the City
had a record of managing its electric system since 1900 at substantial savings to its citizens.
In the early years of the Gas Utility, gas was manufactured from coal tar. On October
7, 1929, natural gas, a superior fuel, was introduced into the City’s mains, as Palo Alto began
purchasing gas from Pacific Gas and Electric Company” (“PG&E”). PG&E obtained natural
gas from the lower San Joaquin oil field and had a superior quality of 1180 Btu per cubic foot.
As a consequence, domestic gas consumption began to rise dramatically in the early 1930s.
The City relied on PG&E for natural gas until September 1, 1987, whereupon the City
contracted with alternative suppliers located in the southwestern United States. At the same
time, the City lowered its retail rates below PG&E for the first time in the City’s history.
As the City’s population grew in the 1930s, 1940s and 1950s, the City issued bonds to
finance the necessary gas distribution system expansions and improvements. This funding
policy was changed in the 1960s to a “pay as you go” funding approach, whereby current
revenues were raised to accommodate capital improvement projects. This issuance of the 2002
Bonds is the first departure from this long-standing policy. The City plans to reinstate the
“pay as you go” funding approach for the Gas System in 2005.
Service Area
The City is the primary provider of gas service within the incorporated limits of the City
of Palo Alto and land owned or leased by the City. The City’s service area encompasses
approximately 26 square miles.
Gas Distribution System
The City operates a gas utility supplying approximately 23,300 customers with high-
quality natural gas. Natural gas is delivered to the City’s four gas receiving stations through
PG&E’s Bay Area local distribution system gas transmission mains, which the City uses
through a contractual arrangement with PG&E. The City distributes gas to its customers
through a distribution system consisting of two-inch to twelve-inch gas mains. Historically, the
City’s gas distribution system has grown and evolved with the City. The rate and extent of the
City’s growth made it necessary to employ an orderly, planned expansion process for the gas
distribution system.
Since 1992, the City has been pursuing an accelerated Gas Main Replacement Program
which has targeted improving the City’s gas distribution system performance by replacing
small diameter steel gas mains with larger diameter polyethylene mains and improving the gas
distribution valve system, which together have increased gas supply to the entire system. This
program has mitigated operational problems caused by past annexations to the system.
Sources of Gas Supply
Gas Supply Acquisition Strategy. Since April 2001, the City has followed a gas laddering
strategy whereby a portion of the City’s gas needs are purchased at fixed- and capped-prices
over a 36-month time horizon. The goal of this purchasing strategy is to smooth or stabilize
gas supply costs relative to the volatile gas spot market. The gas laddering strategy is used to
purchase gas for residential and small commercial customers. Palo Alto’s eight largest
customers manage their own gas portfolio costs by electing either a monthly spot-market-
based commodity rate, a fixed rate for 12 or 24 months, or a custom rate. The gas laddering
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strategy is currently under review. Any residual gas needs are purchased on the monthly and
daily spot markets.
All gas purchases are made through enabling agreements with one of the City’s five
approved counterparties: ConocoPhillips Company, JP Morgan Venture Energy Corporation,
Shell Energy North America, BP Energy Company, and Powerex Corporation. The City’s Risk
Management Policy and contract provisions require that its trading partners be investment
grade counterparties with stable financial standing. Performance assurances and other
financial enhancements, with the rights to early termination, are contract options should the
counterparty fall below investment grade rating or other “events of default.”
Gas Transmission Capacity. The City holds a base quantity of intrastate gas transmission
capacity on PG&E’s Redwood path under a contract with PG&E that expires in December
2014, as per the provisions of Gas Accord V. The rate for this capacity is equal to the rate
PG&E pays for its own distribution-level customers and is discounted relative to the rate
available to other shippers.
As in the past, the City will continue to monitor and intervene in state and federal
proceedings to protect its interests and ensure adequate access to state and national gas
transmission facilities to meet its needs.
Gas Conservation Policies and Procedures
The City Council reviews and adopts natural gas efficiency goals every three years. The
goals are developed based on an analysis of the potential for technology upgrades on a
technical, economic and customer basis. The goals are developed for the upcoming ten years.
The latest Natural Gas Energy Efficiency Potential study was adopted in March 2011. The
current ten-year goals are a cumulative reduction in expected gas use of 5.5% by 2020. This
reduction must be from the direct intervention of utility programs and above what reductions
may result from appliance and building energy standards. In addition, this goal must be
achieved on top of the substantial natural reductions that occur when consumers buy more
efficient equipment simply because it is what is legally available in the market. The savings are
projected to take place primarily from business and residential water heating upgrades, as
well as from residential upgrades to space heating and insulation. Efficiency programs are
reviewed by a third party agency to ensure that savings are being appropriate evaluated,
measured, and verified, as required by State Law (Assembly Bill 2021). A comparison of
goals, as a percentage of total sales, with achieved results, for the past four years is shown
below.
Year Annual Savings Goal Savings Achieved
2007-08 0.25% 0.11%
2008-09 0.28% 0.28%
2009-10 0.32% 0.40%
2010-11 0.40% Not yet available
In the Gas utility, there are utility programs for a full suite of implementation services
for all customer groups. Residential programs promoting gas efficiency include:
• Smart Energy Program (includes rebates for ENERGY STAR® appliances,
insulation, furnaces, and other equipment),
• Residential Energy Assistance Program (REAP) for low income efficiency
installations,
• Home Energy Reports,
• Green@Home energy audits,
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• Solar water heating rebates,
• Community event sponsorship promoting participation in residential efficiency
programs,
• Palo Alto Unified School District Grant Program, $50,000 grant for efficiency
education, and
• New construction incentive program in coordination with the Planning department.
Commercial programs promoting efficiency include:
• Commercial Advantage Program with rebates for many efficiency equipment
installations,
• Commercial and Industrial Energy Efficiency Program, which provides focused
audit and implementation assistance for larger businesses,
• New Construction incentive program,
• Meter Links website program to show the customer's prior-day load profile,
• Efficiency training for City facilities staff and customers, and
• PLUG-In—ultra-clean small-scale distributed generation and cogeneration rebate.
Historical Production and Deliveries
The following table sets forth historical gas production measured at the City’s gate in
the PG&E pipeline in millions of therms. These figures also represent gas deliveries to
customers in the Gas System’s service area.
Table 13
GAS SYSTEM
GAS SUPPLY BY SOURCE AND DELIVERIES
(in millions of therms)
Fiscal Years 2005-06 through 2009-10
Year Therms (million) Supply Source
2006-07 31.3 Wholesale purchase agreements
2007-08 32.2 Wholesale purchase agreements
2008-09 30.6 Wholesale purchase agreements
2009-10 30.7 Wholesale purchase agreements
Environmental Issues Relating to the Gas System
The Utilities Department reports that no environmental issues exist that are anticipated
to materially affect the Gas System.
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Capital Improvement Program Summary
The City currently projects that it will undertake capital improvements to the Gas
System for the current and the next 5 fiscal years in the aggregate amount of approximately
$36 million. The City currently intends to finance the remaining projects with available Gas
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.
Table 14
GAS SYSTEM
CAPITAL IMPROVEMENT PROGRAM SUMMARY
Improvement 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Capital Equipment Purchases $574,000 $306,000 $458,000 $575,000 $439,000 $352,000
Gas System Extensions 862,000 877,000 892,000 908,000 936,000 982,000
Gas System Improvements 632,000 200,000 206,000 212,000 218,000 230,000
Gas Main Replacement 6,257,000 6,438,000 6,632,000 3,692,000 3,842,000 4,035,000
Full Reimbursement by
Customer (Revenues)
(700,000) (710,000) (720,000) (730,000) (752,000) (790,000)
Total $7,625,000 $7,111,000 $7,468,000 $4,657,000 $4,683,000 $4,809,000
Source: City of Palo Alto, Utilities Department.
Gas Rates, Fees and Charges
Gas rates are based on the City’s costs for purchasing gas and operating and
maintaining the Gas System. Purchased natural gas costs make up 48% of the Gas System’s
fiscal year 2010-11 budget. The City has executed gas supply contracts at fixed prices. To
establish retail rates, these costs are added to other revenue requirements related to operation
of the gas distribution system, including the payment of any outstanding debt and the funding
of reserves.
Historical and Current Rates Adjustments. The City has historically adjusted natural gas
rates as needed for each customer class. The most recent rate change occurred in fiscal year
2008-09, which was a decrease of 10 percent. See “THE GAS SYSTEM - Management
Discussion of Operations” below. The following table sets forth a five-year history of natural
gas rate increases.
Table 15
GAS SYSTEM
HISTORIC GAS RATE INCREASES FOR ALL CUSTOMER CLASSES
Year Increase
2005-06 20.0%
2006-07 9.5%
2007-08 7.1%
2008-09 -10.0%
2009-10 —
2010-11 —
2011-12 —
Natural Gas Rate Structure. Natural gas rate schedules are established for residential and
non-residential (commercial and industrial) users. The residential rate schedule consists of rate
or usage blocks that ascend in price as consumption increases. The rates are seasonal and
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change between winter and summer. Non-residential users (including public facilities) pay a
flat rate. Starting in Fiscal Year 2007-08, all rate schedules have a monthly service charge.
The following table sets forth the Gas System rates for the past four fiscal years and
the current fiscal year. The current fiscal year’s rate structure was approved on July 1, 2009.
The rates shown below are per therm (100,000 Btu) of natural gas usage.
Table 16
GAS SYSTEM
GAS RATE STRUCTURE
Fiscal Years 2006-07 through 2010-11
(per therm)
User type and
Bi-Monthly Rate Block
2006-07
2007-08
2008-09
2009-10
2010-11
Residential:
Summer: 0-20 1.3332 1.4226 1.5561 1.3872 1.3872
Over 20 1.9492 2.0386 2.1721 1.9592 1.9592
Winter: 0-96 1.3332 1.4226 1.5561 1.3872 1.3872
Over 96 1.9492 2.0386 2.1721 1.9592 1.9592
Monthly Service Charge 5.25 5.25 5.25 5.25
Small Non-Residential
All therms 1.2936 1.3820 1.5155 1.3541 1.3541
Monthly Service Charge 35.00 35.00 35.00 35.00
Large Non-Residential
All therms (1) 1.0290 1.1942 1.0151 0.8086 0.7791
Monthly Service Charge 311.00 311.00 311.00 311.00
(1) G3 commodity rate changes monthly. The therm rate presented is the annual average rate.
Projected Rates. To match revenue requirements over the next 5-year period, only one
retail gas rate increase is anticipated during the next five years. The City currently projects that
retail natural gas rates will increase by 2% in fiscal year 2012-13, and remain flat otherwise for
the 5-year horizon. These rate projections could change depending on future estimates, and
will largely depend on the future costs of purchased natural gas.
Comparative Monthly Natural Gas Rates. The table below shows comparative average
residential natural gas bills charged by the City and PG&E, the only other natural gas supplier
serving neighboring Santa Clara County communities, for a usage rate of 30 therms per month
in the summer (May-October) and 100 therms per month in the winter (November/April).
Table 17
GAS SYSTEM
COMPARATIVE BILLING FOR AVERAGE MONTHLY RESIDENTIAL SERVICE
Calendar Year ____
Supplier Total Bill Monthly Average
PG&E $922.48 $76.87
Palo Alto $1,193.06 $99.42
Gas Demand and Customer Base
On average, the City provides its customers with 84,000 therms of natural gas per day.
However, demand rises and falls depending on the season, with the winter months showing
high consumption and the summer months lower consumption. In fiscal year 2009-10, the Gas
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System supplied approximately 23,700 users with approximately 30.7 million therms of
natural gas.
The following table sets forth a five-year history of the number of accounts for the Gas
System.
Table 18
GAS SYSTEM
NUMBER OF ACCOUNTS
As of June 30, 2006 through 2010
Fiscal Year Number of Accounts
2005-06 23,353
2006-07 23,357
2007-08 23,502
2008-09 23,576
2009-10 23,721
The following table shows billing amounts, gas consumption in therms by customer
type, and gas consumption as a percentage of total consumption by type of customer for
active gas accounts during fiscal year 2009-10.
Table 19
GAS SYSTEM
SUMMARY OF GAS ACCOUNTS AND USAGE BY USER TYPE
Fiscal Year 2009-10
User Type
Number of
Accounts
Billings
($000s)
Consumption
(in therms)
Consumption as
Percent of Total
Single Family Residences 15,397 $ 16,121 9,965,292 32.4%
Apartments 6,758 6,341 4,064,427 13.2%
Commercial/Industrial 1,493 17,490 13,507,881 43.9%
Other 73 3,343 3,205,907 10.4%
Total 23,721 $ 43,294 30,743,507 100.0%
Largest Gas Customers. The following are the ten largest customers for the Gas System
for fiscal year 2009-10. In the aggregate, the ten largest customers represent approximately
18% of the annual Gas System service charges received by the City.
Table 20
GAS SYSTEM
TEN LARGEST CUSTOMERS
Fiscal Year 2009-10
Rank Industry Name
1 Medical Veterans Administration Hospital
2 Government City Of Palo Alto
3 Education Stanford University
4 High Tech Syntex
5 High Tech Space Sys Loral
6 Medical Stanford Hospital & Clinic
7 Education Palo Alto Schools
8 Education Stanford University.
9 High Tech CPI
10 Medical Schering-Plough Biopharma
Source: City of Palo Alto, Utilities Department.
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Total consumption of these customers was 30,743,358 therms and total operating
revenue was $43,049,787.77. The ten largest customers accounted for approximately 23.3% of
total consumption and 17.9% of total operating revenues during fiscal year 2009-10. The
largest customer (other than City) accounted for 5.9% of total consumption and 3.5% of total
Operating revenue.
Management Discussion of Operations
Utilities Strategic Plan. Utilities is in the process of updating the Strategic Plan last
approved in 2005. The five key objectives in the 2011 Utilities Strategic Plan which is
scheduled for Council approval in the Fall of 2011 are: (1) Superior delivery of service; (2)
providing service with respect and concern; (3) productive, effective use of resources; (4)
straight-forward, honest and fair relations; (5) excellence in creative thought and
implementation. Based on these objectives, seventeen strategic initiatives were proposed to
achieve one or more objectives and the overall strategic plan. The Utilities Strategic Plan is
applicable to Water, Gas, Electric, Wastewater Collection, and Fiber Optics operations.
Sales Revenues. Retail sales revenue during the past five-year period grew from $36.4
million in fiscal year 2005-06 to $43.2 million in fiscal year 2009-10. Over this period, this
represents a revenue growth rate of 4.4% annually.
Rate Stabilization Reserves. The primary goal of the Rate Stabilization reserves is to
maintain adequate Rate Stabilization Reserves is to provide rate stability to City residents and
businesses. The unprecedented rise in wholesale gas costs during fiscal year 2000-01 presented
an opportunity to utilize these reserves to help mitigate the full impact of higher commodity
rates. In this regard, the Gas Fund Rate Stabilization Reserves were purposely drawn down
during fiscal year 2000-01 as retail rates moved upward. Thus, the financial strategy used
during fiscal year 2000-01 consisted of a combination of staggered rate increases, withdrawal
of reserves to cushion customer bill impacts, and implementation of a large (67%) rate increase
to accelerate restoration of reserve balances.
Today, the Gas Fund Rate Stabilization Reserves consist of two parts, the Gas Supply
Rate Stabilization Reserve and the Gas Distribution Rate Stabilization Reserves. Combined,
Gas Fund Rate Stabilization Reserve balance at the beginning of Fiscal Year 2010-11 is $18.5
million. At the end of the five year planning horizon in Fiscal Year 2015-16, Gas Rate
Stabilization Reserve balance is expected to be $10.7 million.
(See “AVAILABLE RESERVES” for a discussion of the minimum and maximum
guideline levels established for each reserve fund.)
Gas Purchase Costs. Gas wholesale market costs have been decreasing over the last two
years and they are expected to remain stable for the foreseeable future for planning purposes.
As a result gas purchase costs will remain around their budgeted levels of $19.4 million in
Fiscal Year 2011-12 throughout the forecast horizon ending in Fiscal Year 2015-16.
Capital Improvements. The City has undertaken significant capital improvements to the
Gas System . Gas mains have been replaced when leaks present a potential safety hazard or
when leak repairs are no longer cost effective. In 1992, the City accelerated the rate of gas main
replacements from 7,000 to 20,000 feet per year to replace leaking thin-walled plastic gas
mains and corroded steel mains. The Gas Main Replacement Program was again further
accelerated to 30,000 feet per year in fiscal year 1999- 00 due to the introduction of new gas
main construction methods that lowered gas distribution system construction costs.
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The City evaluated ways to improve the safety, operational distribution, and supply
reliability of the City’s gas distribution system and has included this analysis in its distribution
system Capital Improvement Plan project planning. The accelerated Gas Main Replacement
Program improves the City’s gas distribution supply capabilities and operational safety by
installing larger diameter polyethylene gas mains and control valves. The new polyethylene gas
mains will not corrode, thereby reducing the City’s operating costs in the future by eliminating
the maintenance expenses for cathodic protection system and leak repairs on the existing steel
gas distribution mains. To date, the majority of the gas main replacement projects have been
completed. The planned capital improvement expenditures are expected to decrease from their
current levels of $8.3 million in FY 2011 to $5.4 million in Fiscal Year 2014, and continue at this
level into the foreseeable future.
Balance Sheet
The following table sets forth the balance sheet of the Gas System for the four most
recent fiscal years. These numbers are excerpted from the audited general purpose financial
statements of the City which were prepared in accordance with generally accepted accounting
principles.
Table 21
GAS SYSTEM
BALANCE SHEET
Fiscal Years Ended June 30, 2006 through June 30, 2010
(in $000s)
2005-06 2006-07 2007-08 2008-09 2009-10
ASSETS
CURRENT ASSETS:
Cash and Investments $12,251 $16,337 $21,534 $24,024 $29,005
Accounts Receivable (Net) 2,438 2,784 3,714 1,084 3,059
Interest Receivable 153 185 231 4,154 242
TOTAL CURRENT ASSETS 14,842 19,306 25,479 29,262 32,306
NON-CURRENT ASSETS:
Property, Plant and Equipment: (net) 61,191 65,471 69,525 75,038 79,246
TOTAL ASSETS 76,033 84,777 95,004 104,300 111,552
LIABILITIES
Accounts Payable and Accrued Liabilities 1,560 1,744 3,045 2,271 2,033
Accrued Salaries and Benefits 68 76 79 104 122
Utility revenue bonds 11,471
11,066
10,647
10,214 9,766
TOTAL LIABILITIES 13,099 12,886 13,771 12,589 11,921
FUND EQUITY
Investment in capital assets, net of related debt 49,353 53,990 58,449 64,381 69,092
Restricted for Debt Service 952 952 952 952 952
Unrestricted 12,629 16,949 21,832 26,378 29,587
TOTAL FUND EQUITY 62,934 71,891 81,233 91,711 99,631
TOTAL LIABILITIES AND FUND EQUITY 76,033 84,777 95,004 104,300 111,552
Source: City of Palo Alto Audited Financial Statements, 2005-2010.
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Income Statements
The following table sets forth the statement of revenues, expenses and changes in
retained earnings of the Gas System for the four most recent fiscal years. These numbers are
excerpted from the audited general purpose financial statements of the City which were
prepared in accordance with generally accepted accounting principles.
Table 22
GAS SYSTEM
STATEMENT OF REVENUES, EXPENSES AND CHANGES IN RETAINED EARNINGS
Fiscal Years Ended June 30, 2006 through June 30, 2010
(in $000s)
2005-06 2006-07 2007-08 2008-09 2009-10
OPERATING REVENUES:
Sales of Utilities:
Customers $35,392 $40,474 $46,710 $46,059 $41,754
City Departments 1,040 863 1,393 1,194 1,490
Service Connection Charge & Miscellaneous 427 756 817 461 434
Other Operating Revenues 118 129 101 124 772
Total Operating Revenues 36,977 42,222 49,021 47,838 44,450
OPERATING EXPENSES:
Purchase of Utilities 21,375 22,250 27,220 25,091 22,529
Administration and General 2,121 2,472 3,309 1,830 2,690
Engineering (Operating) 237 295 341 310 266
Resource Management 807 878 839 1,037 1,124
Operations and Maintenance 2,340 2,467 3,097 3,234 3,943
Rent 143 148 161 205 320
Depreciation and Amortization 1,249 1,623 1,636 1,674 1,728
Total Operating Expenses 28,272 30,133 36,603 33,381 32,600
Operating Income (Loss) 8,705 12,089 12,418 14,457 11,850
NON-OPERATING REVENUES
(EXPENSES):
Return on Investment 498 804 854 984 972
Unrealized Gain/Loss on Investment (311) (80) 488 631 371
Interest Expense (558) (546) (535) (521) (506)
Capacity Fees 1 1
Loss on Disposal of Fixed Assets (278) (14) — (329) (16)
Net Non-operating Revenues (Expenses) (649) 165 807 766 821
INCOME (LOSS) BEFORE OPERATING
TRANSFERS
8,056 12,254 13,225 15,223 12,671
Operating Transfers In 39 956
Operating Transfers (Out) (4,294) (3,297) (3,883) (4,784) (5,707)
Net Revenue 3,762 8,957 9,342 10,478 7,920
2002 Bonds (Water System Portion) 947 947 948 949 947
Net Revenues Available for Debt Service (1) 6,158 11,220 11,025 12,371 9,799
Debt Service Coverage 6.50x 11.85x 11.63x 13.04x 10.35x
Source: City of Palo Alto
(1) Depreciation and amortization, unrealized gain and loss on investments, loss on disposal of fixed assets, and
Interest Expense have been added back.
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Projected Operating Results and Debt Service Coverage
The following table sets forth the City’s actual revenues, expenses and net revenues for
the Gas System for the two prior fiscal years and projected revenues, expenses and net
revenues for the Gas System for the current and next two fiscal years.
Table 23
GAS SYSTEM
ACTUAL AND PROJECTED REVENUES, EXPENSES AND NET REVENUES
Fiscal Years Ended June 30
(in $000s)
2010-11 2011-12 2012-13 2013-14 2014-15
OPERATING REVENUES:
Sales of Gas $41,172 $43,029 $44,060 $44,249 $44,254
Service Connection Charge & Capacity Fees 700 710 720 730 752
Other Operating Revenues and Transfers In 111 96 96 96 96
Total Operating Revenues 41,983 43,835 44,876 45,070 45,102
NON-OPERATING REVENUES
Interest/Return on Investment 847 904 577 507 551
Total Revenues 42,830 44,739 45,453 45,582 45,653
OPERATING EXPENSES
Purchase of Gas (1) 20,830 19,397 18,627 18,445 19,024
Administration and
General/Engineering/Resource Mgmt/O&M
10,988 15,129 11,481 11,695 11,912
Interest Expense 487 470 450 430 408
Rent 215 215 218 221 224
Depreciation and Amortization 1,700 1,750 1,800 1,800 1,800
Total Operating Expenses (2) 34,220 36,961 32,576 32,591 33,368
NON-OPERATING EXPENSES
General Fund and Other Transfers 5,918 6,384 6,753 7,353 7,011
Total Non-Operating Expenses 5,918 6,384 6,753 7,353 7,011
Total Expenses 40,138 43,345 39,329 39,944 40,379
Net Revenues 2,692 1,394 6,124 5,638 5,274
Net Revenues Available for Debt Service (3) 4,879 3,614 8,374 7,868 7,482
2002 Utility Revenue Bonds (Gas System Portion) 947 117 0 0 0
2011 Bonds (Gas System Portion) (4) 0 902 869 871 870
Total Debt Service 947 1,019 869 871 870
Debt Service Coverage 5.15x 3.55x 9.64x 9.03x 8.60x
Net Revenues After Debt Service 3,932 2,595 7,505 6,997 6,612
Reserve Balance As of Year End
Emergency Plant Replacement $ 1,000 $1,000 $1,000 $1,000 $ 1,000
Rate Stabilization 14,152 8,996 8,234 9,767 10,865
Total Reserve Balance $15,152 $9,996 $9,234 $10,767 $11,865
Source: City of Palo Alto
(1) Purchase cost decreases from 2010-11 to 2013-14 due to projected lower market prices
(2) One time $3.8 million expense in 2011-12 for cross-bore safety program
(3) Depreciation and amortization and interest expense have been added back.
(4) Estimate, subject to change.
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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, including 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 City 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 management 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, the City 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
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2001, 2003, 2007, and in 2009, the City Council made various revisions to the guidelines for
the Electric and Gas Supply and Distribution RSRs and Water and Wastewater RSRs.
Available Reserve Balances History. The table below sets forth a summary of the amounts
on hand in the Available Reserves for the prior five fiscal years, debt service of the outstanding
bonds with a claim on Available Reserves, and resulting debt service coverage ratios.
Table 24
AVAILABLE RESERVE BALANCES
Fiscal Years 2006-2010
(Dollars in Thousands)
Rate Stabilization Reserve Fund 2005-06 2006-07 2007-08 2008-09 2009-10
Water System $ 4,143 $ 16,276 $ 13,111 $ 5,400 $ 17,037
Electric System (Supply) 64,542 60,594 47,309 41,442 44,855
Electric System (Distribution) 12,281 7,787 8,109 6,341 9,484
Gas System (Supply) 2,801 6,668 7,399 8,733 12,339
Gas System (Distribution) 3,868 1,738 4,734 4,449 6,209
Calaveras Reserve (Electric) 73,163 71,810 70,397 64,535 59,865
Total: $160,798 $164,873 $151,059 $130,900 149,789
Debt Service 3,613 3,612 3,713 3,715
Debt Service Coverage Ratio 44.51x 45.65x 40.68x 35.24.x
Source: City of Palo Alto.
Rate Stabilization Reserve for the Water System
The Water System rate stabilization reserve fund is maintained on the basis of the
following guidelines:
Minimum Guideline Level: 15 percent of budgeted sales revenue for that year
Maximum Guideline Level: twice the minimum 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:
Table 25
RATE STABILIZATION RESERVE FOR THE WATER SYSTEM
Fiscal Years 2006-2010
(Dollars in Thousands)
2005-06 2006-07 2007-08 2008-09 2009-10
Actual Sales Revenue $20,430 $22,914 $25,856 $26,554 $25,745
Minimum Level 7,435 7,108 4,942 5,303 4,317
Maximum Level 14,869 14,215 12,356 13,258 8,634
Actual Reserve Level 4,143 16,276 13,111 5,400 17,037
Source: City of Palo Alto.
See also APPENDIX C—COMPREHENSIVE ANNUAL FINANCIAL REPORT OF
THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2010.
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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. 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 the City 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, the City 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, the
City Council revised the guidelines so that the maximum reserve level guideline was set at 103
percent of the supply purchases costs for Electric Supply. As before, the minimum guideline
level was half the maximum guideline level. In 2007, the City 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, the City 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, the City 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
City 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: 50% of budgeted purchase costs
Maximum Guideline Level: twice the minimum level
The current target guidelines for the Electric System Distribution Rate Stabilization
Reserve are set forth below:
Minimum Guideline Level: 15% of budgeted distribution sales revenue
Maximum Guideline Level: twice the minimum level
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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 26
RATE STABILIZATION RESERVE FOR THE ELECTRIC FUND
Fiscal Years 2006 through 2010
(Dollars in Thousands)
2005-06 2006-07 2007-08 2008-09 2009-10
Actual Sales Revenue $84,961 $85,417 $90,833 $104,809 $112,280
Minimum Level 32,669 33,900 35,913 47,834 45,721
Maximum Level 65,338 67,799 75,147 99,292 91,442
Actual Reserve Level 75,866 68,381 55,418 7,783 54,339
Source: City of Palo Alto.
See also APPENDIX C—COMPREHENSIVE ANNUAL FINANCIAL REPORT OF
THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2010.
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 with the Electrical System.
At the time, the 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, the City Council
revised the guidelines for the G-SRSR 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, the
City 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 half the maximum guideline level. In 2007, the City 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 City 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, the City 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 City Council’s final
revision to the guidelines, G-DRSR minimum and maximum guidelines were set at 15 percent
and 30 percent of sales respectively.
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The current (2009-10) target guidelines for the Gas System Supply Rate Stabilization
Reserve are set forth below:
Minimum Guideline Level: 25% of budgeted purchase costs
Maximum Guideline Level: twice the minimum level
The current target guidelines for the Gas System Distribution Rate Stabilization Reserve
are set forth below:
Minimum Guideline Level: 15% of budgeted sales revenue
Maximum Guideline Level: twice the minimum level
Based on the guidelines applicable in the previous fiscal years, the Gas System
guidelines and actual reserve levels are set forth below:
Table 27
RATE STABILIZATION RESERVE FOR THE GAS SYSTEM
Fiscal Years 2006 through 2010
(Dollars in Thousands)
2005-06 2006-07 2007-08 2008-09 2009-10
Actual Sales Revenue $36,433 $41,457 $48,100 $47,253 $43,244
Minimum Level 10,572 13,145 13,150 13,839 9,399
Maximum Level 21,145 26,289 29,606 31,111 18,798
Actual Reserve Level 6,669 8,406 12,133 13,182 18,548
Source: City of Palo Alto.
See also APPENDIX C—COMPREHENSIVE ANNUAL FINANCIAL REPORT OF
THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2010.
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 was 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 (i.e.,
“stranded cost”).
The City 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 (i.e., stranded cost). In addition, the
City 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
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the Seattle City Light Exchange contract, the Calaveras Hydroelectric Project, and the
California-Oregon Transmission Project (COTP). In 1999, the City 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, the City 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, the City 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 City 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 City Council
consideration and approval. Such projects shall be to the benefit of electric ratepayers.
The guidelines are once again under review and may be revised in Fiscal Year 2011-12.
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The approximate balance of the Calaveras Reserve for the last five fiscal years is set
forth below:
Table 28
CALAVERAS-STRANDED COSTS RESERVE
Fiscal Years 2006 through 2010
(Dollars in Thousands)
2005-06 2006-07 2007-08 2008-09 2009-10
Balance $73,163 $71,180 $70,397 $64,535 $59,865
Source: City of Palo Alto Audited Financial Statements.
See also APPENDIX C—COMPREHENSIVE ANNUAL FINANCIAL REPORT OF
THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2010.
CONSTITUTIONAL LIMITATIONS ON TAXES AND WATER RATES AND CHARGES
Article XIIIA
Article XIIIA of the State Constitution 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 votes 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
governmental 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 2011
Bonds (including the funding of the Reserve Account), the City believes that such moneys are
not subject to the annual appropriations limit of Article XIIIB.
Articles XIIIC and XIIID
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 XIIID 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 local jurisdictions in complying with Article XIIIC and Article XIIID (“SB
919”). However, on July 24, 2006, the California Supreme Court ruled in Bighorn-Desert View
Water Agency v. Virjil (Kelley) (the “Bighorn Decision”) that charges for ongoing water delivery
are property-related fees and charges within the meaning of Article XIIID 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 XIIIC.
In the Bighorn Decision, the Supreme Court did state that nothing in Section 3 of Article
XIIIC 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
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may determine rates and charges upon proper action of the governing body and that the
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 statutory 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 subject to the limitations imposed on the impairment of contracts under the contract clause
of the United States 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 2011 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 XIIID 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
XIIID 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 XIIID 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 if one were brought.
In addition, Article XIIID also includes a number of limitations applicable to existing
fees and charges including 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
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of property ownership shall not exceed the proportional cost of the service attributable to the
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. Finally, the Court held that
the Santa Clara Open Space Authority did not meet the proportionality requirement of Article
XIIID 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 is 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
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with the rate covenant set forth in the Installment Purchase Agreement in conformity with the
provisions of Article XIIID of the California State Constitution. The City is 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 XIIID in connection with such proposed increase. To
date, there have been no legal challenges to water rate increases implemented by the City
pursuant to Proposition 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 2011 BONDS
Payment of principal of and interest on the 2011 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 2011 Bonds and the order in
which the risks are discussed does not necessarily reflect the relative importance of the various
risks.
Limited Obligations
The 2011 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 its income or
receipts, except the Net Revenues. The obligation of the City to pay debt service on the 2011
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 Default
Failure by the City to pay debt service on the 2011 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
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right to accelerate the total unpaid principal amount of the debt service on the 2011 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 2011 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 2011 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 discretion 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
2011 Bonds will be subject to such limitations and the various other legal opinions to be
delivered concurrently with the issuance of the 2011 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
2011 Bonds, there can be no assurance of the availability of remedies adequate to protect the
interest of the holders of the 2011 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 outstanding 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 “CONSTITUTIONAL 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 2011 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 creditors’ rights, to the exercise of judicial discretion in appropriate cases
and to limitations on legal remedies against public agencies in the State of California. The
various opinions of counsel to be delivered with respect to the 2011 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 2011 Bonds and the City
could be prohibited from taking any steps to enforce their rights under the Indenture.
Tax Exemption of the 2011 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 2011 Bonds from the gross income of the Owners of
the 2011 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 2011
Bonds may be includable in the gross income of the Owners thereof for federal tax purposes.
See “LEGAL MATTERS—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 2011 Bonds. Such additional Bonds would increase debt service
payable from Net Revenues and could adversely affect debt service coverage with respect to
the 2011 Bonds. In such event, however, the Rate Covenant will remain in effect. See
“SECURITY FOR THE 2011 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
2011 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 2011 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 2011 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 hereto as Appendix D.
Quint & Thimmig LLP, San Francisco, California, is acting as disclosure counsel to the City in
connection with the issuance of the 2011 Bonds.
Payment of the fees and expenses of Jones Hall and of Quint & Thimmig LLP are
contingent upon issuance of the 2011 Bonds.
Absence of Litigation
At the time of delivery of and payment for the 2011 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 2011 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 2011 Bonds, or in any way
contesting or affecting the validity or enforceability of the 2011 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 2011 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 2011 Bonds or any
action of the City contemplated by any of those documents.
Tax Matters
In the opinion of Jones Hall, A Professional Law Corporation, San Francisco, California,
Bond Counsel, subject, however to the qualifications set forth below, under existing law, the
interest on the 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, provided, however, that, for the purpose of
computing the alternative minimum tax imposed on corporations (as defined for federal
income tax purposes), such interest is taken into account in determining certain income and
earnings.
The opinions set forth in the preceding paragraph are subject to the condition that the
Community comply with all requirements of the Internal Revenue Code of 1986 (the “Code”)
that must be satisfied subsequent to the issuance of the Bonds in order that such interest be, or
continue to be, excluded from gross income for federal income tax purposes. The Community
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has covenanted to comply with each such requirement. Failure to comply with certain of such
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 Bonds.
If the initial offering price to the public (excluding bond houses and brokers) at which a
2011 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 price to the public (excluding bond
houses and brokers) at which 2011 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 is disregarded.
Under the Code, original issue discount is treated as interest excluded from federal
gross income and exempt from State of California personal income taxes to the extent properly
allocable to each owner thereof subject to the limitations described in the first paragraph of this
section. The original issue discount accrues over the term to maturity of the 2011 Bond on the
basis of a constant interest rate compounded on each interest or principal payment date (with
straightline interpolations between compounding dates). The amount of original issue discount
accruing during each period is added to the adjusted basis of such Bonds to determine taxable
gain upon disposition (including sale, redemption, or payment on maturity) of such Bonds.
The Code contains certain provisions relating to the accrual of original issue discount in the
case of purchasers of the Bonds who purchase the Bonds after the initial offering of a
substantial amount of such maturity. Owners of such Bonds should consult their own tax
advisors with respect to the tax consequences of ownership of Bonds with original issue
discount, including the treatment of purchasers who do not purchase in the original offering,
the allowance of a deduction for any loss on a sale or other disposition, and the treatment of
accrued original issue discount on such Bonds under federal individual and corporate
alternative minimum taxes.
Under the Code, original issue premium is amortized on an annual basis over the term
of the Bonds (said term being the shorter of the 2011 Bond’s maturity date or its call date). The
amount of original issue premium amortized each year reduces the adjusted basis of the
owner of the Bonds for purposes of determining taxable gain or loss upon disposition. The
amount of original issue premium on a 2011 Bond is amortized each year over the term to
maturity of the 2011 Bond on the basis of a constant interest rate compounded on each interest
or principal payment date (with straightline interpolations between compounding dates).
Amortized 2011 Bond premium is not deductible for federal income tax purposes. Owners of
Premium Bonds, including purchasers who do not purchase in the original offering, should
consult their own tax advisors with respect to State of California personal income tax and
federal income tax consequences of owning such Bonds.
In the further opinion of Bond Counsel, interest on the Bonds is exempt from California
personal income taxes.
Owners of the Bonds should also be aware that the ownership or disposition of, or the
accrual or receipt of interest on, the 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 Bonds other than as expressly described above.
A copy of the proposed form of opinion of Bond Counsel is attached hereto
APPENDIX D—PROPOSED FORM OF BOND COUNSEL OPINION.
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CONTINUING DISCLOSURE
The City has covenanted for the benefit of the holders and beneficial owners of the 2011
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, 2012, with the Annual
Report for the 2010-11 Fiscal Year, and to provide notices of the occurrence of certain
enumerated events. 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
City will file, or cause to be filed, the notices of enumerated events with the MSRB. The specific
nature of the information to be contained in the Annual Report or the notices of enumerated
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 15c2-12(b)(5).
The City has never failed to comply, in all material respects, with an undertaking under
the Rule.
FINANCIAL ADVISOR
The City has retained Public Financial Management, Inc., San Francisco, California, as
financial advisor (the “Financial Advisor”) in connection with the authorization and delivery of
the Bonds. The fees of the Financial Advisor are contingent upon the sale and delivery of the
Bonds. The Financial Advisor is an independent advisory firm and is not engaged in the
business of underwriting, trading or distributing municipal or other public securities.
RATINGS
Moody’s Investors Service, Inc. (“Moody’s”) has assigned its municipal bond rating of
“____” to the 2011 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 2011 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 2011 Bonds.
VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS
Upon delivery of the Bonds, the arithmetical accuracy of certain computations included
in the schedules provided by the Financial Advisor on behalf of the City relating to the
computation of (a) the adequacy of forecasted receipts of principal and interest on the U.S.
Treasury Securities and cash to be held in the Escrow Fund to pay, when due, the principal
and interest on the 2002 Bonds, (b) the forecasted payments of principal and interest due on
the 2002 Bonds on and prior to their maturity date, and (c) the yield with respect to the Bonds
and the securities to be deposited in the Escrow Fund upon the delivery of the Bonds., will be
verified by the Verification Agent. Such verification of the accuracy of the mathematical
computations shall be based solely upon information and assumptions supplied to such
accountants by the Financial Advisor. Such accountants have restricted their procedures to
examining the arithmetical accuracy of certain computations and have not made a study or
evaluation of the information and assumptions on which the computations are based, and
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accordingly, have not expressed an opinion on the data used, the reasonableness of the
assumptions, or the achievability of the forecasted outcome.
UNDERWRITING
The 2011 Bonds were sold pursuant to competitive sale held on __________, 2011, and
were awarded to __________ (the “Underwriter”). The 2011 Bonds are being purchased by the
Underwriter at a purchase price of $__________, which represents the aggregate principal
amount of the 2011 Bonds, less an original issue discount of $__________ and less an
Underwriter’s discount of $__________.
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 2011 Bonds.
During the initial offering period for the 2011 Bonds, copies of the Indenture may be
obtained, upon written request, from the City. After issuance of the 2011 Bonds, copies of
such documents may be obtained from the Trustee.
The execution and delivery of this Official Statement have been duly authorized by the
City Council of the City.
CITY OF PALO ALTO
By
Director of Administrative Services
Appendix A
APPENDIX A
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
[TO COME]
THIS PAGE INTENTIONALLY LEFT BLANK
Appendix B
Page 1
APPENDIX B
GENERAL 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 64,943. 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 Loral, 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.
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 City Council Members are elected at large for four-year, staggered
terms. The Mayor and Vice Mayor are elected annually at the first City Council meeting in January. The
Mayor presides over all City 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.
CITY OF PALO ALTO, SANTA CLARA COUNTY,
AND STATE OF CALIFORNIA
Population Comparison
Year
City of
Palo Alto
Percent
Change
Santa Clara
County
Percent
Change
State of
California
Percent
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 60,269 2.8 1,701,362 1.1 34,430,970 1.6
2002 60,325 0.1 1,715,295 0.8 35,063,959 1.8
2003 60,320 0.0 1,726,081 0.6 35,652,700 1.7
2004 60,480 0.2 1,738,435 0.7 36,199,342 1.5
2005 61,451 1.6 1,752,696 0.8 36,676,931 1.3
2006 62,096 1.0 1,771,291 1.0 37,087,005 1.1
2007 62,245 0.2 1,797,623 1.5 37,463,609 1.0
2008 63,080 1.3 1,828,977 1.7 37,871,509 1.1
2009 64,480 2.2 1,857,516 1.6 38,255,508 1.0
2010 65,408 1.4 1,880,876 1.2 38,648,090 1.0
Sources: U.S. Department of Commerce, Bureau of the Census (1980, 1990 and 2000); State of California,
Department of Finance, E-4 Population Estimates for Cities, Counties and the State, 2001-2010, with 2000
Benchmark. Sacramento, California, May 2010.
Appendix B
Page 2
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 south 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 July 2, 1925, Palo Alto voters
approved the annexation of Mayfield and the two communities were officially consolidated on July 6, 1925.
Budgetary Policies 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 conducted 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 XIIIA 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, special districts and school districts for
the amount of tax revenues lost by reason of such exemption, as adjusted for percentage changes in 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%
Appendix B
Page 3
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.
CITY OF PALO ALTO
ASSESSED VALUATIONS OF TAXABLE PROPERTY
2005-06 through 2009-10
(In Thousands)
Fiscal
Year
Secured Valuation
(Net of Exemptions)
Public
Utility
Unsecured
Valuation
Total Assessed
Value
2005-06 $14,884,944 $4,084 $1,361,117 $16,250,145
2006-07 16,214,406 3,923 1,391,284 17,609,613
2007-08 17,382,730 3,174 1,536,584 18,922,488
2008-09 19,211,744 2,573 1,871,292 21,085,609
2009-10 20,068,667 2,573 1,809,119 21,880,359
Source: City of Palo Alto, Comprehensive Annual Financial Report 2009-10
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.
CITY OF PALO ALTO
PROPERTY TAX LEVIES AND COLLECTIONS
2005-06 through 2009-10
(In Thousands)
Fiscal
Year
Gross
Tax Levy
Current Tax
Collections
Percentage of
Current Levy
Collected
Delinquent
Tax Collections
Total
Collections
2005-06 $18,731 $18,731 100% — $18,731
2006-07 21,466 21,466 100 — 21,466
2007-08 23,084 23,084 100 — 23,084
2008-09 25,432 25,432 100 — 25,432
2009-10 25,981 25,981 100 — 25,981
Source: County of Santa Clara Assessor’s Office, as published in the City of Palo Alto, Comprehensive Annual
Financial Report 2009-10
Appendix B
Page 4
CITY OF PALO ALTO
TEN LARGEST PROPERTY OWNERS
Fiscal Year ending June 30, 2010
(In Thousands)
Company
Type of Business
Assessed
Property Valuation
Leland Stanford Jr University Education $3,339,922
Space System /Loral, Inc. 210,132
Arden Realty Limited Partnership 111,897
Whisman Ventures, LLC 104,529
ECI 2 Bayshore LLC / ECI Hamilton LLC 73,523
Blackhawk Parent LLC 49,939
Pacific Hotel Dev Venture LP 43,686
300 / 400 Hamilton Associates 41,221
Ronald & Ann Williams Charitable Foundation 40,346
505 Hamilton Avenue Partners LP 40,142
Source: City of Palo Alto, Comprehensive Annual Financial Report 2009-10
Employment
The City is home to a strong mix of large, medium and small firms. The City employment
opportunities are much sought after and include: education at Stanford University, high technology at the
Stanford Research Park, and health care at two medical facilities of national stature.
The largest employers in the City of Palo Alto as of June 30, 2010, are as follows:
CITY OF PALO ALTO
TEN LARGEST EMPLOYERS
Fiscal Year ending June 30, 2010
Employer Number of Employees
Stanford University 10,101
Stanford University Medical Center/Hospital 5,569
Lucile Packard Children's Hospital 3,549
Veteran's Affairs Palo Alto Health Care System 3,500
Hewlett-Packard Company 2,001
Palo Alto Medical Foundation 2,000
Space Systems Loral 1,700
Wilson Sonsini Goodrich Rosati 1,500
City of Palo Alto 1,336
Roche Bioscience 1,100
Source: www.ReferenceUSA.com & Palo Alto Weekly, as published in City of Palo Alto Comprehensive Annual
Financial Report 2009-10
Due to the nature of local industry, with its heavy emphasis on electronics, aerospace and research,
Santa Clara has attracted 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 Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area for
the years 2006 through 2010.
Appendix B
Page 5
According to the California Employment Development Department, the County’s unemployment
rate was 11.3% in 2010, up from 10.9% in 2009. The following table sets forth certain information regarding
employment in the City from calendar year 2006 through 2010.
SAN JOSE-SUNNYVALE-SANTA CLARA MSA
(San Benito and Santa Clara Counties)
INDUSTRY EMPLOYMENT & LABOR FORCE - BY ANNUAL AVERAGE
March 2010 Benchmark
2006 2007 2008 2009 2010
Civilian Labor Force 847,800 869,100 894,600 899,700 899,700
Civilian Employment 809,200 827,900 840,500 801,200 797,800
Civilian Unemployment 38,600 41,200 54,100 98,500 102,000
Unemployment Rate 4.6% 4.7% 6.1% 10.9% 11.3%
Agricultural 6,200 6,700 6,100 5,600 5,200
Natural Resources and Mining 891,200 911,200 914,900 856,400 852,400
Construction 300 300 300 200 200
Manufacturing 46,800 47,200 44,200 34,400 32,300
Trade, Transportation and Utilities 163,700 166,700 168,000 155,800 153,000
Information 137,100 139,700 137,600 126,400 125,300
Financial Activities 36,900 36,900 34,300 31,500 30,800
Professional and Business Services 172,000 178,300 178,900 161,400 162,300
Educational and Health Services 100,600 103,500 108,200 109,300 111,400
Leisure and Hospitality 75,200 76,800 78,100 74,900 74,300
Other Services 24,800 25,100 25,400 24,500 25,500
Government 96,400 97,200 97,800 96,500 93,600
Total All Industries (1) 897,400 917,900 921,000 862,000 857,600
Source: California Employment Development Department, Labor Market Information Division.
(1) Totals may not add due to independent rounding.
CITY OF PALO ALTO
AVERAGE ANNUAL CIVILIAN LABOR FORCE
EMPLOYMENT AND UNEMPLOYMENT
Calendar Years 2002-2008
Year
Labor Force
Unemployment
Number
Rate
2006 30,200 700 2.3%
2007 20,900 800 2.5%
2008 31,600 1,000 3.2%
2009 31,000 1,800 5.9
2010 not available
Source: California Employment Development Department
Construction Activity
“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 they are 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 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
Appendix B
Page 6
to residential structures, excluding special installation permits for electrical, plumbing, heating, air-
conditioning, or similar mechanical work, or installation of fire escapes, elevators, signs, etc.
“New Commercial” includes new hotels and motels, office and bank buildings, stores and other
mercantile buildings, parking garages, service stations, and amusement and recreational buildings. “New
Industrial” includes manufacturing plants and affiliated buildings. “Other New Nonresidential” includes
churches and religious buildings, hospitals and institutional buildings, schools and educational buildings,
residential garages, public works and utilities buildings, and miscellaneous nonresidential structures.
“Nonresidential Alterations and Additions” 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 escapes, elevators and signs, etc.
CITY OF PALO ALTO
BUILDING PERMITS AND VALUATION
(Dollars in Thousands)
2006 2007 2008 2009 2010
Permit Valuation:
New Single-family $ 78,044 $ 82,769 $ 50,213 $ 30,683 $ 50,946
New Multi-family 28,338 81,679 27,827 7,306 5,000
Res. Alterations/Additions 30,770 34,756 33,897 26,902 33,336
Total Residential 137,152 199,204 111,937 64,891 89,282
Total Nonresidential 168,817 133,547 90,019 83,922 83,394
Total All Building $303,969 $332,751 $201,956 $148,813 $172,676
New Dwelling Units:
Single Family 147 195 102 58 144
Multiple Family 117 294 125 27 35
Total 264 489 227 85 179
Sources: Construction Industry Research Board: “Building Permit Summary.”
Note: Totals may not add due to independent 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 2006
through 2010.
Appendix B
Page 7
CITY, COUNTY, STATE AND UNITED STATES
EFFECTIVE BUYING INCOME
Year
Area
Total Effective
Buying Income
(000s Omitted)
Median Household
Effective
Buying Income
2006 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
2007 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 41,792
2008 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
2009 City of Palo Alto $ 3,002,678 $81,855
County of Santa Clara 55,561,405 71,077
California 84,482,319 49,736
United States 6,571,536,768 43,252
2010 City of Palo Alto $ 3,142,000 82,448
County of Santa Clara 53,692,143 68,047
California 801,393,028 47,177
United States 6,365,020,076 41,368
Source: Nielsen Claritas, Inc.
Commercial Activity
Taxable sales in the City of Palo Alto exceed $1.6 billion annually. 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 the annual volume of taxable sales within the City since 2005.
During 2009, retail sales totaled $1,075,044 and total taxable sales reached $1,621,264.
Appendix B
Page 8
The following table shows annual sales tax revenues for the City for the last five years. The latest
full-year data available from the State is for calendar year 2009. In early 2007 the Board of Equalization
began a process of converting business codes of sales and use tax permit holders to North American
Industry Classification System (NAICS) codes. This process is now complete; over one million permit
holders were converted from the previous business coding system to the NAICS codes. Beginning in 2009,
reports summarize taxable sales and permits using the NAICS codes. As a result of the coding change,
however, industry-level data for 2009 are not comparable to that of prior years.
CITY OF PALO ALTO
TAXABLE TRANSACTIONS
($000s)
2005 2006 2007 2008
Apparel stores $ 127,235 $ 129,903 $ 134,920 $ 173,360
General merchandise 284,186 289,288 301,192 230,521
Foods stores 33,726 33,495 31,781 28,328
Eating and drinking places 208,128 224,276 234,084 239,517
Home furnishings and appliances 64,308 68,273 75,510 103,878
Building materials 23,619 26,258 24,437 24,142
Automotive Group 203,998 202,441 187,342 149,857
Service stations 56,548 60,078 63,418 66,214
All other retail stores 248,882 250,153 224,463 197,029
Total Retail Outlets 1,250,630 1,284,165 1,277,147 1,212,846
All other outlets 458,491 551,068 629,859 587,667
Total All Outlets $1,709,121 $1,835,233 $1,907,006 $1,800,513
2009 (1)
Retail and Food Services
Motor Vehicles and Parts Dealers $ 128,399
Home Furnishings and Appliance Stores 145,348
Bldg Mtrl. and Garden Equip. and Supplies 24,317
Food and Beverage Stores 31,489
Gasoline Stations 52,025
Clothing and Clothing Accessories Stores 224,507
General Merchandise Stores 147,243
Food Services and Drinking Places 224,651
Other Retail Group 97,064
Total Retail and Food Services 1,075,044
All Other Outlets 546,220
Totals All Outlets $1,621,264
Source: California State Board of Equalization, Taxable Sales in California Reports 2005-2009.
(1) Latest available full-year data.
Education
The Palo Alto Unified School District provides public schooling from kindergarten through high
school. The Stanford University is the second largest university campus in the world. The University
comprises the Schools of Engineering, Law, Medicine, Education, Business, Earth Sciences and Humanities
and Science. Stanford University’s teaching hospital and clinics are known for excellence.
Community Facilities
The City has some of the most outstanding healthcare facilities in California. Most prominent in the
community is Stanford Hospital & Clinics, which is part of Stanford University Medical Center. With 611
Appendix B
Page 9
beds for in-patient treatment, emergency care and major surgeries, Stanford Hospital is well known for its
cancer treatment, oncology and transplant services.
Medical groups affiliated with Stanford Hospital & Clinics are Stanford Family Practice, Stanford
Medical Group and Menlo Medical Clinic, and also includes the Stanford University School of Medicine and
the Lucile 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 including three nursing homes and a
100-bed homeless domiciliary on the Menlo Park campus. The Health Care System is affiliated with the
Stanford University School of Medicine.
The Palo Alto Medical Foundation is a full-service health-care clinic and research institute. Nearly
250 physicians provide a range of diagnostic and treatment services 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.
Transportation
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 and Highway 92, the Hayward-San Mateo Bridge; and Interstate 280, which runs
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 outlets and fresh fruit and vegetable stands.
Local greenhouses and florists provide a diverse selection to help residents and business beautify
their yards and homes. The area also features a number of machinery and equipment outlets to make
agriculture related job feasible.
Appendix B
Page 10
Government and Services
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 City Council Members are elected at large for four-year, staggered
terms. The Mayor and Vice Mayor are elected annually at the first City Council meeting in January. The
Mayor presides over all City 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.
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 C
APPENDIX C
COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY
FOR THE FISCAL YEAR ENDED JUNE 30, 2010
THIS PAGE INTENTIONALLY LEFT BLANK
Appendix D
Page 1
APPENDIX D
PROPOSED FORM OF BOND COUNSEL OPINION
[Letterhead of Jones Hall, A Professional Law Corporation]
[Closing Date]
City of Palo Alto
250 Hamilton Avenue
Palo Alto, California 94301
OPINION: $_________* City of Palo Alto Utility Revenue Refunding Bonds, 2011 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 $________* City of Palo Alto Utility Revenue Refunding Bonds, 2011 Series A (the "Series A Bonds"),
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 (the “Bond Law”), an Indenture of Trust, dated as of September 1, 2011, 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 18, 2011. 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 Series A Bonds.
2. The Indenture has been duly approved by the City, and constitutes a valid and binding
obligation of the City, enforceable against 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 and Gas System (as defined in the Indenture) pledged by the Indenture for the
security of the Series A Bonds.
4. The Series A 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. 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 purposes of the federal alternative minimum tax imposed
on individuals and corporations; it should be noted, however, that, for the purpose of computing the
alternative minimum tax imposed on corporations (as defined for federal income tax purposes), such
interest is taken into account in determining certain income and earnings. The 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 Series A Bonds in order that
* Preliminary, subject to change.
Appendix D
Page 2
interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The City
has covenanted in the Indenture to comply with each such requirement. Failure to comply with certain of
such requirements may cause the inclusion of interest on the Series A Bonds in gross income for federal
income tax purposes to be retroactive to the date of issuance of the Series A Bonds. We express no opinion
regarding other federal tax consequences arising with respect to the Series A Bonds.
6. The interest on the Series A Bonds is exempt from personal income taxation imposed by the
State of California.
The rights of the owners of the Series A Bonds and the enforceability of the Series A 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 E
Page 1
APPENDIX E
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 of by the City of its
$_________* City of Palo Alto Utility Revenue Refunding Bonds, 2011 Series A (the “Bonds”). The Bonds are
being issued pursuant to an Indenture of Trust, dated as of September 1, 2011 (the “Indenture”), by and
between the City and U.S. bank National Association, as trustee (the “Trustee”). The Bonds shall be secured
by a pledge, charge and lien upon Net Revenues (as such term is defined in the Indenture). Pursuant to
Section 5.206 of the Indenture, the City covenants and agrees as follows:
Section 1. Definitions. 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 1, the following
capitalized terms shall have the following meanings when used in this Disclosure Certificate:
“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 who (a) has the power, directly or indirectly, to vote or
consent 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.
“Dissemination 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 Market Access” means the centralized on-line repository for
documents to be 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.
“Listed Events” shall mean any of the events listed in Section 5(a) or 5(b) of this Disclosure
Certificate.
“MSRB” means the Municipal Securities Rulemaking Board, which has been designated by the
Securities and Exchange Commission as the sole 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 original underwriter of the Bonds required to comply
with the Rule in connection with offering of the Bonds.
“Rule” shall mean Rule 15c2-12 adopted by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as the same may be amended from time to time.
Section 2. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and
delivered by the City for the benefit of the owners and Beneficial Owners of the Bonds and in order to assist
the Participating Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5).
Section 3. Provision of Annual Reports.
(a) Delivery of Annual Report. 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 2010-11 Fiscal Year, which is due not later than March 1, 2012, file with EMMA, in a readable
* Preliminary, subject to change.
Appendix E
Page 2
PDF or other electronic format as prescribed by the MSRB, an Annual Report that is consistent with the
requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single
document or as separate documents comprising a package and may cross-reference 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) Change of Fiscal Year. If the City’s fiscal year changes, it shall give notice of such change in the
same manner as for a Listed Event under Section 5(c), and subsequent Annual Report filings shall be made
no later than nine months after the end of such new fiscal year end.
(c) Delivery of Annual Report to Dissemination Agent. Not later than fifteen (15) Business Days prior to
the date specified in subsection (a) (or, if applicable, subsection (b)) of this Section 3 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 Dissemination Agent has not received a copy of the Annual Report, the
Dissemination Agent shall notify the City.
(d) Report of Non-Compliance. If the City is the Dissemination Agent and is unable to file an Annual
Report by the date required in subsection (a) (or, if applicable, subsection (b)) of this Section 3, the City shall
send a notice to EMMA substantially in the form attached hereto as Exhibit A. If the City is not the
Dissemination Agent and is unable to provide an Annual Report to the Dissemination Agent by the date
required in subsection (c) of this Section 3, the Dissemination Agent shall send a notice to EMMA in
substantially the form attached hereto 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 filed with EMMA
pursuant to Section 3 of this Disclosure Certificate, stating the date it was so provided and filed.
Section 4. Content of Annual Reports. The Annual Report shall contain or incorporate by reference
the following:
(a) Financial Statements. Audited financial statements of the City for the preceding fiscal year,
prepared in accordance generally accepted accounting principles. 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) Other Annual Information. To the extent not included in the audited final statements of the City,
the Annual Report shall also include financial and operating data with respect to the City for preceding
fiscal year, as follows:
Appendix E
Page 3
(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;
(ii) Description of any Parity Bonds or subordinate debt issued with respect to the Water
System during the most recently completed fiscal year;
(iii) Total actual Gross Revenues and Net Revenues generated by the Water System in the
most recently completed fiscal year, the total debt service on the subseries of the Bonds
related to the Water System for such fiscal year and the respective debt service
coverage ratio;
(iv) Updated information on the collective total billings of the top ten customers of the
Water System in the most recently completed fiscal year, and the percentage of the total
Water System billings represented thereby;
(v) Discussion of any changes in the rate and fee structure with respect to the Gas System
in the most recently completed fiscal year which could have a material affect on the Net
Revenues of the Gas System;
(vi) Description of any Parity Bonds or subordinate debt issued with respect to the Gas
System during the most recently completed fiscal year;
(vii) Total actual Gross Revenues and Net Revenues generated by the Gas System in the
most recently completed fiscal year, the total debt service on the subseries of the Bonds
related to the Gas System for such fiscal year and the respective debt service coverage
ratio;
(viii) Updated information on the collective total billings of the top ten customers of the Gas
System in the most recently completed fiscal year, and the percentage of the total Gas
System billings represented thereby;
(ix) 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; and
(x) 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.
(c) Cross References. 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 EMMA. The City shall clearly 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) Further Information. 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 specifically required statements, in the light of the circumstances under which they
are made, not misleading.
Section 5. Reporting of Listed Events.
(a) Reportable Events. The City shall, or shall cause the Dissemination Agent (if not the City) to, give
notice of the occurrence of any of the following events with respect to the Bonds:
(1) Principal and interest payment delinquencies.
(2) Unscheduled draws on debt service reserves reflecting financial difficulties.
(3) Unscheduled draws on credit enhancements reflecting financial difficulties.
(4) Substitution of credit or liquidity providers, or their failure to perform.
(5) Defeasances.
Appendix E
Page 4
(6) Rating changes.
(7) Tender offers.
(8) Bankruptcy, insolvency, receivership or similar event of the obligated person.
(9) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or
final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or
other material notices or determinations with respect to the tax status of the
security, or other material events affecting the tax status of the security.
(b) Material Reportable Events. The City shall give, or cause to be given, notice of the occurrence of
any of the following events with respect to the Bonds, if material:
(1) Non-payment related defaults.
(2) Modifications to rights of security holders.
(3) Bond calls.
(4) The release, substitution, or sale of property securing repayment of the securities.
(5) The consummation of a merger, consolidation, or acquisition involving an
obligated person or the sale of all or substantially all of the assets of the obligated
person, other than in the ordinary course of business, the entry into a definitive
agreement to undertake such an action or the termination of a definitive
agreement relating to any such actions, other than pursuant to its terms.
(6) Appointment of a successor or additional trustee, or the change of name of a trustee.
(c) Time to Disclose. The City shall, or shall cause the Dissemination Agent (if not the City) to, file a
notice of such occurrence with EMMA, in an electronic format as prescribed by the MSRB, in a timely
manner not in excess of 10 business days after the occurrence of any Listed Event. Notwithstanding the
foregoing, notice of Listed Events described in subsections (a)(5) and (b)(3) above need not be given under
this subsection any earlier than the notice (if any) of the underlying event is given to owners of affected
Bonds under the Indenture.
Section 6. Identifying Information for Filings with EMMA. All documents 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 full of all of the Bonds. If
such termination occurs prior to the final maturity of the Bonds, the City shall give notice of such
termination in the same manner as for a Listed Event under Section 5(c).
Section 8. Dissemination 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. It is
understood and agreed that any information that the Dissemination Agent may be instructed to file with
EMMA shall be prepared and provided to it by the City. The Dissemination Agent has undertaken no
responsibility with respect to the content of any reports, notices or disclosures provided to it under this
Disclosure Certificate and has no liability to any person, including any Bond owner, with respect to any
Appendix E
Page 5
such reports, notices or disclosures. The fact that the Dissemination Agent or any affiliate thereof may have
any fiduciary or banking relationship with the City shall not be construed to mean that the Dissemination
Agent has actual knowledge of any event or condition, except as may be provided by written notice from
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 expenses 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, owners or
Beneficial Owners, or any other party. The 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. The Dissemination Agent shall not be liable hereunder except for its negligence or willful
misconduct.
(c) Responsibilities of Dissemination Agent. In addition of the filing obligations of the Dissemination
Agent set forth in Sections 3(e) and 5, the Dissemination Agent shall be obligated, and hereby agrees, to
provide a request to the City to compile the information required for its Annual Report at least 30 days prior
to the date such information is to be provided to the Dissemination Agent pursuant to subsection (c) of
Section 3. The failure to provide or receive any such request shall not affect the obligations of the City under
Section 3.
Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate,
the City may amend 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 all of
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) or (b), 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 as 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.
(c) Consent of Holders; Non-impairment Opinion. The amendment or waiver either (i) is approved by
the Bond owners in the same manner as provided in the Indenture for amendments to the Indenture with
the consent of Bond owners, or (ii) does not, in the opinion of nationally recognized bond counsel, materially
impair the interests of the Bond owners or Beneficial Owners.
If 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(c), and (ii) the Annual Report for the year in which the change is made
should present a comparison (in narrative form and also, if feasible, in quantitative form) between the
financial statements as prepared on the basis of the new accounting principles and those prepared on the
basis of the 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
Appendix E
Page 6
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 it in
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 Certificate owner 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 no implied
covenants or obligations shall be read into this Disclosure Certificate against the Dissemination Agent, 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 and expenses) of defending against any claim of liability, but excluding liabilities due to the
Dissemination Agent’s negligence or willful misconduct. The Dissemination Agent shall have the same
rights, privileges and immunities hereunder as are afforded to the Trustee under the Indenture. The
obligations of the City under this Section 12 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 Underwriter and the owners 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 PALO ALTO
By
Name
Title
Appendix E
Page 7
EXHIBIT A
NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT
Name of Issuer: City of Palo Alto
Name of Issue: City of Palo Alto Utility Revenue Refunding Bonds, 2011 Series A
Date of Issuance: [Closing Date]
NOTICE IS HEREBY GIVEN that the Issuer has not provided an Annual Report with respect to the above-
named Issue as required by the Continuing Disclosure Certificate, dated September, 2011, furnished by the
Obligor in connection with the Issue. The Issuer anticipates that the Annual Report will be filed by
_________________.
Date: ________________
CITY OF PALO ALTO, Dissemination Agent
By
Authorized Officer
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Appendix F
Page 1
APPENDIX F
DTC AND THE BOOK-ENTRY ONLY SYSTEM
The following description of the procedures and record keeping with respect to beneficial ownership interests
in the 2011 Bonds, payment of principal, redemption premium, if any, and interest with respect to the 2011 Bonds to
DTC, its Participants or Beneficial Owners, confirmation and transfers of beneficial ownership interests in the 2011
Bonds and other related transactions by and between DTC, its Participants and the Beneficial Owners is based solely
on the understanding of the City of such procedures and record keeping from information provided by DTC.
Accordingly, no representations can be made concerning 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 same with DTC or its Participants, as the case may be. The City, the Trustee and the Underwriter understand that
the current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and that the current
“Procedures” of DTC to be followed in dealing with Participants are on file with DTC.
The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the
Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s
partnership nominee) or such other name as may be requested by an authorized representative of DTC.
One fully-registered Bond certificate will be issued for each maturity of the Bonds, each in the aggregate
principal amount of such maturity, and will be deposited with DTC.
DTC, 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 “clearing corporation” within the meaning of the New York
Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of
the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of
U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from
over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the
post-trade settlement among Direct Participants of sales and other securities transactions in deposited
securities, through electronic computerized book-entry transfers and pledges between Direct Participants’
accounts. This eliminates the need for physical movement of securities certificates. Direct Participants
include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations,
and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing
Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation
and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTTC is owned by
users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and
non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through
or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect
Participants”). DTC has 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 DTC can be
found at www.dtcc.com and www.dtc.org.
Purchases of the Bonds under the DTC system must be made by or through Direct Participants,
which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser
of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records.
Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are,
however, expected to receive written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner
entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries
made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial
Owners will not receive 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 DTC are
registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested
by an authorized representative of DTC. The deposit of the Bonds with DTC and their registration in the
name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has
Appendix F
Page 2
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 may or may not be the Beneficial
Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct
Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial
Owners will be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time. Beneficial Owners of 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 in 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 customers 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.
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
Appendix F
Page 3
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
respect to the Bonds or an error or delay relating thereto.
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OFFICIAL NOTICE OF SALE
$___________*
CITY OF PALO ALTO
(SANTA CLARA COUNTY, CALIFORNIA)
UTILITY REVENUE REFUNDING BONDS
2011 SERIES A
NOTICE IS HEREBY GIVEN by the City of Palo Alto (the “City”) that bids will be
received by the City for the purchase of $___________* City of Palo Alto Utility Revenue
Refunding Bonds, 2011 Series A (the “Bonds”). Only electronic bids will be accepted. The bids
will be received in the manner and up to the time and date specified below:
DATE AND TIME: 9:30 A.M. Pacific Daylight Time on __________, September
__, 2011 (subject to postponement or cancellation in
accordance with this Official Notice of Sale).
ELECTRONIC BIDS: Bid proposals may only be submitted electronically, via
PARITY®, as provided below.
See “TERMS OF SALE - Warnings Regarding Electronic 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
actual interest rates affect the refunding of the City’s 2002 Bonds (defined below), amount of
costs of issuance and the size of the reserve fund and as a function of the actual discount taken
by the successful bidder. The definitive principal amount will be determined on the date of
sale, after adjustment, as provided herein. Bidders should refer to the preliminary Official
Statement for definitions of terms and credit information regarding the Bonds.
The City further reserves the right to modify or amend this Official Notice of Sale in any
respect, including, without limitation, the principal amount of the Bonds being offered, upon
notice given as described above. As an accommodation to bidders, telephonic, electronic or
faxed notice of any postponement of the sale date and of the new sale date and time or any
amendment or modification of this Official Notice of Sale will be given to any bidder requesting
such notice from the City’s Financial Advisor: PUBLIC FINANCIAL MANAGEMENT, INC., 50
California Street, 23rd Floor, San Francisco, California 94111, Attention: Bob Gamble, email:
gambler@pfm.com, telephone: (415) 982-5544, fax: (415) 982-4513. Failure of any bidder to
receive such supplemental notice shall not affect the sufficiency of any required notice or the
legality of the sale.
Notice of any change to the principal payment schedule for the Bonds to be utilized for
the bidding process will be given via PARITY® not later than 1:00 p.m. (California time) on the
* Preliminary, subject to change, as provided herein.
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day prior to the date prescribed for the receipt of bids. Potential bidders must obtain any such
revised principal payment schedule before bidding on the Bonds. See “TERMS RELATING TO
THE BONDS - Principal Payments” and “- Adjustment of Principal Payments” below.
TERMS OF THE BONDS
ISSUE. The Bonds will be issued under an Indenture of Trust, dated as of September 1,
2011, between U.S. Bank National Association (the “Trustee”) and the City (the “Indenture”), in
the aggregate principal amount of approximately $___________* designated "City of Palo Alto
Utility Revenue Refunding Bonds, 2011 Series A (the “Bonds”) consisting of fully-registered
bonds, without coupons, executed and delivered in book-entry only form and registered in the
name of Cede & Co., as nominee for The Depository Trust Company ("DTC"), in the
denomination of five thousand dollars ($5,000) each or any integral multiple thereof.
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: The principal amount in each maturity is subject to change as provided
herein and will not change by more than 15% in each maturity.
Maturity Date
(June 1)
Principal
Amount *
Maturity Date
(June 1)
Principal
Amount *
ADJUSTMENT OF PRINCIPAL 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; provided, however, that the total
principal amount will not exceed $__________. The principal amount of each maturity (set forth
above) will not change by more than fifteen per cent. 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, however, 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,
* Preliminary, subject to change, as provided herein.
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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 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.
REDEMPTION.
(a) Optional Redemption. The Bonds maturing on or 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, pro rata
among maturities, and by lot within a maturity, in whole or in part, on any date occurring on or
after June 1, 20__, from any source of available funds, at a redemption price equal to the
principal amount of the Bonds to be redeemed, plus accrued interest thereon to the date of
redemption, without premium.
(b) 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 or rebuild the City’s Water System or Gas System (as
defined in the Indenture, described below) or the net proceeds of condemnation awards
received with respect to the Water System or Gas System 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.
(c) Mandatory Sinking 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 respective 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).
PAYMENT. Interest on the Bonds is payable semiannually on each June 1 and
December 1 (each, and "Interest Payment Date" or "Payment Date"), commencing December 1,
2011. 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 disbursement to the beneficial
owners of the 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) refund, on a current basis, the City’s
outstanding City of Palo Alto Utility Revenue Bonds, 2002 Series A (the “2002 Bonds”),
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currently outstanding in the principal amount of $18,050,000 (ii) 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 the
Trustee, for the benefit of the Owners, the Net Revenues of the Water System and the Gas
System of the City, as more particularly provided for in the Indenture, 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 have been
irrevocably pledged to the punctual payment of the principal or redemption price of and
interest on the Bonds. Such Net Revenues cannot 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 or issued on a parity
therewith, including the City’s outstanding Water Revenue Bonds, 2009 Series A, issued to
finance certain improvements to the Water System, of which $12,715,000 are presently
outstanding and which are secured by a pledge the Net Revenues of the Water System, all in
accordance with the terms thereof. However, the City’s Utility Revenue Bonds, 1995 Series A
(the "1995 Bonds") are currently outstanding in the principal amount of $4,595,000, 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 and the
Gas System is senior to the lien on those Net Revenues securing the Bonds.
The Net Revenues constitute a trust fund for the security and payment of the principal
or redemption price of and interest 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 owners of the Bonds cannot 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 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 and the Gas System.
Neither the faith and credit nor the taxing power of the City, the State of California, or any
political subdivision thereof is pledged to the payment of the Bonds. The Bonds are not general
obligations of the City, but are limited obligations payable solely from certain funds held pursuant to the
Indenture. Neither the City of Palo Alto nor the State of California shall be obligated to pay the principal
of the Bonds, or the interest thereon and neither the faith and credit nor the taxing power of the City of
Palo Alto, the State of California or any of its political 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 Bonds is excluded from gross income for federal income tax
purposes, and is not an item of tax preference for purposes of the federal alternative minimum
tax imposed on individuals and corporations.
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In the event that, prior to the delivery of the Bonds (a) the interest on other obligations
of the same type and character shall be declared 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 Bonds as such,
the successful bidder may, at its option, prior to the tender of the Bonds, be relieved of its
obligation to purchase the Bonds, and in such case the deposit accompanying its bid will be
returned.
EXEMPTION FROM CALIFORNIA INCOME TAX. In the opinion of Bond Counsel,
interest on the Bonds is exempt from California personal income taxes.
LEGAL OPINION. The legal opinion of Jones Hall, A Professional Law Corporation,
San Francisco, California, Bond Counsel, approving the validity of the Bonds and regarding
"TAX-EXEMPT STATUS" above will be furnished to the 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: Public Financial
Management, Inc., 50 California Street, Suite 2300, San Francisco, California 94111 (the
“Financial Advisor”). Facsimile: (415) 982-4513.
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 ratings desired by
the purchaser of the Bonds, as well as any fees associated with such additional ratings, will be
the sole responsibility of the purchaser.
TERMS OF SALE
FORM OF BID: All bids 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 98.5% of the par value
thereof.
Bidders may submit only one bid, electronically through PARITY®. All bids must
comply with the requirement for a good faith deposit. See “GOOD FAITH DEPOSIT” herein.
ELECTRONIC BIDS. Electronic bids must conform with the procedures established by
PARITY®. Electronic bids will be received exclusively through PARITY® in accordance with
this Official Notice of Sale until 9:30 a.m. California time on the sale date, but no bid will be
received after the time specified for receiving bids. To the extent any instructions 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. 23rd Street, 5th Floor, New York, NY
10010 (Eric Washington), 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
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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 PARITY®. 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 BIDDER 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.
INTEREST RATE: Bidders must specify the rate or rates of interest which shall be
payable on the Bonds. The maximum rate bid may not exceed __________ percent (__%) per
annum. Interest on the Bonds is payable semiannually on each Interest Payment Date. Bidders
will be permitted to bid different rates of interest but (a) each interest rate specified in any bid
must be in a multiple of one-twentieth (1/20) or one-eighth (1/8) of one percent; (b) interest on
each Bond shall be computed from the closing date (expected to be September __, 2011), to its
stated maturity date, at the interest rate specified in the bid, payable semiannually as set forth
above; (c) interest on all Bonds maturing at any one time shall be payable at the same rate of
interest; and no bid will be accepted which contemplates the waiver of any interest or other
concession by the bidder as a substitute for payment in full of the purchase price.
BEST BID: The Bonds will be awarded to the best responsible bidder therefor,
considering the interest rate or rates specified and the premium offered, if any, or discount
taken, if any, and the best bid will be determined on the basis of the lowest true interest cost.
The true interest cost will be that nominal annual discount rate which, when discounted
semiannually and when used to discount all payments of principal and interest on the Bonds at
the rate or rates specified in the bid to the date of the Bonds results in the amount equal to the
purchase price, which is the principal amount of the Bonds plus the amount of any premium,
less the amount of any discount. In the event two or more bids setting forth identical interest
rates are received, the City reserves the right to allow its authorized representative to exercise
his or her own discretion and judgment in making the award and may award the Bonds on a
pro rata basis in such denominations as he or she shall determine.
ADJUSTMENT OF PRINCIPAL AMOUNTS: Following the receipt of bids, the City
reserves the right to increase or to decrease the principal amount of any maturity of the Bonds
as the City deems advisable, based on the actual rates of interest to be borne by the Bonds. Any
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such increase or decrease shall be allocated among the various maturities of the Bonds on such
basis as the City deems advisable, and shall result in a proportionate increase or decrease (as
the case may be) in the amount of any premium or discount bid. Notice of such increase or
decrease shall be given to the successful bidder as soon as practicable following the notification
of award, as described below. No such adjustment will have the effect of altering the basis
upon which the best bid is determined.
RIGHT TO MODIFY OR AMEND: The City reserves the right, in its sole discretion, to
modify or amend this Official Notice of Sale including, but not limited to, the right to adjust and
change the principal amount and principal amortization schedule of the Bonds being offered,
however, such modifications or amendments shall be made not later than 1:00 P.M., California
time, on the business day prior to the bid opening and communicated through PARITY®.
RIGHT TO POSTPONEMENT OR CANCELLATION: The City may postpone or cancel
the sale prior to the time bids are to be received as provided on page one hereof, provided that
notice is communicated to prospective bidders through PARITY® prior to the time then
scheduled for the receipt of such bids. Notice of a new time, or of a new date and time, if any,
will be given through PARITY®, telephone or facsimile as soon as practicable following a
postponement. In the event of a postponement of the sale only, any subsequent bid submitted
by the bidder will supersede any prior bid made. Failure of any bidder to receive notice of any
postponement or cancellation shall not invalidate the sufficiency of any such notice.
RIGHT OF REJECTION: The City reserves the right, in its sole discretion, to reject any
and all bids and to waive any irregularity or informality in any bid except that no bids will be
accepted later than 9:30 A.M. on the date set for receipt of bids.
PROMPT AWARD: An authorized representative of the City will take action awarding
the sale of the Bonds or reject all bids not later than twenty-six (26) hours after the expiration of
time herein prescribed for the receipt of bids and until such expiration of time all bids received
shall be irrevocable. Unless such time of award is waived by the successful bidder, the award
may be made after the expiration of the specified time if the bidder shall not have given to the
City notice in writing of the withdrawal of such proposal. Notice of the award will be given
promptly to the successful bidder.
DELIVERY AND PAYMENT: Delivery of the Bonds will be made to the successful
bidder in New York, New York, as soon as the Bonds can be prepared, which is estimated to be
September __, 2011 (the “Closing Date”). The Bonds will be delivered in full book-entry form
through the facilities of DTC. Payment for the Bonds must be made in immediately available
funds to the Paying Agent. Any expense in providing immediately available funds shall be
borne by the purchaser.
RIGHT OF CANCELLATION: The successful bidder shall have the right, at its option,
to cancel its purchase of the Bonds if the City shall fail to cause the execution and delivery of the
Bonds and tender the same for delivery within 30 days from the date of sale thereof and in such
event the successful bidder shall be entitled to the return of the deposit accompanying its bid.
GOOD FAITH DEPOSIT. A financial surety bond or cashier’s check drawn on a bank
or trust company transacting business in the State of California and payable to the order of the
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City of Palo Alto, in the amount equal to $________ (the “Good Faith Deposit”), must be
submitted with each bid to protect the City against any loss resulting from the failure of the
bidder to comply with the terms of its bid.
If the apparent winning bidder on the Bonds is determined to be a bidder who has not
submitted a Good Faith Deposit in the form of a cashier’s check or financial surety bond, as
provided above, the Financial Advisor will request the apparent winning bidder to immediately
wire the Good Faith Deposit and provide the Federal wire reference number of such Good Faith
Deposit to the Financial Advisor within 90 minutes of such request by the Financial Advisor.
The Bonds will not be officially awarded to a bidder who has not submitted a Good Faith
Deposit in the form of a cashier’s check or a financial surety bond, as provided above, until such
time as such bidder has provided a Federal wire reference number for the Good Faith Deposit
to the Financial Advisor.
No interest will be paid upon the Good Faith Deposit made by any bidder. Checks of
the unsuccessful bidders will be returned by the City promptly after the award of the Bonds or
the rejection of all bids. The Good Faith Deposit of the winning bidder will, immediately upon
acceptance of its bid, become the property of the City, and if in the form of a check, will be
cashed. The Good Faith Deposit will be held and invested for the exclusive benefit of the City.
The Good Faith Deposit, without interest thereon, will be credited against the purchase price of
the Bonds purchased by the winning bidder at the time of delivery thereof.
If the purchase price is not paid in full upon tender of the Bonds, the City shall retain the
Good Faith Deposit and the winning bidder will have no right in or to the Bonds or to the
recovery of its Good Faith Deposit, or to any allowance or credit by reason of such deposit,
unless it shall appear that the Bonds would not be validly delivered if delivered to the winning
bidder in the form and manner proposed, except pursuant to a right of cancellation. In the
event of nonpayment for the Bonds by the winning bidder, the City reserves any and all rights
granted by law to recover the full purchase price of the Bonds and, in addition, any damages
suffered by the City.
ESTIMATE OF TRUE INTEREST COST: Each bidder is requested, but not required, to
state in its bid the true interest cost, as described under the caption “BEST BID” herein, which
shall be considered as informative 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 or less than the Initial Offering Prices.
The successful bidder agrees that, on or prior to the Closing Date, it will deliver a
certificate regarding the reoffering prices of the Bonds, dated as of the Closing Date, in form
and substance satisfactory to Bond Counsel.
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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 CUSIP 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, Securities Industry and
Financial Markets 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 ADVISORY COMMISSION FEES: All fees payable
to the California Debt and Investment Advisory Commission in connection with the issuance of
the Bonds will be the responsibility of the purchaser of the Bonds.
OFFICIAL STATEMENT: 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 purposes 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”) Rule G-32 or any
other rules adopted by the MSRB, including information permitted to be omitted by paragraph
(b)(1) 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 connection 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 or 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.
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 Disclosure Certificate, to provide certain annual financial information and notices of
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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
GIVEN pursuant to resolution of the Council of the City of Palo Alto adopted July 18,
2011.
Dated: September __, 2011
By: /s/ Lalo Perez
Administrative Services Director
City of Palo Alto
NOTICE OF INTENTION TO SELL
CITY OF PALO ALTO
(Santa Clara County, California)
$__________
UTILITY REVENUE REFUNDING BONDS, 2011 SERIES A
NOTICE IS HEREBY GIVEN by the City of Palo Alto (the “City”) that bids will be
received via facsimile, on
TUESDAY, SEPTEMBER __, 2011
At 10:00 a.m. Pacific Daylight Time for the purchase of approximately $33,000,000
principal amount of Utility Revenue Refunding Bonds, 2011 Series A (the “Bonds”) payable
under an Indenture of Trust, dated as of September 1, 2011, between the City and U.S. Bank
National Association. Bidders are directed to the Notice of Sale (described below) for
information on the City, the City’s Water System and Gas System, the Bonds, the security for
the Bonds, and details on bidding on the Bonds. The principal amount of the Bonds offered for
sale is subject to adjustment, as provided in the Official Notice of Sale for 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.tm3.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, Public Financial Management, Inc., 50 California Street, Suite 2300, San Francisco,
California 94111, telephone (415) 982-5544, attention: Bob Gamble.
Dated: September __, 2011
26005-64 JH:WHM 5/25/11
6/17/11
6/29/11
INDENTURE OF TRUST
by and between the
CITY OF PALO ALTO
and
U.S. BANK NATIONAL ASSOCIATION
as Trustee
Dated as of September 1, 2011
Relating to
City of Palo Alto
$[Principal Amount]
Utility Revenue Refunding Bonds
2011 Series A
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TABLE OF CONTENTS
ARTICLE I
DEFINITIONS; AUTHORIZATION AND PURPOSE OF BONDS;
EQUAL SECURITY
SECTION 1.01. Definitions...............................................................................................................................
SECTION 1.02. Rules of Construction..........................................................................................................
SECTION 1.03. Authorization and Purpose of Series A Bonds................................................................
SECTION 1.04. Equal Security.......................................................................................................................
ARTICLE II
ISSUANCE OF SERIES A BONDS
SECTION 2.01. Terms of Series A Bonds. ....................................................................................................
SECTION 2.02. Redemption of Series A Bonds...........................................................................................
SECTION 2.03. Form of Series A Bonds.......................................................................................................
SECTION 2.04. Execution of Series A Bonds...............................................................................................
SECTION 2.05. Transfer of Series A Bonds..................................................................................................
SECTION 2.06. Exchange of Series A Bonds. ..............................................................................................
SECTION 2.07. Temporary Series A Bonds.................................................................................................
SECTION 2.08. Bond Registration Books.....................................................................................................
SECTION 2.09. Series A Bonds Mutilated, Lost, Destroyed or Stolen.....................................................
SECTION 2.10. Book Entry System................................................................................................................
ARTICLE III
ISSUE OF SERIES A BONDS; PARITY BONDS
SECTION 3.01. Issuance of Series A Bonds .................................................................................................
SECTION 3.02. Application of Proceeds of Sale of Series A Bonds..........................................................
SECTION 3.03. Reserve Account...................................................................................................................
SECTION 3.04. Cost of Issuance Fund. ........................................................................................................
SECTION 3.05. Issuance of Parity Bonds.....................................................................................................
SECTION 3.06. No Prior Lien Bonds............................................................................................................
SECTION 3.07. Validity of Bonds..................................................................................................................
ARTICLE IV
PLEDGE OF NET REVENUES; FUNDS AND ACCOUNTS
SECTION 4.01. Pledge of Net Revenues, Revenue Fund...........................................................................
SECTION 4.02. Receipt and Deposit of Revenues. .....................................................................................
SECTION 4.03. Establishment of Funds and Accounts and Allocation of Revenues Thereto..............
SECTION 4.04. Application of Debt Service Fund......................................................................................
SECTION 4.05. Application of Reserve Account. .......................................................................................
SECTION 4.06. Application of Redemption Account. ...............................................................................
SECTION 4.07. Surplus...................................................................................................................................
SECTION 4.08. Investments...........................................................................................................................
SECTION 4.09. Valuation; Replenishment of Reserve Account; Investments........................................
ARTICLE V
COVENANTS OF THE CITY; SPECIAL TAX COVENANTS
SECTION 5.01. Punctual Payment; Compliance With Documents..........................................................
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SECTION 5.02. Against Encumbrances........................................................................................................
SECTION 5.03. Discharge of Claims.............................................................................................................
SECTION 5.04. Maintenance and Operation of Systems in Efficient and Economical Manner...........
SECTION 5.05. Against Sale, Eminent Domain. .........................................................................................
SECTION 5.06. Insurance...............................................................................................................................
SECTION 5.07. Records and Accounts.........................................................................................................
SECTION 5.08. Protection of Security and Rights of Owners...................................................................
SECTION 5.09. Against Competitive Facilities...........................................................................................
SECTION 5.10. Payment of Taxes, Etc..........................................................................................................
SECTION 5.11. Rates and Charges................................................................................................................
SECTION 5.12. Maintenance of Available Reserves; Transfers Therefrom ............................................
SECTION 5.13. No Priority for Additional Obligations.............................................................................
SECTION 5.14. Tax Covenants Relating to Series A Bonds.......................................................................
SECTION 5.15. Continuing Disclosure.........................................................................................................
SECTION 5.16. Further Assurances..............................................................................................................
ARTICLE VI
THE TRUSTEE
SECTION 6.01. Appointment of Trustee......................................................................................................
SECTION 6.02. Acceptance of Trusts............................................................................................................
SECTION 6.03. Fees, Charges and Expenses of Trustee. ...........................................................................
SECTION 6.04. Notice to Bond Owners of Default. ...................................................................................
SECTION 6.05. Intervention by Trustee.......................................................................................................
SECTION 6.06. Removal of Trustee..............................................................................................................
SECTION 6.07. Resignation by Trustee........................................................................................................
SECTION 6.08. Appointment of Successor Trustee....................................................................................
SECTION 6.09. Merger or Consolidation.....................................................................................................
SECTION 6.10. Concerning any Successor Trustee....................................................................................
SECTION 6.11. Appointment of Co-Trustee................................................................................................
SECTION 6.12. Indemnification; Limited Liability of Trustee..................................................................
ARTICLE VII
MODIFICATION AND AMENDMENT OF THE INDENTURE
SECTION 7.01. Amendment by Consent of Bond Owners........................................................................
SECTION 7.02. Amendment Without Consent of Bondholders...............................................................
SECTION 7.03. Disqualified Bonds...............................................................................................................
SECTION 7.04. Endorsement or Replacement of Bonds After Amendment. .........................................
SECTION 7.05. Amendment by Mutual Consent.......................................................................................
ARTICLE VIII
EVENTS OF DEFAULT AND REMEDIES OF BOND OWNERS
SECTION 8.01. Events of Default and Acceleration of Maturities...........................................................
SECTION 8.02. Application of Funds Upon Acceleration.........................................................................
SECTION 8.03. Other Remedies; Rights of Bond Owners.........................................................................
SECTION 8.04. Power of Trustee to Control Proceedings.........................................................................
SECTION 8.05. Appointment of Receivers..................................................................................................
SECTION 8.06. Non-Waiver. .........................................................................................................................
SECTION 8.07. Rights and Remedies of Bond Owners. ............................................................................
SECTION 8.08. Termination of Proceedings................................................................................................
ARTICLE IX
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MISCELLANEOUS
SECTION 9.01. Limited Liability of City......................................................................................................
SECTION 9.02. Benefits of Indenture Limited to Parties...........................................................................
SECTION 9.03. Discharge of Indenture........................................................................................................
SECTION 9.04. Successor Is Deemed Included in All References to Predecessor..................................
SECTION 9.05. Content of Certificates.........................................................................................................
SECTION 9.06. Execution of Documents by Bond Owners.......................................................................
SECTION 9.07. Waiver of Personal Liability...............................................................................................
SECTION 9.08. Partial Invalidity. .................................................................................................................
SECTION 9.09. Destruction of Cancelled Series A Bonds .........................................................................
SECTION 9.10. Funds and Accounts............................................................................................................
SECTION 9.11. Notices...................................................................................................................................
SECTION 9.12. Unclaimed Moneys..............................................................................................................
EXHIBIT A: Form of Series A Bond
EXHIBIT B: Debt Service on 2011 Water System Bonds & Debt Service on 2011 Gas System
Bonds
INDENTURE OF TRUST
THIS INDENTURE OF TRUST, dated as of September 1. 2011, 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 corporate trust 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 pursuant 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 purposes of financing and refinancing
improvements to an enterprise of the City;
WHEREAS, the City has heretofore authorized, issued and sold (i) $8,640,000 principal
amount of its City of Palo Alto Utility Revenue Bonds, 1995 Series A (the “1995 Bonds”)
pursuant to an Indenture of Trust dated as of August 1, 1990 (the “1990 Indenture”), and a
Second Supplemental Indenture of Trust (the “Second Supplemental Indenture of Trust”), both
by and between the City and the Trustee (as successor trustee to Security Pacific National Bank
and Bank of America National Trust Savings Association), and (ii) $26,055,000 principal amount
of its City of Palo Alto Utility Revenue Bonds, 2002 Series A (the “2002 Bonds”) pursuant to an
Indenture of Trust, dated as of January 1, 2002 (the “2002 Indenture”);
WHEREAS, as provided in the 1990 Indenture and Second Supplemental Indenture of
Trust, the 1995 Bonds are secured 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 $35,015,000 principal
amount of its City of Palo Alto Water Revenue Bonds, 2009 Series A (Taxable Direct Payment
Build America Bonds) (the “2009 Bonds”) pursuant to an Indenture of Trust, dated as of
October 1, 2009, by and between the City and the Trustee;
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 refunding bonds
under this Indenture for the purpose of refunding the 2002 Bonds for such purpose;
WHEREAS, to that end the City Council of the City (the “Council”) has heretofore
adopted its Resolution No. ____, approving and authorizing the issuance of its City of Palo Alto
Utility Revenue Refunding Bonds, 2011 Series A (the “Series A Bonds”) for such purpose;
WHEREAS, in order to provide for the authentication and delivery of the Series A
Bonds and any bonds issued on a parity therewith, as herein provided (together, the “Bonds”),
to establish and declare the terms 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
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premium, if any, thereon, the Council has authorized the execution and delivery of this
Indenture;
WHEREAS, subject to the prior lien of the 1995 Bonds, the Bonds will be secured by a
pledge of the Net Revenues, as defined herein, and certain other moneys and securities held by
the City and the Trustee hereunder; and
WHEREAS, the 2011 Water System Bonds (as herein defined) will be issued on a parity
with the 2009 Bonds; 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 Trustee 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 covenants herein
contained and of the purchase and acceptance of the Series A Bonds by the Owners thereof, and
for 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:
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ARTICLE I
DEFINITIONS; AUTHORIZATION AND PURPOSE OF BONDS;
EQUAL SECURITY
SECTION 1.01. Definitions. Unless the context otherwise requires, the terms defined
in this Section shall for all purposes of this Indenture and of any Parity Bonds Instrument and of
the Bonds and of any certificate, opinion, request or other documents herein mentioned have
the meanings herein specified.
“Allocable Share” means, in any Fiscal Year, with respect to a particular System, Debt
Service due in that Fiscal Year on the Sub-Series of Series A Bonds issued for such System,
divided by Debt Service due in the same Fiscal Year.
"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 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; (ii) 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 Mortgage 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-1" by Moody’s and "A-1" or "A-1+" 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;
(e) commercial paper which is rated at the time of purchase in the single highest
classification, "P-1" by Moody’s and "A-1+" by S&P, and which matures not more than
270 days after the date of purchase;
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(f) investments in a money market fund rated "AAAm" or "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, instrumentality
or local governmental unit of any such state which are not callable at the option of the
obligor prior to maturity or as to which irrevocable instructions have been given by the
obligor to call on the date specified in the notice; and (i) which are rated, based 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 secured 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
(B) which escrow is sufficient, as verified by a nationally recognized independent
certified public accountant, to pay principal of and interest and redemption premium, if
any, on the bonds or other obligations described in this paragraph on the maturity date
or dates thereof or on the redemption date or dates specified in the irrevocable
instructions referred to above, as appropriate;
(h) general obligations of states with a rating of at least "A2/A" or higher by both
Moody’s and S&P;
(i) investment agreements: (1) with financial institutions whose long-term
general credit rating is A or better from the Rating Agencies, by the terms of which the
Trustee may withdraw funds from the provider of such investment agreement if such
rating falls below “A”; or (2) which are fully collateralized by Authorized Investments
described in (a), (b) or (c) of this definition in an amount at least equal to 105% of the
amount being invested in such investment agreement, by the terms of which such
collateral is valued at least quarterly, and the Trustee may withdraw funds from the
provider of such investment agreement if the market value of such collateral falls below
105% of the amount invested in such investment agreement;
(j) the Local Agency Investment Fund maintained by the State, to the extent any
investments 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).
“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.
“Available Reserves” means funds held in the City’s:
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(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 Reserve.
“Available Reserves” 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 Series A Bonds are Outstanding, divided by the number of Fiscal Years
or portions thereof during which the Series A Bonds are Outstanding.
"Bond Counsel" 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.
"Bond 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.
"Bonds" means, collectively, the Series A Bonds and any Parity Bonds issued and at any
time Outstanding hereunder and under a Parity Bonds Instrument.
"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
Trustee 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.
"Charges" 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 a particular
System furnished by the City.
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"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 proceeds representing the purchase of the Series A Bonds by the Original Purchaser
thereof.
"Cost of Issuance Fund" means the Fund by that name established pursuant to Section
3.04.
"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
financial 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.
"Council" means the City Council of the City or any other legislative body of the City
hereafter provided for pursuant to law.
"Debt Service" means, during any period of computation, the amount obtained for such
period by totaling the following amounts:
(a) The principal amount of all Outstanding Serial Bonds payable by their terms
in such period;
(b) The principal amount of all Outstanding Term Bonds scheduled to be paid or
redeemed by operation of mandatory Sinking Fund Installments in such period; and
(c) The interest which would be due during such period on the aggregate
principal amount of Series A Bonds which would be Outstanding in such period if the
Series A Bonds are paid or redeemed as scheduled.
"Debt Service Fund" means the fund by that name established and held by the Trustee
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 proportionate interests in
future interest and principal payments on Treasuries held by a bank or trust company as
custodian, under which the owner of the investment is the real party in interest and has the
right to proceed directly and individually against the obligor and the underlying Treasuries are
not available to any person claiming through the custodian or to whom the custodian may be
obligated 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 Participant" means any participant in the Depository's book-entry
system.
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"DTC" means The Depository Trust Company, New York, New York, and its successors
and assigns.
“Electric System” means the existing electrical system of the City, comprising all
facilities for the transmission and distribution of electric energy.
“Escrow Agreement” means the Escrow Deposit and Trust Agreement, dated as of
September 1, 2011, by and between the City and the Escrow Bank, with respect to the
establishment and administration of the Escrow Fund for the purpose of providing for the
refunding of the 2002 Bonds.
“Escrow Bank” means U.S. Bank National Association, a national banking association
organized and existing under and pursuant to the laws of the United States of America.
“Escrow Fund” means the Escrow Fund established and held by the Escrow Bank
pursuant to the Escrow Agreement.
"Event of Default" means any of the events 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 or sell the investment becomes binding) if the investment is traded
on an established securities market (within the meaning of section 1273 of the Tax Code) and,
otherwise, the term "Fair Market Value" means the acquisition price in a bona fide arm's length
transaction (as referenced above) if (i) the investment is a certificate of deposit that is acquired
in accordance with applicable regulations under the Tax Code, (ii) the investment is an
agreement with specifically negotiated withdrawal or reinvestment provisions and a
specifically negotiated interest rate (for example, a guaranteed investment contract, a forward
supply contract or other investment agreement) that is acquired in accordance with applicable
regulations under the Tax Code, (iii) the investment is a United States Treasury Security--State
and Local Government Series that is acquired in accordance with applicable regulations of the
United States Bureau of Public Debt, or (iv) any commingled investment fund in which the City
and related 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 or 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.
"Fiscal Year" means the period commencing on July 1 of each year and terminating on
the next succeeding June 30.
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“Gas 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 received for,
and all other gross income and revenues derived by the City from, the ownership or operation
of a System or otherwise arising from a System during such period, including but not limited to
(a) all Charges received by the City for use of such System, (b) all receipts derived from the
investment of funds held by the City or the Trustee under this Indenture, (c) transfers from any
stabilization reserve funds of a System into the Revenue Fund of such System, and (d) all
moneys received by the City from other public entities whose inhabitants are served by such
System pursuant to contracts with the City.
"Improvement" means any addition, extension, improvement, equipment, machinery or
other facilities to or 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 Accountant" means any certified public accountant or
firm of such accountants appointed and paid by the City, and who, or each of whom-
(a) is in fact independent and not under domination of the City;
(b) does not have any substantial 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.
"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 the Municipal Securities Rulemaking Board Electronic Municipal Market Access (EMMA) system accessible at the emma.msrb.org website.
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"Interest Payment Date" means, with respect to the Series A Bonds, June 1 and
December 1 in each year, beginning December 1, 2011, and with respect to any Parity Bonds,
any date on which interest is due and payable thereon, and continuing so long as any Bonds or
Parity Bonds remain Outstanding.
"Interest Requirement" means, as of any particular date of calculation, the amount
equal to any unpaid interest then due and payable on the Series A Bonds, plus an amount
which will on the next succeeding Interest Payment Date be equal to the interest to become due
and payable on the Series A Bonds on such next succeeding Interest Payment Date.
"Maintenance and Operation Costs" means the reasonable and necessary costs spent or
incurred by the City for maintaining and operating a System, calculated in accordance with
sound accounting principles, 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 such System in good repair and working order, and including all reasonable and
necessary administrative costs of the City attributable to such 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 engineers, 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
this Indenture, but excluding depreciation, replacement and obsolescence charges or reserves
therefor and amortization of intangibles or other bookkeeping entries 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.
"Moody's" means Moody's Investors 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 if such corporation shall be dissolved or liquidated or shall 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", when used with reference to any insurance or condemnation award or
sale of property, 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 (including attorneys' fees and any extraordinary expenses of the Trustee) incurred in
the collection of such gross proceeds.
"Net Revenues" means, with respect to a System, for any period of computation, the
amount of the Gross Revenues received from such System during such period, less the amount
of Maintenance and Operation Costs of such System becoming payable during such period.
"1990 Indenture" means that Indenture of Trust dated as of August 1, 1990, by and
between the City and the Trustee, as successor to Security Pacific National Bank, as trustee, as
supplemented by the Second Supplemental Indenture of Trust.
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"1995 Bonds" means the $8,640,000 original principal amount of the City of Palo Alto
Utility Revenue Refunding Bonds, 1995 Series A issued by the City pursuant to the 1990
Indenture and the Second Supplement to 1990 Indenture of Trust.
"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 Series A Bond shall be registered
on the Bond Registration Books.
"Parity Bonds" means, for the Water System, the 2009 Bonds, and for all the Systems, all
bonds, notes or other obligations (including without limitation long-term contracts, loans,
installment sale agreements 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 3.05.
"Parity Bonds Instrument" means the resolution, trust 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.
"Principal Installment 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.
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"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.
"Redemption 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.
"Request of the City" means a request 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.
"Reserve Account" means the Account by that name established and held by the Trustee
pursuant to Section 4.03.
"Reserve Requirement" means an amount equal to the lesser of: (i) Maximum Annual
Debt Service; (ii) ten percent (10%) of the Outstanding principal amount of the Series A Bonds;
or (iii) 125% of Average Annual Debt Service, as may be set forth in a Parity Bonds Instrument
pursuant to Section 3.05.
"Revenue Fund" means the Fund by that name established and held by the City
pursuant to the 1990 Indenture and referred to in Section 4.02.
"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 refer to any other
nationally recognized securities rating agency selected by the City.
"Second Supplemental Indenture of Trust" means the Second Supplemental Indenture
of Trust, between the City and the Trustee, as successor to Bank of America National Trust and
Savings Association, as Trustee, dated as of February 1, 1995.
"Serial Bonds" means all Series A Bonds other than Term Bonds.
"Series" when used with respect to less than all of the Series A Bonds, means and refers
to all of the Series A Bonds delivered on original issuance in a simultaneous transaction,
regardless of variations in maturity, interest rate or other provisions, and any Series A Bond
thereafter delivered in lieu of or substitution for any of such Series A 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 Utility Revenue Refunding Bonds, 2011
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
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on such date toward the retirement of any particular Term Bonds prior to their respective stated
maturities.
"State" means the State of California.
“Sub-Series” means any of 2011 Gas System Bonds, 2011 Sewer System Bonds, Storm
Water System Bonds or Water System Bonds, treating each group of Series A Bonds secured by
a different System as a “Sub-Series”.
"System" means either of the Gas System or the Water System, as applicable. “Systems”
means the aggregate of the Gas System and the Water System
"Tax 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, together with applicable
proposed, temporary 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 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 One California Street,
Suite 1000, San Francisco, California 94111, or such other or additional offices as may be
specified to the City by the Trustee in writing.
"Trustee" means U.S. Bank National Association, appointed by the City to act as trustee
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 Bonds” means the City’s Utility Revenue Bonds, 2002 Series A, issued in the
original principal amount of $26,055,000 pursuant to an Indenture of Trust, dated as of January
1, 2002, between the City and the Trustee.
"2009 Bonds” means the City’s Water Revenue Bonds, 2009 Series A (Taxable Direct
Payment Build America Bonds), issued in the original principal amount of $35,015,000 pursuant
to an Indenture of Trust dated as of October 1, 2009, by and between the City and the Trustee.
"2011 Gas System Bonds” means Series A Bonds issued in the original principal amount
of $____________, and which are secured by the Net Revenues of the Gas System, in the
amounts and on the dates set forth in Exhibit B.
"2011 Water System Bonds” means Series A Bonds issued in the original principal
amount of $____________, and which are secured by the Net Revenues of the Water System on
a parity with the 2009 Bonds, in the amounts and on the dates set forth in Exhibit B.
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“Water System” means the existing water system of the City, comprising all facilities for
the obtaining, conserving, treating, distributing, 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 construed 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.
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 refund the 2002 Bonds, fund the Reserve Account for the Series A Bonds,
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
contract 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 or otherwise of any of the Series
A Bonds over any of the others by reason of the number or date thereof or the time of sale,
execution or 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 A Bonds. 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 Utility Revenue Refunding Bonds, 2011 Series A", and shall be
issued in the original principal amount of ________________ Dollars ($[Principal Amount]). Of
the Series A Bonds, $_________ shall be issued as 2011 Water System Bonds and $__________
shall be issued as 2011 Gas System Bonds.
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 Principal Interest Rate
(June 1) Amount 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 immediately 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 respect 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 30-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 November 15, 2011, in which event such interest is payable from
the Closing Date; provided, however, that if, as of the date of authentication of any Series A
Bond, interest thereon is in default, such Series A Bond shall bear interest from the date to
which interest has previously been paid or made available for payment thereon in full.
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SECTION 2.02. Redemption of Series A Bonds.
(a) 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 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
the Series A Bonds to be redeemed), plus accrued interest thereon to the date of redemption:
Redemption Periods Redemption Prices
The City shall have the option to redeem one or more Sub-Series of Series A Bonds, in
whole or in part, in which case the Trustee shall select for redemption those Series A Bonds
whose maturities correspond to the Debt Service for the Sub-Series of Series A Bonds being
redeemed by reference to the Debt Service due on such Sub-Series as shown on Exhibit B. The
City shall be required to give the Trustee written notice of its intention to redeem Series A
Bonds under this subsection (a), and shall deposit all amounts required for such redemption
with the Trustee at least forty-five (45) days prior to the date fixed for such redemption.
(b) Mandatory Redemption.
(i) Mandatory 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, ____ 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 follows:
June 1 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 Systems or the Net
Proceeds of condemnation awards received with respect to the Systems 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) Redemption of Additional Bonds. Any Parity Bonds issued pursuant to Section 3.05
of this Indenture may 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 may be determined by the City in the
applicable Parity Bonds Instrument.
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(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
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) Contents of Notice. All notices of redemption shall be dated and shall state:
(i) the redemption date,
(ii) the Redemption Price,
(iii) if fewer than all Outstanding Bonds are to be redeemed, the identification
(and, in the case of partial redemption, the respective principal 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 for
redemption, and that interest with respect thereto shall cease to accrue from and after
said date, and
(v) the place or places where such Series A Bonds are to be surrendered for
payment of the Redemption Price, which places of payment may include the Trust
Office of the Trustee.
(f) 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 Price 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 Trustee at the Redemption Price. Installments of interest due on or prior to the
redemption date shall be payable as herein provided 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 Series A 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 accrual of interest thereon.
(g) Additional Notice. In addition to the foregoing notice, further notice shall be given
by the Trustee as set out below, but no defect in said further notice nor 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:
(i) Each further notice of redemption given hereunder shall contain the
information required above for an official notice of redemption plus (A) the CUSIP
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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.
(ii) Each further notice of redemption shall be sent at least 35 days before the
redemption date by registered or certified mail or overnight delivery service to all
registered securities depositories then in the business of holding substantial amounts of
instruments of types comprising the Series A Bonds, and, on the date notice is mailed to
Series A Bond Owners, to one or more Information Services.
(iii) Upon the payment of the Redemption Price of the Series A Bonds being
redeemed, each check or 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 or other transfer.
(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 Series A Bond or Series A Bonds.
(j) 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 Bonds in 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, for the purchase of Series A
Bonds at public or private sale as and when and at such prices (including brokerage and other
charges, but excluding accrued interest, which is payable from the 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 for deposit in the Debt
Service Fund the amount of any deficiency in such Fund which may be caused by such
purchase. All Series A Bonds purchased 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 form set
forth in Exhibit A attached hereto and by this reference incorporated herein, with necessary or
appropriate variations, omissions and insertions, as permitted or required by this Indenture.
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SECTION 2.04. Execution 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 or 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. The Series A Bonds shall then be
delivered to the Trustee 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 Trustee or 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 officer.
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 Trustee shall be conclusive evidence that the Series A Bonds so authenticated have been
duly 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 Series 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 Series A Bonds. The Series 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, for cancellation, in
exchange therefor at the Trust Office of the Trustee, and the Trustee shall authenticate and
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 temporary
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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 Registration Books. 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 or cause to be registered or transferred, on
said books, Series A Bonds as hereinbefore provided.
SECTION 2.09. Series A Bonds Mutilated, Lost, Destroyed 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 Series 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 upon
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 indemnity satisfactory to them shall be given, the
City, at the expense of the Series A Bond Owner, shall execute, and the Trustee shall thereupon
authenticate and deliver, a new Series A Bond of like maturity and principal amount in lieu of
and in substitution for the Series A Bond so lost, destroyed or stolen (or if any such Series A
Bond shall have matured or shall have been called for redemption, instead of 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 of a reasonable fee for
each new Series A Bond issued under this Section and of the expenses which may be incurred
by the City and the Trustee. Any Series A Bond issued under the provisions of this Section in
lieu of any Series A Bond alleged to be lost, destroyed 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 shall be equally and
proportionately entitled to the benefits of this Indenture with all other Bonds secured by this
Indenture.
SECTION 2.10. Book Entry System.
(a) Original Delivery. The Series A Bonds shall be initially delivered in the form of a
separate single fully registered Series A Bond (which may be typewritten) 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 such 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
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
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to any ownership interest in the Series A Bonds, (ii) the delivery to any Depository System
Participant or 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 Bond is registered as the absolute owner of such Bond for the
purpose of payment of principal, premium, if any, and interest represented by such Bond, for
the purpose of giving notices of redemption and other matters with respect to such Bond, for
the purpose of registering transfers of ownership of such 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 Bond evidencing the obligation of the City to make payments of
principal, interest and premium, if any, pursuant to this 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 Owners. Upon the written
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-Entry System. In the event that either (i) the Depository
determines not to continue to act as Depository for the Series A Bonds, or (ii) 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 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
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shall be registered in whatever name or names the Owners transferring 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
through the Depository. In such event, the Trustee will execute, transfer and exchange Series A
Bonds as required by the Depository and others in appropriate amounts; and whenever the
Depository requests, the Trustee and the City shall cooperate with the Depository in taking
appropriate action (y) to make available one or more separate certificates evidencing the 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 Nominee. Notwithstanding any other provision of this Indenture
to the contrary, so long as any Bond is registered in the name of the Nominee, all payments
with respect to principal, interest and premium, if any, represented by such Bond and all
notices with respect to such Bond shall be made and given, respectively, as provided in the
letter described in subsection (b) of this Section or as otherwise instructed by the Depository.
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ARTICLE III
ISSUE OF SERIES A BONDS; PARITY BONDS
SECTION 3.01. Issuance 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
original 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
$______________ (being the Reserve Requirement); and
(b) The Trustee shall transfer $_________ to the Escrow Bank, for deposit to the
Escrow Fund; 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. An amount equal to the Reserve Requirement under
Section 4.06(a) for the account of the Reserve Account, shall be maintained in the Reserve
Account at all times; any deficiency therein shall be replenished from available Net Revenues
pursuant to Section 4.03(3).
SECTION 3.04. Cost of Issuance Fund. There is hereby created a fund to be known as
the "City of Palo Alto Utility Revenue Refunding Bonds, 2011 Series A Cost of Issuance Fund"
(the "Cost of Issuance Fund"), which the City hereby covenants and agrees 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 the purpose of the payment of
Costs of Issuance upon receipt by the Trustee of Requests of the City therefor, on or after the
Closing Date. Any funds remaining in the Cost of Issuance Fund on ____1, 2011, shall be
transferred by the Trustee to the Debt Service Fund.
SECTION 3.05. Issuance of Parity Bonds. In addition to the Series A Bonds, the City
may, by Parity Bonds Instrument, issue or incur other loans, advances or indebtedness payable
from Net Revenues to be derived from any System, to provide financing for such System, in
such principal amount as shall be determined by the City. 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:
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(a) The City shall be in compliance with all covenants set forth in this Indenture.
(b) The Net Revenues of the System for which such Parity Bonds are being
issued, 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 transfers, if any, from such System’s rate stabilization fund, plus, at the
option of the City, any or all of the amount described in the following paragraph, 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
such System.
The following may be added to Net Revenues for the purpose of issuing or
incurring Parity Bonds hereunder: an allowance for earnings arising from any increase
in the Charges which has become effective prior to the incurring 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 or such twelve (12) month period, all as shown in
the written report of an Independent Consultant engaged by the City.
(c) The Net Revenues of the System for which such Parity Bonds are being
issued, 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, 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 such 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:
(i) An allowance for Net Revenues from any additions to or
improvements or extensions of the System to be made with the proceeds of such
Parity Bonds, 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 or extension is respectively to be in
operation, all as shown in the written report of an Independent Consultant
engaged by the City;
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(ii) An allowance for earnings arising from any increase in the Charges
which has become effective prior to the incurring 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 or such twelve (12) month
period, all as shown in the written report of an Independent Consultant engaged
by the City; and
(iii) Funds then on hand in Available Reserves for the System for which
such Parity Bonds are being issued.
(d) The Parity Bonds Instrument providing for the issuance of such Parity Bonds
under this Section 3.05 shall provide that:
(i) 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 System, or otherwise
for facilities, improvements or property which the City determines are of benefit
to the 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; and
(iii) The principal of such Parity Bonds shall be payable on June 1 in any
year in which principal is payable.
SECTION 3.06. No Prior Lien Bonds. The City covenants that it will not issue any
obligations which have a lien on Gross Revenues or Net Revenues superior to the lien created
hereunder as security for the Series A Bonds.
SECTION 3.07. Validity of Bonds. The validity of the authorization and issuance of
the Bonds shall not be affected in any way by any proceedings taken by the City for the
acquisition or construction of the Project, or by any contracts made by the City in connection
therewith, and the recital contained in the 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, 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 each System which are necessary to pay Debt
Service on the Sub-Series of Bonds issued for such System. The 2011 Water System Bonds are
issued on a parity with the 2009 Bonds. The Net Revenues shall not 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 this
Article. Said pledge shall constitute a first, direct and exclusive charge and lien on the Net
Revenues for the payment of the principal or Redemption Price of and interest on the Bonds in
accordance with the terms thereof, subject to the prior lien of the 1995 Bonds.
(B) The Net Revenues constitute a trust fund for the security and payment of the
principal or Redemption Price of and interest 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 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 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.
SECTION 4.02. Receipt and Deposit of Gross 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 Revenue Fund (which has heretofore
been created pursuant to the 1990 Indenture and now exists in the City Treasury) and will be
accounted for through and held in trust in the Revenue Fund, and the City shall only have such
beneficial right or 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 Allocation 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.
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 Revenue Fund and shall be
applied, transferred, used and withdrawn only for the purposes hereinafter authorized in this
Article.
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(1) Operating Costs. The City shall first pay from the moneys in the Revenue Fund the
budgeted Maintenance and Operation Costs as such Costs become due and payable.
(2) Debt Service Fund. On or before the third Business Day prior to each Interest
Payment Date, the City shall transfer from the 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) on or
before the third Business Day prior to each Principal Payment Date, an amount equal to the
aggregate amount of Principal Installments becoming due and payable on all Outstanding
Bonds on the next succeeding Principal Installment Date. All interest earnings 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 transfer 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.
(3) Reserve Account. After making the payments, allocations and transfers provided for
in subsections (2) and (3) above, if the balance in the Reserve Account is less than the Reserve
Requirement, the deficiency shall be restored by transfers from the first moneys which become
available in the 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).
(4) Surplus. As long as all of the foregoing payments, allocations and transfers are
made at the times and in the manner set forth above in subsections (2) and (3), inclusive, any
moneys remaining in the Revenue Fund may at any time be treated as surplus and applied as
provided in Section 4.07.
SECTION 4.04. Application 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 (or by
wire transfer, as the case may be), as provided in Section 2.01.
(b) The Trustee shall withdraw from the Debt Service Fund, 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, and shall cause the same to be applied to the
payment of the principal of said Bonds when due, and is hereby authorized to apply the same
to such payment upon presentation and surrender of the 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 of Reserve Account. If at any time there shall not be
sufficient amounts in the Debt Service Fund to make payment of Principal Installments or
Redemption Price of or interest on the 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 connection with the refunding of the 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 Revenue Fund.
SECTION 4.06. Application of Redemption Account. On or before the 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
Instrument authorizing such Parity Bonds, the City shall transfer from the 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. Amounts 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) or (b) and to
pay the purchase price in the same manner and subject to the same limitation as purchasers of
Bonds under Section 2.02(k) or the Redemption Price of any Parity Bonds to be redeemed
pursuant to similar provisions of the Parity Bonds Instrument authorizing such Parity Bonds. If
after all of the 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 Revenue Fund.
SECTION 4.07. Surplus. Moneys remaining in the Revenue Fund after making the
payments, allocations and transfers provided for in subsections (2), (3), and (4) of Section 4.03
shall be applied by the City as required by the city charter.
SECTION 4.08. Investments. All moneys in the 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 pursuant to a Request of the City. In the absence of any such Request of the City, the
Trustee may (but shall not be required to) invest any such moneys in money market funds
whose investments are restricted to Federal Securities or obligations fully secured by such
Federal Securities, selected by the Trustee, which by their terms mature prior to the date on
which such moneys are required 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 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(c)
(with respect to the Debt Service Fund) and Section 4.05(a) (with respect to the Reserve
Account). For purposes of acquiring any investments hereunder, the Trustee may commingle
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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 arising 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 hereunder. 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; Replenishment 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 Reserve
Requirement, such deficiency shall be made up (i) over a period of not more than four (4)
months, in four (4) substantially equal payments, from Allocable Shares of the Net Revenues of
the Systems received after making the required deposits to the Debt Service Fund, in the event
such deficiency results from a decrease in the market value of the Authorized Investments on
deposit in the Reserve Account or (ii) over a period of not more than twelve (12) months, in
twelve (12) substantially equal payments, from (A) Net Revenues of the applicable System, in
the event such deficiency results from a withdrawal from the Reserve Account by reason of the
City’s failure to pay Debt Service on the Sub-Series of Series A Bonds of such System.
(b) Investment of Amounts Representing 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 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) Additional Limitations. Except as otherwise provided in the following sentence, the
City covenants that all investments of amounts deposited in any fund or account created by or
pursuant to this Indenture, or otherwise containing gross proceeds of the 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 or the Tax Code) at Fair Market Value.
Investments in funds or accounts (or portions thereof) that are subject to a yield restriction
under applicable provisions of the Tax Code and (unless valuation is undertaken at least
annually) 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. Punctual Payment; Compliance With Documents. The City shall
punctually pay or cause to be paid the interest and principal to become due with respect to all
of the Bonds in strict conformity with the terms of the 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.
SECTION 5.02. Against Encumbrances. The City will not mortgage or otherwise
encumber, pledge or place any charge upon any System or any part thereof, or upon any of the
Net Revenues of such System, 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 furnished for or in connection with
any System which, if unpaid, may become a lien or charge upon the Net Revenues prior or
superior to the lien of the Bonds and impair the security of the Bonds. The City shall also pay
from the Net Revenues all taxes and assessments or other governmental charges lawfully levied
or assessed upon or in respect of each System or upon any part thereof or upon any of the Net
Revenues therefrom.
SECTION 5.04. Maintenance and Operation of Systems in Efficient and Economical
Manner. The City covenants and agrees to maintain and operate the Systems in an efficient and
economical manner and to operate, maintain and preserve the Systems in good repair and
working order.
SECTION 5.05. Against Sale, Eminent Domain.
(a) The City will not sell, lease or otherwise dispose of the Systems or any part thereof
essential to the proper operation of the Systems or to the maintenance of the Net Revenues
except as herein expressly permitted. The City will not enter into any lease or agreement which
impairs the operation of the Systems 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
Bonds, or which would otherwise impair the rights of the Holders with respect to the Net
Revenues or the operation of the Systems. Any real or personal property which has become
non-operative or which is not needed for the efficient and proper operation of the Systems, or
any material or 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 Revenue Fund.
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(b) If all or any part of a 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 and applied by the City to the cost of acquiring or constructing or financing
Improvements to a 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 Systems then proposed to be acquired or 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 determination shall be final and conclusive. If the foregoing
conditions are met, the City shall then promptly proceed with the acquisition or construction or
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 for the purposes aforesaid shall be deposited in the Revenue Fund. If the
foregoing conditions are not met, then such Net Proceeds shall be applied by the Trustee pro
rata to the redemption or purchase of the 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 Bonds then Outstanding. If the Trustee is unable to purchase
or redeem 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 Bonds of such Series as the same become due by their terms,
and, pending such application, such remaining moneys may be invested by the Trustee in the
manner provided in Section 4.08 for the investment of moneys in the Reserve Account.
SECTION 5.06. Insurance. The City covenants that it shall at all times maintain such
insurance on the Systems as is customarily maintained with respect to works and properties of
like character against accident to, loss of or damage to such works or properties. If any useful
part of a System shall be damaged or destroyed, such part shall be restored to use. The Net
Proceeds of insurance against accident to or destruction of a System shall be used for repairing
or rebuilding the damaged or destroyed portions of such System (to the extent that such repair
or rebuilding is determined by the City to be useful or of continuing value to such 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 contracts for insurance with
insurers of good standing and shall be payable to the City, or may be in the form of self-
insurance by the City. The City shall establish such fund or funds or reserves as are necessary
to provide for its share of any such self-insurance. The City shall file or cause to be filed with
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 requirements of this Section, and
(c) stating whether during the preceding Fiscal Year any loss has been incurred with respect to
the Systems and, if so, the amount of Net Proceeds 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.
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SECTION 5.07. Records and Accounts. The City covenants that it shall keep proper
books of record and accounts of the Systems, separate from all other records and accounts, in
which complete and correct entries shall be made of all transactions relating to the Systems.
Said books shall, upon reasonable request, be subject to the inspection of the Owners of not less
than ten percent (10%) of the Outstanding Bonds or their representatives authorized in writing.
The City covenants that it will cause the books and accounts of the Systems 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 report 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 close of each Fiscal Year, as a part of its regular annual
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 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 Systems. The City shall furnish a copy of the statement to the
Trustee, and upon written request, to any Bond Owner. The Trustee shall have no duty to
review such statement.
SECTION 5.08. Protection of Security and Rights of Owners. 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 5.09. Against Competitive Facilities. 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 Systems.
SECTION 5.10. 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 Systems 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 Systems 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 Systems.
SECTION 5.11. Rates and Charges.
(1) The City shall fix, prescribe, revise and collect Charges for each System during each
Fiscal Year which (together with other funds transferred from stabilization reserve funds for
such 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 of such System estimated by the City to
become due and payable in such Fiscal Year;
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(b) the Debt Service on the Sub-Series of Series A Bonds issued for such System;
(c) all other payments required for compliance with this Indenture and the
instruments pursuant to which any Parity Bonds relating to such System shall have been
issued; 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 of such System
or the Net Revenues of such System.
(2) In addition, the City shall fix, prescribe, revise and collect Charges for such System
during each Fiscal Year which, when added to the balance then on hand in Available Reserves
for such System, are sufficient to yield Net Revenues of such System at least equal to one
hundred twenty-five percent (125%) of the amounts payable under the preceding clause (1)(b)
in such Fiscal Year for Bonds which have a lien on such Net Revenues.
(3) To the extent that the City appropriates funds from Gross Revenues into a
stabilization reserve fund for a System, a deduction shall be made from Gross Revenues of such
System in the Fiscal Year during which said transfer occurred for purposes of calculations to be
made under this Section 5.11 and Section 3.05. To the extent that the City appropriates funds
from a stabilization reserve fund for a System into the Revenue Fund, the City may count the
funds so transferred as Gross Revenues in the Fiscal Year in which said transfer occurs, for
purposes of this Section 5.11 and Section 3.05.
SECTION 5.12. Maintenance of Available Reserves; Transfers Therefrom.
(A) The City shall maintain the funds on hand in Available Reserves 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 (the “Available Reserves
Targeted Level”); provided that:
(1) any depletion of the Available Reserves which causes the balance therein to fall
below the Available Reserves Targeted Level shall be restored from Net Revenues of the
System which caused such depletion to take place;
(2) the covenant contained in this Section 5.12 shall not require the City to charge
Charges for services provided by any System which exceed the reasonable costs of
providing said services, or otherwise violate applicable law; and
(3) testing of the amount of Available Reserves shall not be required to occur more
frequently than twice in any Fiscal Year.
(B) The City shall transfer from Available Reserves, to the applicable Revenue Fund, as
needed, amounts sufficient to enable the City to pay all Maintenance and Operation Costs of the
applicable System, and all Debt Service, when and as the same become due and payable.
SECTION 5.13. No Priority for Additional Obligations. The City covenants that no
additional bonds or other obligations shall be issued or incurred having any priority in payment
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of principal or interest out of the Net Revenues over the Bonds. Nothing in this Indenture shall
prohibit or impair the authority of the City to issue bonds or other obligations secured by a lien
on Gross Revenues or Net Revenues which is subordinate to the lien established hereunder,
upon such terms and in such principal amounts as the City may determine.
SECTION 5.14. Tax Covenants Relating to Series A Bonds.
(a) Generally. The City shall not take any action or permit to be taken any
action within its control which would cause or which, with the passage of time if not
cured would cause, interest on the Series A Bonds to become includable in gross income
for federal income tax purposes.
(b) Private Activity Bond Limitation. The City shall assure that the proceeds
of the Series A Bonds are not used in a manner which would cause the Series A Bonds to
become “private activity bonds” within the meaning of section 141(a) of the Tax Code or
to meet the private loan financing test of Section 141(c) of the Tax Code.
(c) Federal Guarantee Prohibition. The City shall not take any action or
permit or suffer any action to be taken if the result of the same would be to cause the
Series A Bonds to be “federally guaranteed” within the meaning of Section 149(b) of the
Tax Code.
(d) No Arbitrage. The City shall not take, or permit or suffer to be taken by
the Trustee or otherwise, any action with respect to the Series A Bond proceeds which, if
such action had been reasonably expected to have been taken, or had been deliberately
and intentionally taken, on the Closing Date, would have caused the Series A Bonds to
be “arbitrage bonds” within the meaning of Section 148 of the Tax Code.
(e) Rebate of Excess Investment Earnings. The City shall calculate or cause
to be calculated all amounts of excess investment earnings with respect to the Series A
Bonds which are required to be rebated to the United States of America under Section
148(f) of the Tax Code, at the times and in the manner required under the Tax Code.
The City shall pay when due an amount equal to excess investment earnings to the
United States of America in such amounts, at such times and in such manner as may be
required under the Tax Code, such payments to be made from any source of legally
available funds of the City. The City shall keep or cause to be kept, and retain or cause
to be retained for a period of six years following the retirement of the Series A Bonds,
records of the determinations made under this subsection (e).
The Trustee has no duty to monitor the compliance by the City with any of the
covenants contained in this Section 5.14.
SECTION 5.15. Continuing Disclosure. The City will comply with and carry out all of
the provisions of the Continuing Disclosure Certificate which has been executed and delivered
by the City on the Closing Date. Notwithstanding any other provision hereof, failure of the
City to comply with the Continuing Disclosure Certificate does not constitute an Event of
Default hereunder; provided, however, that any Participating Underwriter (as such term is
defined in the Continuing Disclosure Certificate) or any Owner or beneficial owner of the
Series A Bonds may take such actions as may be necessary and appropriate, including seeking
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specific performance by court order, to cause the City to comply with its obligations under this
Section 5.15.
SECTION 5.16. 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 carry 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 and the
Trustee the rights and benefits provided in this Indenture.
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ARTICLE VI
THE TRUSTEE
SECTION 6.01. Appointment of Trustee. 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 Trustee
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 Trustee having a corporate trust 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 or examination by federal or State authority, so long as any 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 5.01 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 Bonds when duly presented for payment at
maturity, or on redemption or purchase prior to maturity, and to cancel all Bonds upon
payment thereof. The Trustee shall keep accurate records of all funds administered by it and of
all Bonds paid and discharged.
SECTION 6.02. Acceptance 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
man would exercise or use under 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 concerning 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 recital herein, or in the 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 Bonds issued hereunder or
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 of the City hereunder. The Trustee shall not be responsible or liable for any loss
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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
Bonds delivered hereunder. The Trustee may become the Owner of 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 formed to protect the rights of Owners of Bonds, whether or not such
committee shall represent the Owners of the majority in principal amount of the 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 or
sent by the proper 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 or authority or consent of any person who at the time of making such request or
giving such authority or consent is the Owner of any Bond, shall be conclusive and
binding upon all future Owners of the same Bond and upon Bonds issued in exchange
therefor or in place thereof. The Trustee shall not be bound to recognize any person as
an Owner of any Bond or to take any action at his request unless the ownership of such
Bond by such person shall be reflected on the Bond Registration Books.
(f) As to the existence or non-existence of any fact or as to the sufficiency or
validity of any instrument, paper or 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 occurrence of an Event of Default hereunder of which the Trustee has been
given notice or 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 or 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 authorization has been duly adopted and is in full force and effect.
(g) The permissive 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 or 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 failure 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 Bonds, unless the Trustee shall be specifically 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 Bonds then Outstanding and all notices or
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other instruments required by this Indenture to be delivered to the Trustee must, in
order to be effective, be delivered at the Trust 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 Systems, including all books, papers and records of the
City pertaining to the Systems and the 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.
(j) The Trustee 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 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, or 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 Bonds, the
withdrawal of any cash, or the taking of any other action by the Trustee.
(l) 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 entitled
to payment and reimbursement 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 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 Bonds, of which the Trustee has been given or is deemed to have
notice, as provided in Section 6.02(h) hereof, then the Trustee shall promptly give written notice
thereof by first-class mail to the Owner of each such 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 make any payment when due, the Trustee may elect
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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. Intervention by Trustee. In any judicial proceeding to which the City
is a party which, in the opinion of the Trustee and its counsel, has a substantial bearing on the
interests of Owners of any of the Bonds, the Trustee may intervene on behalf of such Bond
Owners, and subject to Section 6.02 (l) hereof, shall do so if requested in writing by the Owners
of at least twenty-five percent (25%) in aggregate principal amount of such 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 instruments in writing delivered to the
Trustee, 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. Resignation 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 or 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.
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 forty-five-day period.
SECTION 6.09. Merger or Consolidation. Any company into which the Trustee may
be merged or converted or which it may be consolidated or 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.
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,
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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 predecessor 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 instruments 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 or 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-trustee but only to the extent necessary to enable such separate or co-
trustee to exercise such powers, rights and remedies, and every covenant and obligation
necessary to the exercise thereof 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 certainly 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 trustee or co-
trustee.
SECTION 6.12. Indemnification; Limited Liability of Trustee. The City shall
indemnify and hold the Trustee harmless from and against all claims, losses, costs, expenses,
liabilities and damages including legal fees and expenses arising from the exercise and
performance of its duties hereunder. Such indemnity shall survive the resignation or removal
of the Trustee hereunder. No provision in this Indenture shall require 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 adequate indemnity against such
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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.
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ARTICLE VII
MODIFICATION AND AMENDMENT OF THE INDENTURE
SECTION 7.01. Amendment by Consent of Bond Owners. This Indenture and the
rights and obligations of the City and of the Owners of the 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 Bonds then
Outstanding exclusive of 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 Bond or otherwise alter or impair the obligation of the City to pay the
principal, interest or redemption premiums at the time and place and at the rate and in the
currency provided therein of any Bond without the express written consent of the Owner of
such Bond, (b) reduce the percentage of Bonds required for the written consent to any such
amendment or modification, or (c) without its written consent thereto, modify any of the rights
or obligations of the Trustee.
SECTION 7.02. Amendment Without Consent of Bondholders. This Indenture and
the rights and obligations of the City and of the Owners of the Bonds may also be modified or
amended at any time by a Parity Bonds 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 any one 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, correcting 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 the interests of the Owners of the 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 3.05; 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 Bonds.
SECTION 7.03. Disqualified Bonds. Bonds owned or held by or for the account of the
City (but excluding 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 shall not be entitled to consent to, or take any other
action in this article provided for.
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SECTION 7.04. Endorsement or Replacement of Bonds After Amendment. After the
effective date of any action taken as hereinabove provided, the City may determine that the
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 Bond for that purpose at the Trust Office of the Trustee, a suitable notation
as to such action shall be made on such Bond. If the City shall so determine, new 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 Bond
Outstanding at such effective date such new Bonds shall be exchanged at the Trust Office of the
Trustee, without cost to each Bond Owner, for Bonds then Outstanding, upon surrender of such
Outstanding 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 Bond
held by him, provided that due notation thereof is made on such Bond.
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ARTICLE VIII
EVENTS OF DEFAULT AND REMEDIES OF BOND OWNERS
SECTION 8.01. Events of Default and Acceleration of Maturities. The following
events shall be Events of Default hereunder:
(a) Default in the due and punctual payment of the principal of any 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 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
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
arrangement 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 Bonds, by written notice to the City,
declare the principal of the Bonds to be immediately due and payable, whereupon that portion
of the principal of the 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 Bonds to the contrary notwithstanding. This provision,
however, is subject to the condition that if, at any time after the principal of the Bonds shall
have been so declared due and payable and before any judgment or decree for the payment of
the moneys due shall have been obtained or entered, the City shall deposit with the Trustee a
sum sufficient to pay all of the principal of and interest on the Bonds having come due prior to
such declaration, with interest on such overdue principal and interest calculated at the rate of
interest per annum then 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 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 Bonds at the time Outstanding may, by written notice to the City and to the
Trustee, on behalf 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
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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 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 VIII, including reasonable
compensation to its agents, attorneys and counsel; and
Second, to the payment of the whole amount then owing and unpaid upon the
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 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 under or with respect to this 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 (l), 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.
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
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upon the request of the Owners of a majority in principal amount of the Bonds then
Outstanding, it shall have full power, in the exercise of its discretion for the best interests of the
Owners of the 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 otherwise 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 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 Bonds similarly situated and the Trustee is hereby appointed (and the successive
respective Owners of the Bonds issued hereunder, by taking and holding the same, shall be
conclusively deemed so to have appointed it) the true and lawful attorney-in-fact of the
respective Owners of the 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 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 Bonds, shall affect or impair the obligation of the City, which is
absolute and unconditional, to pay the interest on and principal of the Bonds to the respective
Owners of the 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 contract 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 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.
SECTION 8.07. Rights and Remedies of Bond Owners. No Owner of any Bond issued
hereunder shall have the right to institute any suit, action or proceeding at law or in equity, for
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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 Bonds then Outstanding shall have made written
request upon the Trustee to exercise the powers hereinbefore granted or to institute 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 request; 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 made to, the Trustee.
Such notification, request, tender of indemnity and refusal or omission are hereby
declared, in every case, to be conditions precedent to the exercise by any Owner of Bonds of any
remedy hereunder; it being understood and intended that no one or more Owners of Bonds
shall have any right in any manner whatever by his or their action to enforce any right under
this Indenture, except in the manner herein provided, and that all proceedings at law or in
equity to enforce any provision of this Indenture 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 Bond to receive payment of the principal of and interest
and premium (if any) on such Bond as herein provided or 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
Indenture.
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 or otherwise, and
such proceedings shall have been discontinued or abandoned for any reason, or 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
property subject to this Indenture, and all rights, remedies and powers of the Trustee shall
continue as if no such proceedings had been taken.
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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
covenants 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 sole 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 Series A Bonds, or any Sub-Series of Series A Bonds, in any one 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 or Sub-Series of Series A Bonds, as and
when the same become due and payable;
(b) by depositing with the Trustee, in trust, 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 or
Sub-Series of Series A Bonds, including all principal, interest and redemption premiums;
or
(c) by depositing with a qualified escrow holder, in trust, 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 or Sub-
Series of 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 or Sub-Series of 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 or Sub-
Series of 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 or
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Sub-Series of Series A Bonds, and all other pecuniary obligations of the City under this
Indenture with respect to all such Series A Bonds or Sub-Series of Series A Bonds, shall cease
and terminate, except only the obligation of the City to pay or cause to be paid to the Owners of
such Series A Bonds or Sub-Series of Series A Bonds not so 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 or Sub-Series of Series A Bonds in full on the maturity or earlier
redemption date ("Verification"), (ii) an escrow deposit agreement, and (iii) an opinion of
nationally recognized bond counsel to the effect that the Series A Bonds or Sub-Series of 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.
In the event a forward purchase agreement will be employed in the refunding.
SECTION 9.04. Successor Is Deemed Included in All References to Predecessor.
Whenever in this Indenture or any Parity Bonds Instrument the City is named or referred to,
such reference shall be deemed to 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 Certificates. Every certificate with respect to compliance
with a condition or 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 the
examination or investigation upon which the statements or opinions contained in such
certificate are based; (c) 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 or not such covenant 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 or 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 respect to which is in the possession of the City, upon the
certificate or opinion of or representations by an officer or officers of the City, unless such
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counsel knows that the certificate or opinion or representations with respect to the matters upon
which his certificate, opinion or representation may be based, as aforesaid, are erroneous, or in
the exercise of reasonable care should have known that the same were erroneous.
SECTION 9.06. Execution of Documents by Bond 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 Series A Bond Owners in person or by agent or agents duly appointed in
writing. Proof of the execution of any such request, consent or other instrument or of a writing
appointing any such agent, 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 witness 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 Bond shall bind every future Owner of
the same Bond and the Owner of any 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) shall 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, request, 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, request, 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. Waiver of Personal Liability. No officer, agent or 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 or employee
from the performance of any official duty provided by law.
SECTION 9.08. Partial Invalidity. If any one or more of the covenants or agreements,
or portions thereof, provided in this Indenture on the part of the City (or 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
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the remaining covenants and agreements 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 or any other applicable provisions of law.
The City hereby declares that it would have entered into this Indenture and each and 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 any
one 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 Indenture
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 destroy 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 generally 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 Administrative Services; and if to the Trustee, at One California Street,
Suite 1000, San Francisco, CA 94111, Attention: Corporate Trust Department. 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 Moneys. Anything in this Indenture to the contrary
notwithstanding, any moneys held by the Trustee in trust 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 or 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
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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.
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IN WITNESS WHEREOF, the CITY OF PALO ALTO has caused this Indenture to be
signed in its name by its Director of Administrative Services and attested by its City Clerk, 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.
CITY OF PALO ALTO
By
Director of Administrative Services
Attest:
By
City Clerk
U.S. BANK NATIONAL ASSOCIATION,
as Trustee
By
Authorized Officer
26005-64 JH:WHM 06/9/11
6/17/11
Global changes:
Prior Bonds to 2002 Bonds
Prior Indentures to 2002 Indenture
ESCROW DEPOSIT AND TRUST AGREEMENT
by and between the
CITY OF PALO ALTO,
and
U.S. BANK NATIONAL ASSOCIATION
as Escrow Bank
Dated as of September 1, 2011
Relating To:
$26,055,000 (Original Principal Amount)
City of Palo Alto
Utility Revenue Bonds, 2002 Series A
ESCROW DEPOSIT AND TRUST AGREEMENT
This Escrow Deposit and Trust Agreement is made and entered into as of the 1st day of
September, 2011, by and between the CITY OF PALO ALTO, a chartered municipal corporation
duly organized and existing under the 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, having a corporate trust office in the City of San
Francisco, California, as escrow agent (the "Escrow Bank");
W I T N E S S E T H:
WHEREAS, the City is authorized pursuant 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 purposes of financing improvements to an
enterprise of the City and to refund any bonds issued for such purpose;
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”)
pursuant to an Indenture of Trust, dated as of January 1, 2002 (the “2002 Indenture”);
WHEREAS, the City, after due investigation and deliberation, has issued its utility
revenue refunding bonds under that certain Indenture of Trust, dated as of September 1, 2011
(the “2011 Indenture”) for the purpose of refunding some or all of the maturities of the 2002
Bonds, and to that end the City Council has heretofore approved and authorized the issuance of
its City of Palo Alto Utility Revenue Refunding Bonds, 2011 Series A (the “2011 Bonds”) for
such purposes;
WHEREAS, the City proposes to make a deposit of moneys and Federal Securities from
the proceeds of the 2011 Bonds, and to appoint the Escrow Bank as its agent for the purpose of
applying said deposit to the payment of debt service on the 2002 Bonds in accordance with the
instructions provided by this Escrow Deposit and Trust Agreement, and to the payment and
redemption of the 2002 Bonds in accordance with the 2002 Indenture, and the Escrow Bank
desires to accept said appointment; and
WHEREAS, the Escrow Bank has full powers to act with respect to the irrevocable
escrow created herein and to perform the duties and obligations to be undertaken pursuant to
this Escrow Deposit and Trust Agreement:
NOW, THEREFORE, in consideration of the above premises and of the mutual
promises and covenants herein contained, the parties hereto DO HEREBY AGREE as follows:
Section 1. Appointment of Escrow Bank. The City hereby appoints the Escrow Bank as
escrow holder for all purposes of this Escrow Deposit and Trust Agreement, and the Escrow
Bank hereby accepts such appointment.
Section 2. Establishment of Escrow Fund. There is hereby created by the City with,
and to be held by, the Escrow Bank, as security for the payment of the debt service on the 2002
Bonds, an irrevocable escrow to be held in escrow by the Escrow Bank on behalf of the City and
for the benefit of the owners of the 2002 Bonds, said escrow to be designated the "City of Palo
Alto Refunding Escrow Fund" (the "Escrow Fund"). All moneys and Federal Securities in the
Escrow Fund are hereby irrevocably transferred to the Escrow Bank, as security for payment of
the debt service on the 2002 Bonds, to be held by the Escrow Bank in escrow for the benefit of
the owners of the 2002 Bonds, except as specified in Section 6 and Section 7 hereof. If at any
time the Escrow Bank shall receive actual knowledge that the moneys and Federal Securities in
the Escrow Fund will not be sufficient to make any payment required by Section 6 hereof, the
Escrow Bank shall notify the City of such fact and the City shall immediately cure such
deficiency.
Section 3. Deposit into Escrow Fund. Concurrently with the delivery of the 2011
Bonds, the City shall cause: (i) $____________ of the proceeds of sale thereof, in immediately
available funds, to be transferred to the Escrow Bank for deposit in the Escrow Fund; and (ii)
$_______ from the Revenue Fund and Reserve Fund for the 2002 Bonds, to be transferred to the
Escrow Bank for deposit to the Escrow Fund, for a total deposit of $______________. Any
moneys remaining in the funds and accounts established under the 2002 Indenture, including
any investment earnings received after the Closing Date, will be transferred to the Trustee, for
deposit to the Revenue Fund created under the 2011 Indenture, and such funds and accounts
will be closed.
Section 4. Investment of Deposit in Escrow Fund. The Escrow Bank shall invest
$_____________ of the moneys deposited into the Escrow Fund pursuant to the preceding
section in the Federal Securities set forth in Exhibit A attached hereto (the "Escrowed Federal
Securities") and the remaining $_____ in cash uninvested. The Escrowed Federal Securities
shall be deposited with and held by the Escrow Bank in the Escrow Fund solely for the uses and
purposes set forth herein.
Section 5. Instructions as to Application of Deposit. The City hereby instructs the
Escrow Bank as its agent to apply the moneys and Escrowed Federal Securities deposited in the
Escrow Fund pursuant to Section 3 hereof to pay the redemption price of all then outstanding
2002 Bonds on ____ __, 2011 (the “Redemption Date”) at a redemption price equal to the
principal amount thereof, plus accrued interest to the Redemption Date, plus a premium equal
to one percent (1%) of the 2002 Bonds being redeemed, all pursuant to and in accordance with
the provisions of the 2002 Indenture, and in the amounts set forth in Exhibit B attached hereto
and by this reference incorporated herein.
Section 6. Remaining Moneys. The Escrow Bank shall hold uninvested money, if any,
remaining from time to time in the Escrow Fund until needed for payment of the debt service
on the 2002 Bonds in accordance with Section 5 hereof; provided, however, that such moneys
may be invested or reinvested at such interest rates as the Escrow Bank shall be directed in
writing by the City, but only if such written directions shall be accompanied by an opinion of
nationally recognized bond counsel that investment in accordance with such directions will not
affect, for federal income tax purposes, the exclusion from gross income for purposes of federal
income taxes of the interest payable with respect to the 2011 Bonds or payable on the 2002
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Bonds. Any interest income resulting from investment or reinvestment of moneys pursuant to
this Section 6 shall be paid to the City promptly after, and only upon, the payment and
redemption in full of the 2002 Bonds.
Section 7. Substitution of Federal Securities. The City may at any time direct the
Escrow Bank to substitute Federal Securities then issued by the United States of America for
any or all of the Federal Securities then deposited in the Escrow Fund, provided that any such
direction and substitution shall be accompanied with a certification of an independent certified
public accountant or firm of certified public accountants of favorable national reputation
experienced in the refunding of obligations of political subdivisions that the Federal Securities
then to be so deposited in the Escrow Fund, together with interest to be derived therefrom, shall
be in an amount at all times at least sufficient to make the payments specified in Section 5
hereof and, further, to be accompanied with an opinion of nationally recognized bond counsel
that the substitution will not affect, for federal income tax purposes, the exclusion from gross
income for purposes of federal income taxes of the interest payable with respect to the 2011
Bonds or payable on the 2002 Bonds. In the event that, following any such substitution of
Federal Securities pursuant to this Section 7, there is an amount of moneys or Federal Securities
in excess of an amount sufficient to make the payments required by Section 5 hereof, such
excess shall be paid to the City.
Section 8. Notices of Redemption. The City hereby ratifies actions taken by the
Escrow Bank to take all steps required to redeem all outstanding 2002 Bonds on the Redemption
Date, including delivery to the holders of the 2002 Bonds of notice of the redemption of the 2002
Bonds, as required by the 2002 Indenture.
Section 9. Application of Certain Terms of the 2002 Indenture. All of the terms of the
2002 Indenture regarding the making of payments of principal, premium, if any, and interest on
the 2002 Bonds are incorporated in this Escrow Deposit and Trust Agreement as if set forth in
full herein. Provisions of the 2002 Indenture relating to the resignation and removal of a trustee
shall be the procedure to be followed with respect to any resignation or removal of the Escrow
Bank hereunder.
Section 10. Compensation to Escrow Bank. The Escrow Bank hereby acknowledges
that it has received on the date hereof partial compensation for its duties under this Escrow
Deposit and Trust Agreement representing its first year administration fees, except that the City
shall indemnify and hold harmless the Escrow Bank for out-of-pocket costs such as mailing
costs, redemption expenses, legal fees and other costs and expenses relating hereto and, in
addition, fees, costs and expenses relating to the purchase of any Federal Securities, but under
no circumstances shall amounts deposited in the Escrow Fund be deemed to be available for
said purposes. The City and the Escrow Bank hereby agree that the Escrow Bank shall be paid
its subsequent annual administration fees, as billed, plus appropriate out-of-pocket expenses.
Section 11. Liabilities and Obligations of Escrow Bank. The Escrow Bank shall have
no obligation to make any payment or disbursement of any type or incur any financial liability
in the performance of its duties under this Escrow Deposit and Trust Agreement unless the City
shall have deposited sufficient funds with the Escrow Bank. The Escrow Bank may rely and
shall be protected in acting upon the written instructions of the City or its agents relating to any
matter or action as Escrow Bank under this Escrow Deposit and Trust Agreement.
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The Escrow Bank undertakes such duties as specifically set forth herein and no implied
duties or obligations shall be read into this Escrow Deposit and Trust Agreement against the
Escrow Bank.
The City hereby assumes liability for, and hereby agrees (whether or not any of the
transactions contemplated hereby are consummated) to indemnify, protect, save and hold
harmless the Escrow Bank and its respective successors, assigns, agents and servants from and
against any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs,
expenses and disbursements (including legal fees and disbursements) of whatsoever kind and
nature which may be imposed on, incurred by, or asserted against, at any time, the Escrow
Bank (whether or not also indemnified against by any other person under any other agreement
or instrument) and in any way relating to or arising out of the execution and delivery of this
Escrow Deposit and Trust Agreement, the establishment of the Escrow Fund, the retention of
the moneys therein and any payment, transfer or other application of moneys or securities by
the Escrow Bank in accordance with the provisions of this Escrow Deposit and Trust
Agreement, or as may arise by reason of any act, omission or error of the Escrow Bank made in
good faith in the conduct of its duties; provided, however, that the City shall not be required to
indemnify the Escrow Bank against its own negligence or misconduct. The indemnities
contained in this Section 11 shall survive the termination of this Escrow Deposit and Trust
Agreement.
The Escrow Bank and its respective successors, assigns, agents and servants shall not be
held to any personal liability whatsoever, in tort, contract, or otherwise in connection with the
execution and delivery of this Agreement, the establishment of the Escrow Fund, the acceptance
of the moneys or any securities deposited therein, the purchase of the securities to be purchase
pursuant hereto, the retention of such securities or the proceeds thereof, the sufficiency of the
securities or any uninvested moneys held hereunder to accomplish the defeasance of the 2002
Bonds, or any payment, transfer or other application of moneys or securities by the Escrow
Bank in accordance with the provisions of this Agreement or by reason of any non-negligent
act, non-negligent omission or non-negligent error or the Escrow Bank made in good faith in the
conduct of its duties. The recitals of fact contained in the "whereas" clauses herein shall be
taken as the statement of the City and the Escrow Bank assumes no responsibility for the
correctness thereof. The Escrow Bank make no representations as to the sufficiency of the
securities to be purchased pursuant hereto and any uninvested moneys to accomplish the
redemption of the 2002 Bonds pursuant to the 2002 Indenture or to the validity of this
Agreement as the City and, except as otherwise provided herein, the Escrow Bank shall incur
no liability in respect thereof. The Escrow Bank shall not be liable in connection with the
performance of its duties under this Agreement except for its own negligence, willful
misconduct or default, and the duties and obligations of the Escrow Bank shall be determined
by the express provisions of this Agreement. The Escrow Bank may consult with counsel, who
may or may not be counsel to the City, and in reliance upon the written opinion of such counsel
shall have full and complete authorization and protection in respect of any action taken,
suffered or omitted by it in good faith in accordance therewith. Whenever the Escrow Bank
shall deem it necessary or desirable that a matter be proved or established prior to taking,
suffering, or omitting any action under this Agreement, such matter (except the matters set
forth herein as specifically requiring a certificate of a nationally recognized firm of independent
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certified public accountants or an opinion of counsel) may be deemed to be conclusively
established by a written certification of the City.
Section 12. Notices. All written notices to be given under this Escrow Deposit and
Trust Agreement shall be given by mail to the party entitled thereto at its address set forth
below, or at such address as the party may provide to the other parties in writing from time to
time.
If to the City: Director of Administrative Services
City of Palo Alto
P. O. Box 10250
Palo Alto, CA 94303
If to the Trustee: U.S. Bank National Association
One California Street, 10th Floor
San Francisco, CA 94111
Section 13. California Law. This Escrow Deposit and Trust Agreement shall be
construed and governed in accordance with the laws of the State of California.
Section 14. Severability. Any provision of this Escrow Deposit and Trust Agreement
found to be prohibited by law shall be ineffective only to the extent of such prohibition, and
shall not invalidate the remainder of this Escrow Deposit and Trust Agreement.
Section 15. Execution in Counterpart. This Escrow Deposit and Trust Agreement may
be executed in counterparts and each of said counterparts shall be deemed an original for all
purposes of this Escrow Deposit and Trust Agreement. All of such counterparts taken together
shall be deemed to be one and the same instrument.
Section 16. Merger or Consolidation of Escrow Bank. Any company into which the
Escrow Bank may be merged or converted or with which may be consolidated or any company
resulting from any merger, conversion or consolidation to which it shall be a party or any
company to which the Escrow Bank may sell or transfer all or substantially all of its corporate
trust business, provided such company shall be eligible to act as Trustee under the 2011
Indenture and the 2002 Indenture, shall be the successor hereunder to the Escrow Bank without
the execution or filing of any paper or any further act.
* * * * *
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IN WITNESS WHEREOF, the Escrow Bank and the City have each caused this Escrow
Deposit and Trust Agreement to be executed by their duly authorized officers all as of the date
first above written.
CITY OF PALO ALTO
By:
Director of Administrative Services
ATTEST:
City Clerk
U.S. BANK NATIONAL ASSOCIATION, as
Escrow Bank
By:
Authorized Officer
EXHIBIT A
SCHEDULE OF ESCROWED FEDERAL SECURITIES
Purchased With ______ Bond Proceeds
Security Type
Maturity
Principal
(Maturity Value)
Interest
Rate
Cost
Purchased With Prior Bond Moneys
Security Type
Maturity
Principal
(Maturity Value)
Interest
Rate
Cost
TOTAL $ $
EXHIBIT B
PAYMENT AND REDEMPTION SCHEDULE OF
2002 BONDS
Payment Date
Principal
Interest
Redemption
Premium
Total Payment
$ $ $ $