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Home My WebLink AboutStaff Report 2603-6100CITY OF PALO ALTO CITY COUNCIL Special Meeting Monday, September 14, 2026 Council Chambers & Hybrid 5:30 PM Agenda Item 8.Refinancing of the 2009A Water Revenue Bonds, Series A; Adoption of a Resolution Authorizing the Issuance and Sale of Tax-Exempt Water Revenue Refunding Bonds in a Principal Amount Not-to-Exceed $20,000,000, Approval of the Official Notice of Sale, Indenture of Trust, Official Statement, Irrevocable Refunding Instructions, and Related Documents; CEQA Status - Not a Project Staff Presentation 9 5 6 7 City Council Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Administrative Services Meeting Date: September 14, 2026 Report #:2603-6100 TITLE Refinancing of the 2009A Water Revenue Bonds, Series A; Adoption of a Resolution Authorizing the Issuance and Sale of Tax-Exempt Water Revenue Refunding Bonds in a Principal Amount Not-to-Exceed $20,000,000, Approval of the Official Notice of Sale, Indenture of Trust, Official Statement, Irrevocable Refunding Instructions, and Related Documents; CEQA Status - Not a Project RECOMMENDATION The Finance Committee recommends that the City Council: 1. Authorize staff to refinance the outstanding City of Palo Alto Water Revenue Bonds, 2009 Series A through the issuance of Water Revenue Refunding Bonds in a principal amount not to exceed $20,000,000; and 2. Approve the Official Notice of Sale, Indenture of Trust, Official Statement, Irrevocable Refunding Instructions, and authorize official actions and related documents thereto. EXECUTIVE SUMMARY Approve the refinancing of the outstanding Water Revenue Bonds, 2009 Series A (“2009 Bonds”) through the issuance of Water Revenue Refunding Bonds, 2026 Series A (“2026 Refunding Bonds”) as recommended by the Finance Committee. Refunding the2009 Bonds achieves three objectives. Refinancing the 2009 Bonds delivers three strategic benefits: it eliminates the Availability Reserve requirement that obligates the Water, Gas, and Electric Funds; it provides significantly greater flexibility for the Electric Fund to finance future capital needs; and it removes the City’s exposure to ongoing federal interest subsidy sequestration risk. First, refinancing the 2009 Bonds removes the 2009 Bonds’ Available Reserve requirement, which currently obligates the Water, Gas, and Electric Funds to collectively maintain reserve levels that are atypically high for modern utility financing structures. Refunding this debt realigns the security to be pledged with the Water Utility only. 9 5 6 7 Second, this covenant constrains the Electric Fund’s ability to issue new debt—particularly limiting the City’s capacity to move forward with the Electric Grid Modernization project. Refinancing the 2009 Bonds will eliminate this restrictive Available Reserves covenant and provide the Electric Fund with the flexibility to issue future revenue bonds without being subject to burdensome reserve funding requirement. 1. However fluctuating interest rates may drive the net present value savings percentage below 3%. When applying a 15-basis point cushion, the net present value savings decreases to 2.42%. The savings guideline may be waived by the Chief Financial Officer if the restructuring is in the City’s overall best financial interest. The advantages position the City for stronger long-term financial management. The Finance Committee recommends this refinancing action to the City Council, including authorization to issue the 2026 Refunding Bonds (in a principal not-to-exceed $20,000,000), approve the Official Notice of Sale, Irrevocable Refunding Instructions, and direct related actions. BACKGROUND 2, the City Council authorized the issuance of 2009 Bonds to construct a 2.5- million-gallon underground water reservoir and pump station to meet emergency water supply and storage needs. In addition to the water reservoir, the project included the construction of several emergency supply wells, and the upgrade of five existing wells and the Mayfield Pump Station. 1 City of Palo Alto Debt Policy, Adopted April 11, 2017: https://www.paloalto.gov/files/assets/public/v/1/administrative-services/adopted-debt-policy-2017-04-11.pdf 2 City Council, July 27, 2009, Staff Report ID: 328:09: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=69894&dbid=0&repo=PaloAlto&searchid=bb59c57b -3fc4-403b-a39f-a6fd9690fa51 9 5 6 7 America Bonds” (“BABs”) under the provisions of the American Recovery and Reinvestment Act of 2009 (“Act”). The Act entitles the City to receive a cash subsidy payment from the United States Treasury equal to 35% of the interest payment on the 2009 Bonds. 5. 6, staff presented this refinancing proposal to the Finance Committee; the Committee supports this refinancing proposal (2-0-1 Council member Burt absent). ANALYSIS Debt Structure, Policy, and Administration 5 Policy & Services Committee, April 14, 2026, Staff Report ID: 2509-5177: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87357&dbid=0&repo=PaloAlto&searchid=ac21168e -fd89-4dc5-a105-b765951405b5 6 Finance Committee, August 18, 2026, Staff Report ID: 2603-6099: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=897180&dbid=0&repo=PaloAlto 9 5 6 7 a public auction process where an issuer advertises its bonds, accepts electronic bids from multiple underwriting firms, and awards the issue to the bidder offering the lowest true interest cost. Table 1: Estimated Refunding Results (rates as of August 24, 2026) Refunding Par (principal amt. of new bonds) $14,590,000 Refunded Par (principal amt. of 2009A Water Bonds) $17,540,000 $ Est. Net Present Value Savings $547,708 % Est. Net Present Value Savings 3.12% True Interest Cost (TIC)3.07% First Maturity June 1, 2027 Final Maturity June 1, 2035 1 stipulates that the savings guideline may be waived by the Chief Financial Officer upon determining that such a restructuring is in the City’s overall best financial interest. Based on rates as of August 24, 2026, this transaction does satisfy the minimum threshold for refunding transactions, however changes in market conditions between Council approval and final sale may change the estimated net present value savings. As discussed in the Executive Summary section of this report, there are significant benefits to the City to removing the bond reserve covenants especially for the Electric Utility and staff highly recommends pursuing this refunding. 9 5 6 7 Rating Agency Presentation 9. In addition to enabling the lowest possible borrowing costs, the rating reflects the City’s disciplined financial and operational management throughout the year – including prudent oversight of pension obligations, long-range capital planning, and consistent clean financial statement audit opinions – all of which contribute to strong market confidence. S&P also highlighted the City’s exceptional economic base and low debt levels and robust liquidity in the Water Fund. Refinancing Mechanics 10 to sell the 2026 Refunding Bonds. The settlement or closing of the bond sale is expected to occur in early October 2026. PFM will assist the City in receiving and evaluating bids 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, including mutual funds, insurance companies, and high net worth individuals. The underwriter with a bid resulting in the lowest true interest cost (“TIC”) to the City will be selected on the sale date. TIC is based on the present value of future debt service payments of the 2026 Refunding Bonds and considers the proposed interest rates and underwriting costs. 9 S&P Global, August 17, 2026: Palo Alto, CA Series 2026A Water Revenue Refunding Bonds Rated ‘AAA’; Outlook Stable: https://www.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/101702163 10 See California Government Code, section 53635.7: https://codes.findlaw.com/ca/government-code/gov-sect- 53635-7/ 9 5 6 7 1.Official Notice of Sale (Attachment B): this document will be distributed to investors along with the Preliminary Official Statement described below, and it details the bond sale parameters and bid requirements. 2.Indenture of Trust (Attachment C): outlines the responsibilities of the City and the Trustee with respect to the receipt of the 2026 Refunding Bond proceeds from the underwriter, disbursement of proceeds of the 2026 Refunding Bonds to refinance the 2009 Bonds, and payment of debt service on the 2026 Refunding Bond. The Indenture of Trust will be executed at bond closing which is expected to occur on October 6, 2026. 3.Preliminary Official Statement (POS) (Attachment D): the City will distribute a disclosure document – called an Official Statement – that describes the terms and security (most notably the revenues, expenses, and net revenues of the Water Utility) of the 2026 Refunding Bonds. A Preliminary Official Statement (“POS”) will be approved by Council in “nearly final” form; it will be substantially complete, except for the interest rates and amount of final numbers which will result from the sale of the 2026 Refunding Bonds. The POS will be circulated to the potential investors prior to the pricing of the 2026 Refunding Bonds After the 2026 Refunding Bonds have been sold to the underwriter, the City will distribute a final Official Statement that will include final pricing information, including principal amount, interest rate, and pre-payment terms. Appendix F to the POS is the Continuing Disclosure Certificate, under which the City will agree to provide certain financial and operating data of the type included in the POS to owners of the 2026 Refunding Bonds on an annual basis, and information about certain enumerated events when they occur. 4.Irrevocable Refunding Instructions Agreement (Attachment E): this document directs U.S. Bank Trust Company, National Association, as trustee for the 2009 Bonds (“2009 Trustee”) to apply amounts held by the 2009 Trustee (including proceeds of the 2026 Refunding Bonds and moneys held in the debt service reserve fund for 2009 Bonds) to redeem the 2009 Bonds and to send related notices to the owners of the 2009 Bonds. Preliminary Official Statement Federal Regulations Distribution of the Official Statement by the City is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the Official Statement to include all facts that would be material to an investor in the 2026 Refunding Bonds. 9 5 6 7 Material information is information that there is a substantial likelihood would have actual significance in the deliberations of the reasonable investor when deciding whether to buy or sell the 2026 Refunding Bonds. If the Council concludes that the POS includes all facts that would be material to an investor in the Bonds, it must adopt a resolution that authorizes staff to execute a certificate to the effect that the Preliminary Official Statement has been “deemed final.” FISCAL/RESOURCE IMPACT STAKEHOLDER ENGAGEMENT ENVIRONMENTAL REVIEW 9 5 6 7 ATTACHMENTS APPROVED BY: 1 027080326 Resolution No. _____ Resolution of the Council of the City of Palo Alto Authorizing the Issuance and Sale of Water Revenue Refunding Bonds in a Principal Amount Not to Exceed $20,000,000, Approving an Indenture of Trust, Official Notice of Sale, Notice of Intention, Refunding Instructions, and Official Statement, and Authorizing Official Actions and Documents RECITALS A. The City of Palo Alto (the “City”) is a chartered city and municipal corporation organized and existing under the constitution and laws of the State of California. B. The City previously issued the $35,015,000 initial principal amount City of Palo Alto Water Revenue Bonds, 2009 Series A (the “2009 Bonds”) under Chapter 12.28 of the Palo Alto Municipal Code to finance improvements to the City’s water system (the "Water System"). C. The City is authorized under Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code (the “Refunding Law”) to issue revenue bonds for the purpose of refunding outstanding revenue bonds of the City. D. 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 water revenue refunding bonds (the “Bonds”) under the Refunding Law for the purpose of refunding the outstanding 2009 Bonds and to pay certain costs of issuing the Bonds. The City wishes to refund the 2009 Bonds in order to generate debt service savings, if available, and eliminate an operating reserve requirement imposed by the legal documents for the 2009 Bonds. E. The Bonds will be secured by a pledge of and lien on net revenues of the Water System. F. Staff has worked with the City’s financing team to prepare the necessary agreements and other documents, including a form of preliminary Official Statement to be distributed in connection with the marketing of the Bonds, and the City Council has reviewed the preliminary Official Statement to assure proper disclosure of all material facts relating to the Bonds that are in the personal knowledge of the members of the City Council and the City staff. G. In accordance with Government Code Section 5852.1, the City Council has obtained and wishes to disclose the information set forth in Exhibit A. NOW, THEREFORE, the Council of the City of Palo Alto RESOLVES, as follows: SECTION 1. Recitals. The Council hereby finds that the foregoing recitals are true and correct. SECTION 2. Authorization of the Bonds. The Council hereby authorizes the issuance of the Bonds under the Refunding Law in a principal amount not to exceed $20,000,000. The Bonds shall be designated the “City of Palo Alto Water Revenue -2- Refunding Bonds, 2026 Series A,” or such other designation given them by an Authorized Officer (as defined below). The Bonds shall be dated their date of issuance and mature no later than June 1, 2035. The Bonds shall accrue interest at a fixed interest rate, and the principal of and interest on the Bonds shall be payable on the dates specified in the Indenture (defined below). The terms of redemption of the Bonds shall be set forth in the Indenture. The City Council hereby authorizes the issuance of the Bonds to refund the 2009 Bonds for the purpose of eliminating an operating reserve requirement imposed by the legal documents for the 2009 Bonds regardless of whether the refunding of the 2009 Bonds will generate debt service savings. SECTION 3. Sale of the Bonds. Staff has recommended that the Bonds be sold in a competitive sale. The Director of Administrative Services (or their designee) is hereby authorized to select a time and date at which bids will be received for the purchase of the Bonds as described in and subject to the terms and conditions of the Official Notice of Sale (defined below). The Director of Administrative Services (or their designee) 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. If, however, the Director of Administrative Services (or their designee) determines that, as a result of market conditions, the Bonds should be sold in a negotiated sale, the Director of Administrative Services (or their designee), after consultation with PFM Financial Advisors LLC (”Municipal Advisor”), Jones Hall LLP (“Bond Counsel”) and the City Attorney, may select an underwriting firm(s) (the “Underwriter”) and negotiate a bond purchase agreement with the Underwriter. SECTION 4. Notice of Sale; Notice of Intention; Bond Purchase Agreement. Staff has caused to be prepared an official notice of sale of the Bonds (the "Official Notice of Sale”) and a notice of intention to sell the Bonds (the "Notice of Intention") to be employed in a competitive sale of the Bonds, copies of which are on file with the City Clerk. The Director of Administrative Services (or their designee) is authorized and directed to cause a notice of the proposed sale of the Bonds to be published in (i) a financial publication in accordance with California Government Code Section 53692 and (ii) a newspaper of general circulation circulated within the boundaries of the City in accordance with California Government Code Section 53583. Staff has caused to be prepared a bond purchase agreement (the “Bond Purchase Agreement”) to be employed in a negotiated sale of the Bonds, a copy of which is on file with the City Clerk. The Bond Purchase Agreement, in substantially the form on file with the City Clerk, is hereby approved, together with any changes therein or additions thereto deemed advisable by the Mayor, the City Manager and the Director of Administrative Services (the “Authorized Officials”; each, an “Authorized Official”), each acting alone. The final form of the Bond Purchase Agreement shall be executed in the name and on behalf of the City by an Authorized Official, and such execution shall be conclusive evidence of the approval of the final form thereof. -3- SECTION 5. Indenture of Trust. The Bonds shall be issued pursuant to an Indenture of Trust (the “Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as trustee (the "Trustee"). As provided in the Indenture, the Bonds shall be secured by the Net Revenues (as that term is defined in the Indenture) of the Water System. The Indenture, in substantially the form on file with the City Clerk, is hereby approved, together with any changes therein or additions thereto deemed advisable by the Authorized Officials, each acting alone. The final form of the Indenture shall be executed in the name and on behalf of the City by an Authorized Official, and such execution shall be conclusive evidence of the approval of the final form thereof. The City Clerk is hereby authorized and directed to attest to the Authorized Official’s signature. SECTION 6. Preliminary Official Statement; Official Statement. Staff has caused to be prepared a preliminary Official Statement relating to the Bonds, a copy of which is on file with the City Clerk, for distribution to potential purchasers of the Bonds. The City Council hereby approves and deems nearly final within the meaning of Rule 15c2-12 of the Securities Exchange Act of 1934 (the “Rule”) the preliminary Official Statement describing the Bonds, in the form on file with the City Clerk, together with such modifications thereof as may be approved by an Authorized Official after consultation with Stradling Yocca Carlson & Rauth LLP (“Disclosure Counsel”), the Municipal Advisor, the Bond Counsel and the City Attorney. An 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. The Municipal Advisor is hereby authorized and directed to cause copies of the preliminary Official Statement to be printed and mailed to prospective bidders for the Bonds, together with copies of the Official Notice of Sale, which Official Notice of Sale, in substantially the form on file with the City Clerk, is hereby approved. The Authorized Officials, each acting alone, are hereby authorized and directed, upon consultation with the Municipal 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 an 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. SECTION 7. Escrow Agreement; Refunding Instructions. The City Council hereby authorizes the Authorized Officials, each acting alone, to execute a refunding instruction or escrow deposit and trust agreement to accomplish the refunding of the 2009 Bonds, and such execution shall be conclusive evidence of the approval of the final form thereof. SECTION 8. Preparation of Bonds. The Director of Administrative Services (or their designee) is directed to cause the Bonds to be prepared in the form set forth in, and in accordance with the provisions of, the Indenture of Trust and to cause their execution by the proper officers of the City and authentication by the Trustee, and to cause the Bonds to be delivered when so executed and authenticated to or on behalf of the purchaser or purchasers thereof, upon the receipt of the purchase price therefor. -4- SECTION 9. Additional Authority. 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, each acting alone, are 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 10. Exemption from CEQA. The City Council finds that this resolution and the issuance of the Bonds are not projects under Section 21065 of the California Environmental Quality Act. SECTION 11. Effective Date. This resolution shall be effective upon the date of its adoption. * * * * * * INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: _________________________________ City Clerk APPROVED AS TO FORM: By: Christopher K. Lynch, Jones Hall LLP Bond Counsel _________________________________ Mayor APPROVED: City Manager Director of Administrative Services City Attorney 027080326 EXHIBIT A GOVERNMENT CODE SECTION 5852.1 DISCLOSURE The following information consists of estimates that have been provided by the Municipal Advisor, which has been represented by such party to have been provided in good faith: (A) True Interest Cost with respect to the Bonds: 2.923608%. (B) Finance Charge with respect to the Bonds (Sum of all fees paid to third parties): $288,827.25. (C) Net Proceeds to be Received from the sale of the Bonds (net of finance charges, reserves and capitalized interest, if any): $15,680,257.80. (D) Total Payment Amount Through Maturity: $18,208,013.89. The foregoing estimates constitute good faith estimates based on a refinancing of the 2009 Bonds. The principal amount of the Bonds, the true interest cost of the Bonds, the finance charges thereof, the amount of proceeds received therefrom and total payment amount with respect thereto may differ from such good faith estimates due to (a) the actual date of the sale of the Bonds being different than the date assumed for purposes of such estimates, (b) the actual principal amount of Bonds sold being different from the estimated amount used for purposes of such estimates, (c) the actual amortization of the Bonds being different than the amortization assumed for purposes of such estimates, (d) the actual market interest rates at the time of sale of the Bonds being different than those estimated for purposes of such estimates, (e) other market conditions, (f) alterations in the City’s financing plan, or a combination of such factors and (g) the treatment of the interest with respect to the Bonds under federal tax law. The actual date of sale of the Bonds and the actual principal amount of Bonds sold will be determined by the City based on the timing of the need for proceeds of the Bonds and other factors. The actual interest rates borne by the Bonds will depend on market interest rates at the time of sale thereof. The actual amortization of the Bonds will also depend, in part, on market interest rates at the time of sale thereof. Market interest rates are affected by economic and other factors beyond the control of the City. OFFICIAL NOTICE OF SALE $14,500,000* CITY OF PALO ALTO Water Revenue Refunding Bonds, 2026 Series A NOTICE IS HEREBY GIVEN by the City Council of the City of Palo Alto (the “City”), that that all-or-none bids will be received by a representative of the City for the purchase of $14,500,000* principal amount of bonds of the City designated the “City of Palo Alto Water Revenue Refunding Bonds, 2026 Series A” (the “Bonds”). All bids must be submitted via BiDCOMPTM/Parity® (“Parity®”), the electronic bidding system, up to the time and at the place specified as follows: DATE: TUESDAY, SEPTEMBER 22, 2026 TIME: 9:00 A.M. CALIFORNIA TIME Bids for the purchase of the Bonds will be received and considered subject to the terms and conditions described herein. Please note that the City reserves the right to cancel or reschedule the sale of the Bonds. Notice of any change of the date or time of the sale will be communicated through Parity, and bids will be received in the manner set forth above at the rescheduled date and time as the City may determine. AUTHORITY FOR THE BONDS The Bonds will be issued under the provisions of a Resolution adopted by the City Council of the City on September 14, 2026 (the “Bond Resolution”), and under Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code. The Bonds are more particularly described in the Indenture of Trust under which the Bonds will be issued (which is incorporated herein by reference) and copies thereof will be furnished to the bidder upon request. PURPOSE OF THE BONDS The City previously issued the $35,015,000 initial principal amount City of Palo Alto Water Revenue Bonds, 2009 Series A (the “2009 Bonds”) to finance improvements to the City’s water system (the "Water System"), and the City is issuing the Bonds to refund the outstanding 2009 Bonds. A portion of the proceeds of the Bonds will also be applied to pay the costs of issuing the Bonds. SECURITY FOR THE BONDS The Bonds are revenue bonds of the City, payable from and secured by a pledge of and lien on the net revenues of the Water System. There are no outstanding obligations payable from net revenues of the Water System. The City has the right to issue parity obligations in the future. Bidders are referred to the Preliminary Official Statement relating to the Bonds for further details regarding the security and sources of payment for the Bonds. * Preliminary; subject to change. 2 The City will not establish a debt service reserve fund for the Bonds. TERMS OF THE BONDS ISSUE; BOOK-ENTRY FORM: The Bonds will be issued in the form of fully registered Bonds without coupons. The Bonds will be issued in a book-entry only system with no physical distribution of the Bonds made to the public. The Depository Trust Company, New York, New York (“DTC”), will act as depository for the Bonds which will be immobilized in its custody. The Bonds will be registered in the name of Cede & Co., as nominee for DTC, on behalf of the participants in the DTC system and the subsequent beneficial owners of the Bonds. DATE OF THE BONDS: The Bonds will be dated as of their original delivery, and will be issued in minimum denominations of $5,000. MATURITIES: The Bonds will mature, or be subject to mandatory sinking fund redemption, on June 1 in each of the years, and in the amounts, as set forth in the following table. The final principal amount of the Bonds, and the final amount of each maturity of the Bonds, is subject to increase or decrease as described below under the heading “Adjustment of Principal Amounts”. Each bidder must specify in its bid whether, for any particular year, the Bonds will mature or, alternately, be subject to mandatory sinking fund redemption in such year. Maturity Date (June 1) Principal mount 2027 $1,205,000 2028 1,285,000 2029 1,375,000 2030 1,480,000 2031 1,585,000 2032 1,695,000 2033 1,820,000 2034 1,955,000 2035 2,100,000 PAYMENT PROVISIONS: Interest on the Bonds will be payable on December 1, 2026, and on June 1 and December 1 in each year thereafter (the “Interest Payment Dates”), to the registered owners by check or draft of U.S. Bank Trust Company, National Association, as trustee for the Bonds (the “Trustee”) or, in the case of the owner of Bonds in an aggregate principal amount of at least $1,000,000, at the written request of such owner by wire transfer. Principal of the Bonds will be paid upon presentation and surrender thereof at the office of the Trustee. The principal of and interest on the Bonds are payable in lawful money of the United States of America. NO OPTIONAL REDEMPTION: The Bonds are not subject to optional redemption prior to their stated maturity date. SINKING FUND REDEMPTION: Any bidder may, at its option, specify that one or more maturities of the Bonds will consist of term Bonds which are subject to mandatory sinking fund redemption in consecutive years immediately preceding the maturity thereof, as designated in the bid of such bidder. If the bid of the successful bidder specifies that any maturity of Bonds will be term Bonds, such term Bonds will be subject to mandatory sinking fund redemption on June 1 in each year so designated in the bid, in the respective amounts for such years as set forth above under the heading “MATURITIES”, at a redemption price equal to the principal amount thereof to be redeemed together with accrued interest to the redemption date, without premium. 3 SPECIAL MANDATORY REDEMPTION FROM INSURANCE OR CONDEMNATION PROCEEDS. The Bonds shall also be subject to redemption as a whole on any date, or in part on any Interest Payment Date in inverse order of maturity and by lot within a maturity, to the extent of the Net Proceeds of hazard insurance not used to repair or rebuild the Water System or the Net Proceeds of condemnation awards received with respect to the Water System to be used for such purpose pursuant to the Indenture, at a redemption price equal to the principal amount of the Bonds plus interest accrued thereon to the date fixed for redemption, without premium. TAX-EXEMPT STATUS: In the opinion of Jones Hall LLP, San Mateo, California, Bonds 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. Interest on the Bonds may be subject to the corporate alternative minimum tax. In the further opinion of Bond Counsel, interest on the Bonds is exempt from California personal income taxes. Bidders are referred to the Preliminary Official Statement for a description of the proposed opinion of Bond Counsel. The opinions set forth in the preceding paragraph are subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986 (the “Tax 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 City will covenant 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. LEGAL OPINION: The legal opinion of Jones Hall LLP, San Mateo, California, approving the validity of the Bonds, will be furnished to the purchaser of the Bonds without cost. A copy of the legal opinion will be appended to each Bond. Bidders are referred to the Preliminary Official Statement relating to the Bonds for the proposed form of Bond Counsel’s legal opinion. FURTHER INFORMATION: A copy of the Preliminary Official Statement describing the Bonds, and any other information concerning the proposed financing, will be furnished upon request to the Municipal Advisor to the City (the “Municipal Advisor”), as follows: PFM Financial Advisors LLC Attn: Fred Dilly Senior Managing Consultant Email: dillyf@pfm.com Phone: 213.415.1640 100 Montgomery Street, Suite 2150 San Francisco, CA 94104 TERMS OF SALE Important Note: This notice will be submitted to i-Deal LLC (“i-Deal”) for posting at the TM3 website and in the Parity bid delivery system. In the event i-Deal’s summary of the terms of sale of the Bonds conflicts with this Notice of Sale in any particulars, the terms of this Notice of Sale (as amended, if necessary, with notice of any amendment hereto to be given as described above) shall control. 4 RIGHT TO CANCEL, POSTPONE OR RESCHEDULE SALE: The City reserves the right to cancel, postpone or reschedule the sale of the Bonds. Notice of any change of the date or time of the sale will be communicated through Parity. If the sale is postponed, bids will be received at the place, date and hour as set forth in the notice. Failure of any bidder to receive such notice or any other form of notice of canceled, postponed or rescheduled sale will not affect the legality or validity of any sale. FORM OF BID. All bids for the Bonds must be unconditional and for not less than all of the Bonds offered for sale. Each bid must be in accordance with the terms and conditions set forth herein. Bids will only be accepted via PARITY® (the “Bid Service” or “Parity®”) pursuant to this Notice the time and date set forth for receipt of bids. To the extent any instructions or directions set forth in PARITY® conflict with this Notice, the terms of this Notice shall control. For further information about PARITY®, potential bidders may contact the City’s municipal advisor (see the cover page of this Notice of Sale for contact information). ELECTRONIC BIDS. Only electronic bids submitted through Parity will be accepted. For further information about Parity, potential bidders may contact: IHS Markit 450 West 33rd Street New York, New York 10001 Phone: (212) 849-5023 Email: munis@ihsmarkit.com Internet address: http://www.newissuehome.i-deal.com If any provision of this Notice of Sale conflicts with information provided by the Bid Service, this Notice of Sale shall control. Each bidder submitting an electronic bid agrees by doing so that it is solely responsible for all arrangements with (including any charges by) the Bid Service and that the Bid Service is not acting as an agent of the City. Instructions for submitting electronic bids must be obtained from the Bid Service, and the City does not assume any responsibility for ensuring or verifying bidder compliance with the Bid Service’s procedures. The City shall be entitled to assume that any bid received via the Bid Services has been made by a duly authorized agent of the bidder. If a bidder submits an electronic bid for the Bonds, such bidder thereby agrees to the following terms and conditions: (i) If any provision in this Notice of Sale with respect to the Bonds conflicts with information or terms provided or required by the Bid Service, this Notice of Sale, including any amendments issued as described herein, shall control; (ii) each bidder shall be solely responsible for making necessary arrangements to access the Bid Service for purposes of submitting its bid in a timely manner and in compliance with the requirements of this Notice of Sale; (iii) the City shall not have any duty or obligation to provide or assure access to the Bid Service to any bidder, and the City shall not be responsible for proper operation of, or have any liability for, any delays, interruptions or damages caused by use of the Bid Service or any incomplete, inaccurate or untimely bid submitted by any bidder through the Bid Service; (iv) the City is using the Bid Service as a communication mechanism, and not as an agent of the City, to conduct the electronic bidding for the Bonds; (v) the Bid Service is acting as an independent contractor, and is not acting for or on behalf of the City; 5 (vi) the City is not responsible for ensuring or verifying bidder compliance with any procedures established by the Bid Service; (vii) the City may regard the electronic transmission of a bid through the Bid Service (including information regarding the purchase price for the Bonds and interest rates for any maturity of the Bonds) as though the information were submitted and executed on the bidder’s behalf by a duly authorized signatory; (viii) if the bidder’s bid is accepted by the City, this Notice of Sale and the information that is transmitted electronically through the Bid Service shall form a contract, and the bidder shall be bound by the terms of such contract; and (ix) information provided by the Bid Service to bidders shall form no part of any bid or any contract between the winning bidder and the City unless that information is included in this Notice of Sale provided by the City. 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®, THAT THE CITY NEITHER ENDORSES NOR EXPLICITLY ENCOURAGES THE USE OF PARITY®, AND THAT PARITY® IS NOT ACTING AS AN AGENT OF THE CITY. INSTRUCTIONS AND FORMS 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 MUNICIPAL 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. MINIMUM / MAXIMUM PURCHASE PRICE: Each proposal must be for not less than all of the Bonds hereby offered for sale. The purchase price for the Bonds shall be not less than 98% of the par amount thereof. Bidders should be aware that the required purchase price is net of purchaser’s compensation and bond insurance premium (if bond insurance is obtained), which is required to be paid by the purchaser. DESIGNATION OF INTEREST RATES: Bidders may specify any number of separate interest rates, and any rate may be repeated as often as desired; provided, however, that: (i) each interest rate specified must be in a multiple of 1/20 of 1% or 1/8 of 1%; (ii) the maximum interest rate bid for any maturity shall not exceed 6% per annum; (iii) a zero rate of interest cannot be specified; (iv) interest on each Bond shall accrue from its dated date to its stated maturity date at the interest rate specified in the bid; (v) all Bonds of the same maturity date shall bear the same rate of interest; (vi) bidders may bid to purchase the Bonds from the City at a discount or with a premium; however, no bid will be considered if the bid is to purchase Bonds at an aggregate price less than 98%; and (vii) no bid will be accepted which contemplates the waiver of any interest or other concession by the bidder as substitute for payment in full of the purchase price. 6 Bids that do not conform to the terms of this paragraph will be rejected. BASIS OF AWARD: Unless all bids are rejected as described in this Notice of Sale, the Bonds will be awarded to the responsible bidder whose bid produces the lowest true interest cost on the Bonds. The true interest cost specified in any bid will be that rate which, when used in computing the present value of principal and interest to be paid on all Bonds from the expected date of delivery (which is assumed for computational purposes to be October 6, 2026), to their respective maturity dates, or mandatory sinking fund prepayment dates in the case of term Bonds, produces an amount equal to the purchase price (including any premium or original issue discount) specified in such bid. For purposes of computing the true interest cost represented by any bid, the purchase price specified in such bid shall be equal to the par amount of the Bonds plus any premium specified in such bid, less any original issue discount, and the true interest cost shall be calculated by the use of a semiannual interval of compounding interest based on the Interest Payment Dates for the Bonds. The interest rates used in the true interest computation will be the interest rates stated in the bid. Bidders are requested to supply a calculation of the true interest cost of the Bonds to the City on the basis of their respective bids, which shall be considered as informative only and not binding on either the bidder or the City. VERIFICATION: All bids are subject to verification and approval by the City. The City has the absolute right, in its sole discretion, to deem final each bid as reported by Parity to be accurate and binding on the bidder immediately after the deadline for receipt of bids. Information or calculations provided by Parity other than the information required to be provided by the bidder in accordance with this Notice of Sale is for information purposes only and is not binding on either the bidder or the City. ALL OR NONE BID. Any prospective purchaser may submit a bid for the Bonds, provided that if any of the Bonds are bid for, then all of the Bonds must be bid for. ADJUSTMENT OF PRINCIPAL MATURITIES: The City reserves the right to increase or decrease the principal amount of any maturity of the Bonds (or, in the case of the term Bonds, the principal amount thereof which is subject to mandatory sinking fund redemption on June 1 in any year). The City will give notice of any such adjustment to the successful bidder as soon as practicable following the notification of award. No such adjustment will alter the basis upon which the best bid is determined. The winning bidder may not withdraw its bid or change its interest rates bid as a result of any changes made to the principal amounts. The City will attempt to maintain the percentage of bidder compensation when adjusting maturities RIGHT OF REJECTION: The City reserves the right, in its discretion, to reject any and all bids and to the extent not prohibited by law to waive any irregularity or informality in any bid. PROMPT AWARD: A representative of the City has been authorized to accept the best responsible bid for the purchase of the Bonds and to accept such bid, for and in the name of the City, by notice to the successful bidder. If two or more bids setting forth identical interest rates and premium, if any, are received, such officer may exercise discretion and judgment in making the award and may award the Bonds on a pro rata basis in such denominations as he or she determines. Such authorized representative of the City may also reject any and all bids and waive any irregularity or informality in any bid. Sale of the Bonds will be awarded or all bids will be rejected not later than 24 hours after the expiration of the time prescribed for the receipt of proposals unless such time of award is waived by the successful bidder; provided, that the award may be made after the expiration of the specified time if the bidder does not notify the City in writing of the withdrawal of its proposal. 7 PLACE OF DELIVERY; CANCELLATION FOR LATE DELIVERY: It is expected that the Bonds will be delivered to DTC for the account of the successful bidder on October 6, 2026. The successful bidder has the right, at the successful bidder’s option, to cancel the contract of purchase if the Bonds are not tendered for delivery within 60 days from the date of the sale thereof. In such event, the successful bidder will be entitled to the return of the deposit accompanying the bid (see “GOOD FAITH DEPOSIT” below). PAYMENT OF PURCHASE PRICE: The successful bidder will be required to pay the purchase price (less the amount of the good faith deposit described in “GOOD FAITH DEPOSIT” below) of the Bonds in funds which are immediately available to the Trustee. Such payment shall be made on the date of original delivery of the Bonds by the City to DTC. GOOD FAITH DEPOSIT: A good faith deposit for the Bonds in the amount of $500,000 (the “Good Faith Deposit”) must be provided by the successful bidder. The Good Faith Deposit must be submitted by wire transfer (as described below). The Bonds will not be officially awarded to a bidder who has not submitted a Good Faith Deposit. Upon the determination by the City of the successful bidder, the City’s municipal advisor will request the successful bidder to (i) immediately wire the Good Faith Deposit to the Trustee, which will be provided to the successful bidder by the City, and (ii) provide, within ninety (90) minutes of such request, the Federal wire reference number of such Good Faith Deposit to the City’s municipal advisor by email (dillyf@pfm.com). In the event that the successful bidder does not wire the Good Faith Deposit as required, or does not provide the Federal wire reference number confirming the wire-transfer of such deposit to the municipal advisor within the time specified above, the City may reject the bid of the successful bidder and may award the Bonds to a responsible bidder that submitted a confirming bid that represents the next lowest true interest cost to the City. No interest will be paid upon a Good Faith Deposit made by a successful bidder. Upon receipt of the Good Faith Deposit by the City, the Good Faith Deposit will immediately become the property of the City. 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 successful 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 successful 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, except pursuant to a right of cancellation. See “PLACE OF DELIVERY; CANCELLATION FOR LATE DELIVERY.” In the event of nonpayment of the purchase price for the Bonds by the successful 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. CUSIP NUMBERS: 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, except that the CUSIP Service Bureau charge for the assignment of said numbers will be the sole responsibility of and shall be paid for by the purchaser. The purchaser shall also notify the CUSIP Service Bureau as to the final structure of the Bonds awarded to such purchaser. QUALIFICATION FOR SALE; BLUE SKY. Compliance with blue sky laws shall be the sole responsibility of the purchaser. The City will furnish such information and take such action not inconsistent with law as the purchaser may request and the City shall deem necessary or appropriate to qualify the Bonds for offer and sale under the blue sky or other securities laws and regulations of such states and other jurisdictions of the United States of America as may be 8 designated by the purchaser; provided, however, that the City shall not execute a general or special consent to service of process or qualify to do business in connection with such qualification or determination in any jurisdiction. The purchaser will not offer to sell or solicit any offer to buy the Bonds in any jurisdiction where it is unlawful for such bidder to make such offer, solicitation or sale, and the bidder shall comply with the blue sky and other securities laws and regulations of the states and jurisdictions in which the bidder sells the Bonds. 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 are the sole responsibility of the purchaser of the Bonds. ESTABLISHMENT OF ISSUE PRICE FOR THE BONDS: By submitting a bid, the purchaser confirms that each maturity of the Bonds has been or will be offered to the public on or before the date of award at the offering price or prices (the “initial offering price”), or at the corresponding yield or yields, set forth in the bid submitted by the purchaser. By submitting a bid, the purchaser agrees to assist the City and Special Counsel in establishing the issue price of the Bonds. Prior to delivery of the Bonds, the purchaser shall be required to provide to the City a reoffering price certification in form and substance similar to either the certificate attached as Appendix A to this Notice of Sale (if the “competitive sale requirements” described below have been met), the certificate attached as Appendix B to this Notice of Sale (if the competitive sale requirements have not been met and the purchaser elects to use the 10% test to determine the issue price), or the certificate attached as Appendix C to this Notice of Sale (if the competitive sale requirements have not been met and the purchaser elects to use the hold- the-offering rule to determine the issue price). The Bonds actually delivered will have such modifications as may be appropriate or necessary, in the reasonable judgment of the purchaser, the City and Special Counsel to accurately reflect, as applicable, the role of the signatory and the sales price or prices or the initial offering price or prices to the public of the Bonds. In addition, based on reasonable requests of Special Counsel, the purchaser will provide information regarding its sales of the Bonds. For purposes of this paragraph, sales of the Bonds to other securities brokers or dealers will not be considered sales to the general public. Competitive Sale Requirements Satisfied. The City intends that the provisions of Treasury Regulation Section 1.148-1(f)(3)(i) (defining “competitive sale” for purposes of establishing the issue price of the Bonds) will apply to the initial sale of the Bonds (the “competitive sale requirements”) because: (1) the City shall disseminate this Notice of Sale to potential underwriters in a manner that is reasonably designed to reach potential underwriters; (2) all bidders shall have an equal opportunity to bid; (3) the City may receive bids from at least three underwriters of municipal bonds who have established industry reputations for underwriting new issuances of municipal bonds; and (4) The City anticipates awarding the sale of the Bonds to the bidder who submits a firm offer to purchase the Bonds at the lowest true interest cost, as set forth in this Notice of Sale. Any bid submitted pursuant to this Notice of Sale shall be considered a firm offer for the purchase of the Bonds, as specified in the bid. Bids will not be subject to cancellation if the competitive sale requirements are not satisfied. 9 If the competitive sale requirements are not satisfied, the City shall so advise the purchaser. If the competitive sale requirements are not satisfied, the purchaser shall advise the City if any maturity of the Bonds satisfies the 10% test (as defined below) as of the date and time of the award of the Bonds, and if the purchaser has elected to apply the hold-the-offering-price rule (as defined below), the purchaser shall notify the City, within one hour of the time of award of the Bonds, which maturities of the Bonds satisfy the 10% test and which maturities shall be subject to the hold-the-offering-price rule. Competitive Sale Requirements Not Satisfied – 10% Test. If the competitive sale requirements are not satisfied, and the purchaser does not elect to use the hold-the-offering-price rule, then the City shall treat the first price at which 10% of a maturity of the Bonds (the “10% test”) is sold to the public as the issue price of that maturity. Until the 10% test has been satisfied as to each maturity of the Bonds to which the 10% test shall apply, the purchaser agrees to promptly report to the City the prices at which such unsold Bonds of that maturity have been sold to the public. That reporting obligation shall continue, whether the Closing Date has occurred, until the 10% test has been satisfied as to the Bonds of that maturity or until all Bonds of that maturity have been sold. Competitive Sale Requirements Not Satisfied – Hold-the-Offering-Price Rule. If the competitive sale requirements are not satisfied, and the purchaser has elected to use the hold- the-offering-price rule, the purchaser agrees, on behalf of the underwriters participating in the purchase of the Bonds, that the underwriters will neither offer nor sell unsold Bonds of any maturity to which the hold-the-offering-price rule applies to any person at a price that is higher than the initial offering price to the public during the period starting on the sale date and ending on the earlier of the following: (1) the close of the 5th business day after the sale date; or (2) the date on which the underwriters have sold at least 10% of that maturity of the Bonds to the public at a price that is no higher than the initial offering price to the public. The purchaser shall promptly advise the City when the underwriters have sold 10% of that maturity of the Bonds to the public at a price that is no higher than the initial offering price to the public, if that occurs prior to the close of the 5th business day after the sale date. The City acknowledges that, if the purchaser has elected to use the hold-the-offering-price rule, in making the representation set forth above, the purchaser will rely on (i) the agreement of each underwriter to comply with the hold-the-offering-price rule, as set forth in an agreement among underwriters and the related pricing wires, (ii) if a selling group has been created in connection with the initial sale of the Bonds to the public, the agreement of each dealer who is a member of the selling group to comply with the hold-the-offering-price rule, as set forth in a selling group agreement and the related pricing wires, and (iii) if an underwriter is a party to a retail distribution agreement that was employed in connection with the initial sale of the Bonds to the public, the agreement of each broker-dealer that is a party to such agreement to comply with the hold-the-offering-price rule, as set forth in the retail distribution agreement and the related pricing wires. The City further acknowledges that each underwriter shall be solely liable for its failure to comply with its agreement regarding the hold-the-offering-price rule and that no underwriter shall be liable for the failure of any other underwriter, or of any dealer who is a member of a selling group, or of any broker-dealer that is a party to a retail distribution agreement to comply with its corresponding agreement regarding the hold-the-offering-price rule as applicable to the Bonds. By submitting a bid, each bidder confirms that: (i) any agreement among underwriters, any selling group agreement and each retail distribution agreement (to which the bidder is a party) relating to the initial sale of the Bonds to the public, together with the related pricing wires, contains or will contain 10 language obligating each underwriter, each dealer who is a member of the selling group, and each broker-dealer that is a party to such retail distribution agreement, as applicable, to (A) report the prices at which it sells to the public the unsold Bonds of each maturity allotted to it until it is notified by the purchaser that either the 10% test has been satisfied as to the Bonds of that maturity or all Bonds of that maturity have been sold to the public and (B) comply with the hold-the-offering-price rule, if applicable, in each case if and for so long as directed by the purchaser and as set forth in the related pricing wires, and (ii) any agreement among underwriters relating to the initial sale of the Bonds to the public, together with the related pricing wires, contains or will contain language obligating each underwriter that is a party to a retail distribution agreement to be employed in connection with the initial sale of the Bonds to the public to require each broker-dealer that is a party to such retail distribution agreement to (A) report the prices at which it sells to the public the unsold Bonds of each maturity allotted to it until it is notified by the purchaser or such underwriter that either the 10% test has been satisfied as to the Bonds of that maturity or all Bonds of that maturity have been sold to the public and (B) comply with the hold-the-offering-price rule, if applicable, in each case if and for so long as directed by the purchaser or such underwriter and as set forth in the related pricing wires. Sales of any Bonds to any person that is a related party to an underwriter shall not constitute sales to the public for purposes of this Notice of Sale. Further, for purposes of this Notice of Sale: (i) “public” means any person other than an underwriter or a related party, (ii) “underwriter” means (A) any person that agrees pursuant to a written contract with the City (or with the lead underwriter to form an underwriting syndicate) to participate in the initial sale of the Bonds to the public and (B) any person that agrees pursuant to a written contract directly or indirectly with a person described in clause (A) to participate in the initial sale of the Bonds to the public (including a member of a selling group or a party to a retail distribution agreement participating in the initial sale of the Bonds to the public), (iii) a purchaser of any of the Bonds is a “related party” to an underwriter if the underwriter and the purchaser are subject, directly or indirectly, to (A) more than 50% common ownership of the voting power or the total value of their stock, if both entities are corporations (including direct ownership by one corporation of another), (B) more than 50% common ownership of their capital interests or profits interests, if both entities are partnerships (including direct ownership by one partnership of another), or (C) more than 50% common ownership of the value of the outstanding stock of the corporation or the capital interests or profit interests of the partnership, as applicable, if one entity is a corporation and the other entity is a partnership (including direct ownership of the applicable stock or interests by one entity of the other), and (iv) “sale date” means the date that the Bonds are awarded by the City to the purchaser. 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 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, which shall include 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 11 “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. 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. DISCLOSURE COUNSEL NEGATIVE ASSURANCE LETTER: The firm of Stradling, Yocca, Carlson & Rauth LLP, as Disclosure Counsel to the City, will provide a letter to the original purchaser of the Bonds regarding the Official Statement. Such letter will be to the effect that during the course of Disclosure Counsel’s work with regard to the Bonds, no facts have come to their attention that cause them to believe that the Official Statement (except for any financial and statistical data and forecasts, numbers, estimates, assumptions and expressions of opinion, and information concerning the Depository Trust Company and the book-entry system) 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. NO LITIGATION CERTIFICATE: At the time of issuance of the Bonds, the City will certify there is no litigation pending concerning the validity of the Bonds, the corporate existence of the City, or the entitlement of the City officers 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. CONTINUING DISCLOSURE. In order to assist bidders in complying with S.E.C. Rule 15c2- 12(b)(5), the City has committed to undertake, under the Bond Resolution and a Continuing Disclosure Certificate, to provide certain annual financial information and notices of the occurrence of certain events, if material. A description of this undertaking is set forth in the Preliminary Official Statement and will also be set forth in the final Official Statement. Such Continuing Disclosure Certificate will be a document required to be delivered at closing by the City, and the failure by the City to deliver such document in form and substance acceptable to Bond Counsel and the successful bidder will relieve the successful bidder of its obligation to purchase the Bonds. GIVEN by order of the City Council of the City of Palo Alto by resolution adopted September 14, 2026. APPENDIX A FORM OF REOFFERING PRICE CERTIFICATE* TO BE DELIVERED IF COMPETITIVE SALE REQUIREMENTS ARE MET (I.E., 3 BIDS FROM COMPETITIVE PROVIDERS ARE RECEIVED) $____________ CITY OF PALO ALTO Water Revenue Refunding Bonds, 2026 Series A ISSUE PRICE CERTIFICATE The undersigned, on behalf of [NAME OF UNDERWRITER] (“[SHORT NAME OF UNDERWRITER]”), hereby certifies as set forth below with respect to the sale of the above- captioned obligations (the “Bonds”). 1. Reasonably Expected Initial Offering Price. (a) As of the Sale Date, the reasonably expected initial offering prices of the Bonds to the Public by [SHORT NAME OF UNDERWRITER] are the prices listed in Schedule 1 (the “Expected Offering Prices”). The Expected Offering Prices are the prices for the Maturities of the Bonds used by [SHORT NAME OF UNDERWRITER] in formulating its bid to purchase the Bonds. Attached as Schedule 1 is a true and correct copy of the bid provided by [SHORT NAME OF UNDERWRITER] to purchase the Bonds. (b) [SHORT NAME OF UNDERWRITER] was not given the opportunity to review other bids prior to submitting its bid. (c) The bid submitted by [SHORT NAME OF UNDERWRITER] constituted a firm offer to purchase the Bonds. 2. Defined Terms. (a) Maturity means Bonds with the same credit and payment terms. Bonds with different maturity dates, or Bonds with the same maturity date but different stated interest rates, are treated as separate Maturities. (b) Public means any person (including an individual, trust, estate, partnership, association, company, or corporation) other than an Underwriter or a related party to an Underwriter. The term “related party” for purposes of this certificate generally means any two or more persons who have greater than 50 percent common ownership, directly or indirectly. (c) Sale Date means the first day on which there is a binding contract in writing for the sale of a Maturity of the Bonds. The Sale Date of the Bonds is [DATE]. (d) Underwriter means (i) any person that agrees pursuant to a written contract with the Issuer (or with the lead underwriter to form an underwriting syndicate) to participate in the initial sale of the Bonds to the Public, and (ii) any person that agrees pursuant to a written contract directly or indirectly with a person described in clause (i) of this paragraph to participate in the initial sale of the Bonds to the Public (including a member of a selling group or a party to a retail distribution agreement participating in the initial sale of the Bonds to the Public). 2 The representations set forth in this certificate are limited to factual matters only. Nothing in this certificate represents [SHORT NAME OF UNDERWRITER]’s interpretation of any laws, including specifically Sections 103 and 148 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder. The undersigned understands that the foregoing information will be relied upon by the Issuer with respect to certain of the representations set forth in the Certificate as to Arbitrage and with respect to compliance with the federal income tax rules affecting the Bonds, and by Jones Hall, A Professional Law Corporation, in connection with rendering its opinion that the interest on the Bonds is excluded from gross income for federal income tax purposes, the preparation of the Internal Revenue Service Form 8038-G, and other federal income tax advice that it may give to the Issuer from time to time relating to the Bonds. Dated: [ISSUE DATE] [UNDERWRITER] By: Name and Title 3 SCHEDULE 1 BIDDING DOCUMENTATION AND INITIAL OFFERING PRICES APPENDIX B FORM OF REOFFERING PRICE CERTIFICATE TO BE DELIVERED IF COMPETITIVE SALE REQUIREMENTS ARE NOT MET (3 COMPETITIVE BIDS ARE NOT RECEIVED) AND 10% TEST IS USED FOR ISSUE PRICE $____________ CITY OF PALO ALTO Water Revenue Refunding Bonds, 2026 Series A ISSUE PRICE CERTIFICATE The undersigned, on behalf of [NAME OF UNDERWRITER/REPRESENTATIVE] ([“[SHORT NAME OF UNDERWRITER]”)][the “Representative”)][, on behalf of itself and [NAMES OF OTHER UNDERWRITERS] (together, the “Underwriting Group”),] hereby certifies as set forth below with respect to the sale and issuance of the above-captioned obligations (the “Bonds”). 1. Sale of the General Rule Maturities. As of the date of this certificate, for each Maturity of the General Rule Maturities, the first price at which at least 10% of such Maturity was sold to the Public is the respective price listed in Schedule 1. 2. Defined Terms. (a) Issuer means the City of Palo Alto, California. (b) Maturity means Bonds with the same credit and payment terms. Bonds with different maturity dates, or Bonds with the same maturity date but different stated interest rates, are treated as separate maturities. (c) Public means any person (including an individual, trust, estate, partnership, association, company, or corporation) other than an Underwriter or a related party to an Underwriter. The term “related party” for purposes of this certificate generally means any two or more persons who have greater than 50 percent common ownership, directly or indirectly. (d) Sale Date means the first day on which there is a binding contract in writing for the sale of a Maturity of the Bonds. The Sale Date of the Bonds is [DATE]. (e) Underwriter means (i) any person that agrees pursuant to a written contract with the Issuer (or with the lead underwriter to form an underwriting syndicate) to participate in the initial sale of the Bonds to the Public, and (ii) any person that agrees pursuant to a written contract directly or indirectly with a person described in clause (i) of this paragraph to participate in the initial sale of the Bonds to the Public (including a member of a selling group or a party to a retail distribution agreement participating in the initial sale of the Bonds to the Public). The representations set forth in this certificate are limited to factual matters only. Nothing in this certificate represents [NAME OF UNDEWRITING FIRM][the Representative’s] interpretation of any laws, including specifically Sections 103 and 148 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder. The undersigned understands that the foregoing information will be relied upon by the Issuer with respect to certain of the representations set forth in the Certificate as to Arbitrage and with respect to compliance 2 with the federal income tax rules affecting the Bonds, and by Jones Hall, A Professional Law Corporation, in connection with rendering its opinion that the interest on the Bonds is excluded from gross income for federal income tax purposes, the preparation of the Internal Revenue Service Form 8038-G, and other federal income tax advice that it may give to the Issuer from time to time relating to the Bonds. Dated: [ISSUE DATE] [UNDERWRITER] By: Name and Title 3 SCHEDULE 1 SALE PRICES APPENDIX C FORM OF REOFFERING PRICE CERTIFICATE TO BE DELIVERED IF COMPETITIVE SALE REQUIREMENTS ARE NOT MET (3 COMPETITIVE BIDS ARE NOT RECEIVED) AND PURCHASER ELECTS TO USE HOLD-THE-OFFERING-PRICE FOR ISSUE PRICE $____________ CITY OF PALO ALTO Water Revenue Refunding Bonds, 2026 Series A ISSUE PRICE CERTIFICATE The undersigned, on behalf of [NAME OF UNDERWRITER/REPRESENTATIVE] ([“[SHORT NAME OF UNDERWRITER]”)][the “Representative”)][, on behalf of itself and [NAMES OF OTHER UNDERWRITERS] (together, the “Underwriting Group”),] hereby certifies as set forth below with respect to the sale and issuance of the above- captioned obligations (the “Bonds”). 1. Initial Offering Price of the Bonds. (a) [SHORT NAME OF UNDERWRITER][The Underwriting Group] offered each Maturity of the Bonds to the Public for purchase at the respective initial offering prices listed in Schedule 1 (the “Initial Offering Prices”) on or before the Sale Date. A copy of the pricing wire or equivalent communication for the Bonds is attached to this certificate as Schedule 1. (b) As set forth in the [Bond Purchase Agreement][Notice of Sale and bid award], [SHORT NAME OF UNDERWRITER][the members of the Underwriting Group] [has][have] agreed in writing that, (i) for each Maturity of the Bonds, [it][they] would neither offer nor sell any of the Bonds of such Maturity to any person at a price that is higher than the Initial Offering Price for such Maturity during the Holding Period for such Maturity (the “hold-the-offering-price rule”), and (ii) any selling group agreement shall contain the agreement of each dealer who is a member of the selling group, and any retail distribution agreement shall contain the agreement of each broker-dealer who is a party to the retail distribution agreement, to comply with the hold-the-offering-price rule. Pursuant to such agreement, no Underwriter (as defined below) has offered or sold any Maturity of the Bonds at a price that is higher than the respective Initial Offering Price for that Maturity of the Bonds during the Holding Period. 2. Defined Terms. (a) Holding Period means, for each Maturity of the Bonds, the period starting on the Sale Date and ending on the earlier of (i) the close of the fifth business day after the Sale Date ([DATE]), or (ii) the date on which [SHORT NAME OF THE UNDERWRITER][the Underwriters] [has][have] sold at least 10% of such Maturity of the Bonds to the Public at prices that are no higher than the Initial Offering Price for such Maturity. (b) Issuer means the City of Palo Alto, California. - 2 - (c) Maturity means Bonds with the same credit and payment terms. Bonds with different maturity dates, or Bonds with the same maturity date but different stated interest rates, are treated as separate Maturities. (d) Public means any person (including an individual, trust, estate, partnership, association, company, or corporation) other than an Underwriter or a related party to an Underwriter. The term “related party” for purposes of this certificate generally means any two or more persons who have greater than 50% common ownership, directly or indirectly. (e) Sale Date means the first day on which there is a binding contract in writing for the sale of a Maturity of the Bonds. The Sale Date of the Bonds is [DATE]. (f) Underwriter means (i) any person that agrees pursuant to a written contract with the Issuer (or with the lead underwriter to form an underwriting syndicate) to participate in the initial sale of the Bonds to the Public, and (ii) any person that agrees pursuant to a written contract directly or indirectly with a person described in clause (i) of this paragraph to participate in the initial sale of the Bonds to the Public (including a member of a selling group or a party to a retail distribution agreement participating in the initial sale of the Bonds to the Public). The representations set forth in this certificate are limited to factual matters only. Nothing in this certificate represents [NAME OF UNDEWRITING FIRM][the Representative’s] interpretation of any laws, including specifically Sections 103 and 148 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder. The undersigned understands that the foregoing information will be relied upon by the Issuer with respect to certain of the representations set forth in the Certificate as to Arbitrage and with respect to compliance with the federal income tax rules affecting the Bonds, and by Jones Hall, A Professional Law Corporation, in connection with rendering its opinion that the interest on the Bonds is excluded from gross income for federal income tax purposes, the preparation of the Internal Revenue Service Form 8038- G, and other federal income tax advice that it may give to the Issuer from time to time relating to the Bonds. Dated: [ISSUE DATE] [UNDERWRITER] By: Name and Title - 3 - SCHEDULE 1 LISTING OF HOLD-THE-PRICE MATURITIES, INITIAL OFFERING PRICES AND PRICING WIRE Agenda draft INDENTURE OF TRUST by and between the CITY OF PALO ALTO and U.S. BANK TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee Dated as of October 1, 2026 Relating to $[Principal Amount] City of Palo Alto Water Revenue Refunding Bonds, 2026 Series A - i - TABLE OF CONTENTS ARTICLE I: DEFINITIONS; AUTHORIZATION AND PURPOSE OF 2026 BONDS; EQUAL SECURITY: SECTION 1.01. Definitions. ................................................................................................................................3 SECTION 1.02. Rules of Construction. ...........................................................................................................10 SECTION 1.03. Authorization and Purpose of 2026 Bonds .........................................................................10 SECTION 1.04. Equal Security. ........................................................................................................................10 ARTICLE II: ISSUANCE OF 2026 BONDS: SECTION 2.01. Terms of 2026 Bonds. .............................................................................................................11 SECTION 2.02. Redemption of 2026 Bonds. ..................................................................................................12 SECTION 2.03. Form of 2026 Bonds. ...............................................................................................................13 SECTION 2.04. Execution of 2026 Bonds. .......................................................................................................14 SECTION 2.05. Transfer of 2026 Bonds. .........................................................................................................14 SECTION 2.06. Exchange of 2026 Bonds. .......................................................................................................14 SECTION 2.07. Temporary Bonds. ..................................................................................................................14 SECTION 2.08. Bond Registration Books. ......................................................................................................14 SECTION 2.09. 2026 Bonds Mutilated, Lost, Destroyed or Stolen. .............................................................15 SECTION 2.10. Book Entry System ..................................................................................................................15 ARTICLE III: ISSUE OF 2026 BONDS; PARITY DEBT: SECTION 3.01. Issuance of 2026 Bonds ..........................................................................................................17 SECTION 3.02. Application of Proceeds of Sale of 2026 Bonds. .................................................................17 SECTION 3.05. Cost of Issuance Fund. ...........................................................................................................17 SECTION 3.06. Issuance of Parity Bonds. ......................................................................................................17 SECTION 3.08. Subordinate Debt ....................................................................................................................18 SECTION 3.09. Validity of 2026 Bonds ...........................................................................................................18 ARTICLE IV: PLEDGE OF NET REVENUES; FUNDS AND ACCOUNTS: SECTION 4.01. Pledge of Net Revenues, Water Revenue Fund. ................................................................19 SECTION 4.02. Receipt and Deposit of Revenues. ........................................................................................19 SECTION 4.03. Establishment of Funds and Accounts and Allocation of Revenues Thereto. ..............19 SECTION 4.04. Application of Debt Service Fund. .......................................................................................20 SECTION 4.05. Application of Redemption Account. ..................................................................................20 SECTION 4.06. Surplus. ....................................................................................................................................21 SECTION 4.07. Investments. ............................................................................................................................21 SECTION 4.08. Valuation .................................................................................................................................21 SECTION 4.09. Rate Stabilization Fund .........................................................................................................21 ARTICLE V: COVENANTS OF THE CITY; SPECIAL TAX COVENANTS: SECTION 5.01. Punctual Payment; Compliance With Documents. ...........................................................23 SECTION 5.02. Against Encumbrances. .........................................................................................................23 SECTION 5.03. Discharge of Claims. ..............................................................................................................23 SECTION 5.04. Acquisition, Construction or Financing of any Improvement to the Water System ....23 SECTION 5.05. Maintenance and Operation of Water System in Efficient and Economical Manner. ...................................................................................................................................................23 SECTION 5.06. Against Sale, Eminent Domain. ............................................................................................23 SECTION 5.07. Insurance. ................................................................................................................................24 SECTION 5.08. Records and Accounts. ..........................................................................................................25 SECTION 5.09. Protection of Security and Rights of Owners. ....................................................................25 SECTION 5.10. Against Competitive Facilities. ............................................................................................25 SECTION 5.11. Payment of Taxes, Etc. ...........................................................................................................25 SECTION 5.12. Rates and Charges. .................................................................................................................25 SECTION 5.13. No Priority for Additional Obligations ...............................................................................26 - ii - SECTION 5.14. Tax Covenants ........................................................................................................................26 SECTION 5.15. Further Assurances ................................................................................................................27 SECTION 5.16. Continuing Disclosure ...........................................................................................................27 ARTICLE VI: THE TRUSTEE: SECTION 6.01. Appointment of Trustee. .......................................................................................................28 SECTION 6.02. Acceptance of Trusts. .............................................................................................................28 SECTION 6.03. Fees, Charges and Expenses of Trustee. .............................................................................30 SECTION 6.04. Notice to Bond Owners of Default. ......................................................................................30 SECTION 6.05. Intervention by Trustee. ........................................................................................................30 SECTION 6.06. Removal of Trustee. ...............................................................................................................30 SECTION 6.07. Resignation by Trustee. .........................................................................................................31 SECTION 6.08. Appointment of Successor Trustee. .....................................................................................31 SECTION 6.09. Merger or Consolidation. ......................................................................................................31 SECTION 6.10. Concerning any Successor Trustee. .....................................................................................31 SECTION 6.11. Appointment of Co-Trustee. .................................................................................................31 SECTION 6.12. Indemnification; Limited Liability of Trustee. ...................................................................32 ARTICLE VII: MODIFICATION AND AMENDMENT OF THE INDENTURE: SECTION 7.01. Amendment by Consent of Bond Owners..........................................................................33 SECTION 7.02. Amendment Without Consent of Bond Owner. ................................................................33 SECTION 7.03. Disqualified Bonds. ................................................................................................................33 SECTION 7.04. Endorsement or Replacement of 2026 Bonds After Amendment. ..................................33 SECTION 7.05. Amendment by Mutual Consent. ........................................................................................34 ARTICLE VIII: EVENTS OF DEFAULT AND REMEDIES OF BOND OWNERS: SECTION 8.01. Events of Default and Acceleration of Maturities. ............................................................35 SECTION 8.02. Application of Funds Upon Acceleration. ..........................................................................35 SECTION 8.03. Other Remedies; Rights of Bond Owners. ..........................................................................36 SECTION 8.04. Power of Trustee to Control Proceedings. ..........................................................................36 SECTION 8.05. Appointment of Receivers. ...................................................................................................37 SECTION 8.06. Non-Waiver. ............................................................................................................................37 SECTION 8.07. Rights and Remedies of Bond Owners. ...............................................................................37 SECTION 8.08. Termination of Proceedings. .................................................................................................38 ARTICLE IX: MISCELLANEOUS: SECTION 9.01. Limited Liability of City. .......................................................................................................39 SECTION 9.02. Benefits of Indenture Limited to Parties. ............................................................................39 SECTION 9.03. Discharge of Indenture. .........................................................................................................39 SECTION 9.04. Successor Is Deemed Included in All References to Predecessor. ..................................40 SECTION 9.05. Content of Certificates. ..........................................................................................................40 SECTION 9.06. Execution of Documents by Bond Owners. ........................................................................40 SECTION 9.07. Waiver of Personal Liability. ................................................................................................41 SECTION 9.08. Partial Invalidity. ....................................................................................................................41 SECTION 9.09. Destruction of Cancelled 2026 Bonds ..................................................................................41 SECTION 9.10. Funds and Accounts. .............................................................................................................41 SECTION 9.11. Notices. ....................................................................................................................................42 SECTION 9.12. Unclaimed Moneys. ...............................................................................................................42 SECTION 9.13. Execution in Several Counterparts ......................................................................................42 SECTION 9.14. Governing Law .......................................................................................................................42 SECTION 9.15. Payment on Business Days ...................................................................................................42 EXHIBIT A: FORM OF 2026 BOND EXHIBIT B: DESCRIPTION OF 2009 WATER PROJECT 1 INDENTURE OF TRUST THIS INDENTURE OF TRUST, dated as of October 1, 2026, 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 Trust Company, 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"); RECITALS: WHEREAS, the City previously issued the $35,015,000 initial principal amount City of Palo Alto Water Revenue Bonds, 2009 Series A (the “2009 Bonds”) under Chapter 12.28 of the Palo Alto Municipal Code to finance the improvements to the City’s water system (as defined more completely herein, the "Water System") described in Exhibit B attached hereto and incorporated herein (“2009 Water Project”); WHEREAS, the City is authorized pursuant to the provisions of Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code to issue its revenue bonds for the purpose of refunding any revenue bonds of the City; WHEREAS, the City, after due investigation and deliberation, has determined that it is in the public interest of the City at this time to issue bonds under the Refunding Law for the purpose of refunding the outstanding 2009 Bonds and to pay certain costs of issuing the 2026 Bonds, and to that end the City Council, on ____, 2026, adopted its Resolution No. _____, authorizing the issuance of its City of Palo Alto Water Revenue Refunding Bonds, 2026 Series A (the “2026 Bonds”) for such purposes; WHEREAS, in order to provide for the authentication and delivery of the 2026 Bonds, to establish and declare the terms and conditions upon which the 2026 Bonds are to be issued and secured and to secure the payment of the principal thereof and of the interest and premium, if any, thereon, the City Council has authorized the execution and delivery of this Indenture; WHEREAS, the 2026 Bonds will be secured by a pledge of the Net Revenues, as defined herein, on a parity basis with the pledge securing any Parity Debt (as defined herein) issued by the City from time to time in accordance with the conditions set forth herein; and WHEREAS, all acts and proceedings required by law necessary to make the 2026 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 2026 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 2026 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 2026 Bonds by the Owners thereof, and for other valuable considerations, the receipt whereof is hereby acknowledged, the City does hereby 2 covenant and agree with the Trustee, for the benefit of the respective Owners from time to time of the 2026 Bonds, as follows: 3 ARTICLE I DEFINITIONS; AUTHORIZATION AND PURPOSE OF 2026 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 the 2026 Bonds and of any certificate, opinion, request or other documents herein mentioned have the meanings herein specified. "Authorized Investments" means any of the following, but only to the extent that the same are acquired at Fair Market Value, which at the time of investment are legal investments under the laws of the State of California and permitted under the City’s investment policy for the moneys proposed to be invested therein: (a) Federal Securities; (b) 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); (c) 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; (d) 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; (e) 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; (f) 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; 4 (g) general obligations of states with a rating of at least "A2/A" or higher by both Moody’s and S&P; (h) any investment agreement with, or guaranteed by, a financial institution the long-term unsecured obligations or the financial strength of which is rated A or better by S&P at the time of initial investment; (i) the Local Agency Investment Fund maintained by the State of California, 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 (j) the California Asset Management Program (CAMP). “Authorized Official” means the City Manager, Assistant City Manager, Director of Administrative Services, or any other officer of the City duly authorized by the Council for that purpose. "Bond Counsel" means Jones Hall LLP, and 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 Registration Books" means the books maintained by the Trustee pursuant to Section 2.08 for the registration and transfer of ownership of the 2026 Bonds. "Bonds" the 2026 Bonds at any time Outstanding hereunder. "Bond Year" means the twelve-month period beginning on June 2 in each year and ending on the following June 1 except that the first Bond Year shall begin on the Closing Date. "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 an Authorized Official. "Charges" means fees, tolls, assessments, rates and rentals prescribed by the Council for the services and facilities of the Water System furnished by the City. "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 2026 Bonds for the proceeds representing the purchase of such 2026 Bonds by the Original Purchaser. "Cost of Issuance Fund" means the Fund by that name established pursuant to Section 3.03. "Costs of Issuance" means all expenses incurred in connection with the authorization, issuance, sale and delivery of the 2026 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. 5 "Council" means the Council of the City or any other legislative body of the City hereafter provided for pursuant to law. "Debt Service" means, as of any date, with respect to the 2026 Bonds and any Parity Debt and, in the case of the additional debt tests, any Parity Debt that is proposed to be outstanding, the aggregate amount of principal and interest scheduled to become due (either at maturity or by mandatory redemption), on the 2026 Bonds or Parity Debt, calculated with the following assumptions: a. Principal payments (unless a different subdivision of this definition applies for purposes of determining principal maturities or amortization) are made in accordance with any amortization schedule published for such principal, including any minimum sinking fund payments; b. Interest on a variable rate Parity Debt that is not subject to a swap agreement and that is issued or will be issued as a tax-exempt obligation under federal law, is the average of the SIFMA Municipal Swap Index, or its successor index, during the 24 months preceding the date of such calculation; c. Interest on a variable rate Parity Debt that is not subject to a swap agreement and that is issued or will be issued as a taxable obligation under federal law, is the average of SOFR, or its successor index, during the 24 months preceding the date of such calculation; d. Interest on a variable rate Parity Debt that is subject to a swap agreement is the fixed swap rate or cap strike rate, as appropriate, if the variable rate has been swapped to a fixed rate or capped pursuant to an interest rate cap agreement or similar agreement; e. Interest on a fixed rate Parity Debt that is subject to a swap agreement such that all or a portion of the interest has been swapped to a variable rate shall be treated as variable rate debt under subdivisions (b) or (c) of this definition of Debt Service; f. Payments of principal and interest on a Parity Obligation are excluded from the calculation of Debt Service to the extent such payments are to be paid from amounts then currently on deposit with a trustee or other fiduciary and restricted for the defeasance of such Parity Obligations; g. If 25% or more of the principal of a Parity Debt is not due until its final stated maturity, then principal and interest on that Parity Debt may be projected to amortize over the lesser of 30 years or the useful life of the financed asset, and interest may be calculated according to subdivisions (b)-(e) of this definition of Debt Service, as appropriate. "Debt Service Fund" means the fund by that name established and held by the Trustee for the 2026 Bonds pursuant to Section 4.03. "Defeasance Obligations" means (a) cash, (b) non-callable direct obligations of the United States of America ("Treasuries"), (c) evidences of ownership of 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). 6 "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. "DTC" means The Depository Trust Company, New York, New York, and its successors and assigns. "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. "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 the Water System or otherwise arising from the Water System during such period, including but not limited to (a) all Charges received by the City for use of the Water System, (b) all receipts derived from the investment of funds held by the City or the Trustee under this Indenture, (c) transfers from any Rate Stabilization Fund into the Water Revenue Fund, and (d) all moneys received by the City from other public entities whose inhabitants are served pursuant to contracts with the City. Gross Revenues for a period of computation shall not include amounts deposited into the Rate Stabilization Fund during such period of computation, but only to the extent such deposits are made from amounts that would otherwise constitute Gross Revenues that were received by the City during such period of computation. 7 "Improvement" means any addition, extension, improvement, equipment, machinery or other facilities to or for the Water System. "Indenture" means this Indenture of Trust, as originally executed or as it may from time to time be supplemented, modified or amended 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. "Information Services" means in accordance with then-current guidelines of the Securities and Exchange Commission, the Electronic Municipal Market Access System (referred to as “EMMA”), a facility of the Municipal Securities Rulemaking Board (at http://emma.msrb.org), or such service or services as the City may designate in a certificate delivered to the Trustee. "Interest Payment Date" means June 1 and December 1 in each year, beginning December 1, 2026. "Interest Requirement" means, as of any particular date of calculation, the amount equal to any unpaid interest then due and payable, plus an amount which will on the next succeeding Interest Payment Date be equal to the interest to become due and payable on the 2026 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 the Water 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 the Water System in good repair and working order, and including all reasonable and necessary administrative costs of the City attributable to the Water System and the 2026 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 this Indenture or any Parity Debt Instrument, but excluding depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature. "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. 8 "Net Proceeds" means the gross proceeds from the sale of property or insurance or condemnation award with respect to which that term is used remaining after payment of all expenses (including attorneys' fees and any extraordinary expenses of the Trustee) incurred in the collection of such gross proceeds. "Net Revenues" means, with respect to the Water System, for any period of computation, the amount of the Gross Revenues received from the Water System during such period, less the amount of Maintenance and Operation Costs of the Water System becoming payable during such period. "Original Purchaser" means the first purchaser of the 2026 Bonds from the City. "Outstanding", when used as of any particular time with reference to 2026 Bonds, means (subject to the provisions of Section 7.03) all 2026 Bonds theretofore executed, issued and delivered by the City under this Indenture except - (a) 2026 Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (b) 2026 Bonds paid or deemed to have been paid within the meaning of Section 9.03; and (c) 2026 Bonds in lieu of or in substitution for which other 2026 Bonds shall have been executed, issued and delivered by the City pursuant to this Indenture. "Owner" or "Bond Owner" or "Bondowner", when used with respect to any 2026 Bond, means the person in whose name the ownership of such Bond shall be registered on the Bond Registration Books. "Parity Debt" means all bonds, notes or other obligations (including without limitation long-term contracts, loans, sub-leases or other legal financing arrangements) of the City payable from and secured by a pledge of and lien upon any of the Net Revenues, issued or incurred pursuant to Section 3.04. "Parity Debt Instrument" means the resolution, trust indenture or installment sale agreement adopted, entered into or executed and delivered by the City, and under which Parity Debt is 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 (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. "Principal Installment Date" means the date on which Principal Installments are required to be made pursuant to Section 2.01. “Rate Stabilization Fund” has the meaning given that term in Section 4.09 of this Indenture. "Record Date" means, with respect to the 2026 Bonds, the fifteenth (15th) calendar day of the month immediately preceding an Interest Payment Date. "Redemption Account" means the Account by that name established and held by the Trustee pursuant to Section 4.03. 9 "Redemption Price" means, with respect to any 2026 Bond, the principal amount thereof, plus the applicable premium, if any, payable upon redemption thereof pursuant to this Indenture. "Refunding Law" has the meaning given that term in the Recitals. "Request of the City" means a request in writing signed by an Authorized Official. "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. "Serial Bonds" means all 2026 Bonds other than Term Bonds. "Sinking Fund Installment" means, with respect to any particular date, the amount of money required by this Indenture to be paid by the City on such date toward the retirement of any particular Term Bonds prior to their respective stated maturities. “SOFR” means the Secured Overnight Financing Rate. "State" means the State of California. "Tax Code" means the Internal Revenue Code of 1986 as in effect on the date of issuance of the 2026 Bonds or (except as otherwise referenced herein) as it may be amended to apply to obligations issued on the date of issuance of the 2026 Bonds, together with applicable proposed, temporary and final regulations promulgated, and applicable official public guidance published, under the Tax Code. "Term Bonds" means such 2026 Bonds which are payable prior to their stated maturity by operation of Sinking Fund Installments. "Trust Office" means the corporate trust office of the Trustee at St. Paul, MN, or such other or additional offices as may be specified to the City by the Trustee in writing. "Trustee" means U.S. Bank Trust Company, 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. "Water Revenue Fund" means the Fund by that name established and held by the City and referred to in Section 4.02. “Water System” means the existing water system of the City, comprising all facilities for the obtaining, conserving, treating, distributing, storing and supplying of water for domestic use, irrigation, sanitation, industrial use, fire protection, recreation, or any other public or private uses. "2026 Bonds" means the City of Palo Alto Water Revenue Refunding Bonds, 2026 Series A, issued and at any time Outstanding hereunder. “2009 Indenture” means that certain Indenture of Trust, dated as of October 1, 2009, by and between the City and the 2009 Trustee. “2009 Trustee” means U.S. Bank Trust Company, National Association, as trustee under the 2009 Indenture. 10 “2009 Water Project” means the extensions and improvements to the City's Water System more particularly described in Exhibit B. 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 2026 Bonds. The City has reviewed all proceedings heretofore taken relative to the authorization of the 2026 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 2026 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, pursuant to the Refunding Law and each and every requirement of law, to issue the 2026 Bonds in the manner and form provided in this Indenture. Accordingly, the City hereby authorizes the issuance of the 2026 Bonds pursuant to the Refunding Law and this Indenture for the purpose of providing funds to refund the 2009 Bonds and to pay Costs of Issuance of the 2026 Bonds. SECTION 1.04. Equal Security. In consideration of the acceptance of the 2026 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 2026 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 2026 Bonds without preference, priority or distinction as to security or otherwise of any of the 2026 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. 11 ARTICLE II ISSUANCE OF 2026 BONDS SECTION 2.01. Terms of 2026 Bonds. The 2026 Bonds authorized to be issued by the City under and subject to the Refunding Law and the terms of this Indenture shall be designated the "City of Palo Alto Water Revenue Refunding Bonds, 2026 Series A", and shall be issued in the original principal amount of _____________ Dollars ($[Principal Amount]). The 2026 Bonds shall be issued in fully registered form without coupons in denominations of $5,000 or any integral multiple thereof, so long as no 2026 Bond shall have more than one maturity date. The 2026 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 (June 1) Principal Amount Interest Rate Per Annum Interest on the 2026 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 2026 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 2026 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 2026 Bonds shall be payable in lawful money of the United States of America. The 2026 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, 2026, in which event such interest is payable from the Closing Date; provided, however, that if, as of the date of authentication of any 2026 Bond, interest thereon is in default, such 2026 Bond shall bear interest from the date to which interest has previously been paid or made available for payment thereon in full. 12 SECTION 2.02. Redemption of 2026 Bonds. (a) No Optional Redemption. The 2026 Bonds are not subject to optional redemption prior to their stated maturity date. (b) Mandatory Redemption. (i) Mandatory Sinking Fund Redemption. 2026 Bonds maturing on June 1, _____ 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, ___, 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 2026 Bonds shall also be subject to redemption as a whole on any date, or in part on any Interest Payment Date in inverse order of maturity and by lot within a maturity, to the extent of the Net Proceeds of hazard insurance not used to repair or rebuild the Water System or the Net Proceeds of condemnation awards received with respect to the Water System to be used for such purpose pursuant to Sections 5.06 or 5.07, at a Redemption Price equal to the principal amount of the 2026 Bonds plus interest accrued thereon to the date fixed for redemption, without premium. (c) Notice of Redemption. Unless waived by any Owner of 2026 Bonds to be redeemed, notice of any redemption of 2026 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 20 days and not more than 60 days prior to the date fixed for redemption to the Owner of the 2026 Bond or 2026 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 2026 Bonds. (d) 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 2026 Bonds are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the 2026 Bonds to be redeemed, (iv) that on the redemption date the Redemption Price will become due and payable with respect to each such 2026 Bond or portion thereof called for redemption, and that interest with respect thereto shall cease to accrue from and after said date, and 13 (v) the place or places where such 2026 Bonds are to be surrendered for payment of the Redemption Price, which places of payment may include the Trust Office of the Trustee. (e) Deposit of Money. On or prior to any redemption date, the City shall deposit with the Trustee an amount of money sufficient to pay the Redemption Price of all the 2026 Bonds or portions of 2026 Bonds which are to be redeemed on that date. (f) Consequences of Notice. Notice of redemption having been given as aforesaid, the 2026 Bonds or portions of 2026 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 2026 Bonds or portions of 2026 Bonds shall cease to have interest accrue thereon. Upon surrender of such 2026 Bonds for redemption in accordance with said notice, such 2026 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 2026 Bond, there shall be prepared for the Owner a new 2026 Bond or 2026 Bonds of the same maturity in the amount of the unredeemed principal. All 2026 Bonds which have been redeemed shall be cancelled and destroyed by the Trustee and shall not be redelivered. Neither the failure of any Bond Owner to receive any notice so mailed nor any defect therein shall affect the sufficiency of the proceedings for redemption of any 2026 Bonds nor the cessation of accrual of interest thereon. (g) Partial Redemption of 2026 Bonds. In the event only a portion of any 2026 Bond is called for redemption, then upon surrender of such 2026 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 2026 Bond or 2026 Bonds, of the same series and maturity, of authorized denominations in aggregate principal amount equal to the unredeemed portion of the 2026 Bond or 2026 Bonds. (h) Manner of Redemption. Whenever any 2026 Bonds are to be selected for redemption, the Trustee shall determine, by lot, the numbers of the 2026 Bonds to be redeemed, and shall notify the City thereof. (i) Purchase of 2026 Bonds in lieu of Redemption. In lieu of redemption of 2026 Bonds as provided in subsection (b)(i)) 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 2026 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 2026 Bonds. 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 2026 Bonds purchased pursuant to this Section shall be cancelled. All 2026 Bonds redeemed pursuant to this Section and all 2026 Bonds purchased by the City pursuant to this subsection shall be cancelled and destroyed pursuant to Section 9.09. SECTION 2.03. Form of 2026 Bonds. The 2026 Bonds, the Trustee's certificate of authentication, and the assignment to appear thereon, shall be substantially in the respective forms set forth in Exhibit A attached hereto and by this reference incorporated herein, with necessary or appropriate variations, omissions and insertions, as permitted or required by this Indenture. 14 SECTION 2.04. Execution of 2026 Bonds. The 2026 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 2026 Bonds. The 2026 Bonds shall then be delivered to the Trustee for authentication by it. In case any officer who shall have signed any of the 2026 Bonds shall cease to be such officer before the 2026 Bonds so signed shall have been authenticated or delivered by the Trustee or issued by the City, such 2026 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 2026 Bond may be signed on behalf of the City by any individual who on the actual date of the execution of such 2026 Bond shall be the proper officer although on the nominal date of such 2026 Bond such individual shall not have been such officer. Only such of the 2026 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 2026 Bonds so authenticated have been duly authenticated and delivered hereunder and are entitled to the benefits of this Indenture. SECTION 2.05. Transfer of 2026 Bonds. Any 2026 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 2026 Bond for cancellation, accompanied by delivery of a written instrument of transfer in a form approved by the Trustee, fully executed. Whenever any 2026 Bond shall be surrendered for transfer, the City shall execute and the Trustee shall thereupon authenticate and deliver to the transferee a new 2026 Bond or 2026 Bonds of like tenor, maturity and aggregate principal amount. No 2026 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 2026 Bonds. 2026 Bonds may be exchanged at the Trust Office of the Trustee, for 2026 Bonds of the same tenor and maturity and of other authorized denominations. No 2026 Bonds the notice of redemption of which has been mailed pursuant to Section 2.02(d) shall be subject to exchange pursuant to this Section. SECTION 2.07. Temporary Bonds. The 2026 Bonds may be issued initially in temporary form exchangeable for definitive 2026 Bonds when ready for delivery. The temporary 2026 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 2026 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 2026 Bonds. If the City issues temporary 2026 Bonds, it will execute and furnish definitive 2026 Bonds without delay, and thereupon the temporary 2026 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 2026 Bonds an equal aggregate principal amount of definitive 2026 Bonds of authorized denominations. Until so exchanged, the temporary 2026 Bonds shall be entitled to the same benefits under this Indenture as definitive 2026 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 2026 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 15 it may prescribe, register or transfer or cause to be registered or transferred, on said books, 2026 Bonds as hereinbefore provided. SECTION 2.09. 2026 Bonds Mutilated, Lost, Destroyed or Stolen. If any 2026 Bond shall become mutilated, the City, at the expense of the Owner of said 2026 Bond, shall execute, and the Trustee shall thereupon authenticate and deliver, a new 2026 Bond of like maturity and principal amount in exchange and substitution for the 2026 Bond so mutilated, but only upon surrender to the Trustee of the 2026 Bond so mutilated. Every mutilated 2026 Bond so surrendered to the Trustee shall be cancelled by it and delivered to, or upon the order of, the City. If any 2026 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 Bond Owner, shall execute, and the Trustee shall thereupon authenticate and deliver, a new 2026 Bond of like maturity and principal amount in lieu of and in substitution for the 2026 Bond so lost, destroyed or stolen (or if any such 2026 Bond shall have matured or shall have been called for redemption, instead of issuing a substitute 2026 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 2026 Bond issued under this Section and of the expenses which may be incurred by the City and the Trustee. Any 2026 Bond issued under the provisions of this Section in lieu of any 2026 Bond alleged to be lost, destroyed or stolen shall constitute an original contractual obligation on the part of the City whether or not the 2026 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 2026 Bonds secured by this Indenture. SECTION 2.10. Book Entry System. (a) Original Delivery. The 2026 Bonds shall be initially delivered in the form of a separate single fully registered Bond (which may be typewritten) for each maturity of the 2026 Bonds. Upon initial delivery, the ownership of each such 2026 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 2026 Bonds shall be registered in the name of the Nominee on such Bond Registration Books. With respect to 2026 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 2026 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 to any ownership interest in the 2026 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 2026 Bonds, including any notice of redemption, (iii) the selection by the Depository of the beneficial interests in the 2026 Bonds to be redeemed in the event the City elects to redeem the 2026 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 2026 Bonds or (v) any consent given or other action taken by the Depository as Owner of the 2026 Bonds. The City and the Trustee may treat and consider the person in whose name each 2026 Bond is registered as the absolute owner of such 2026 Bond for the purpose of payment of principal, premium, if any, and interest represented by such 2026 Bond, for the purpose of giving notices of redemption and other matters with respect to such 2026 Bond, for the purpose of registering transfers of ownership of such 2026 Bond, and for all other purposes whatsoever. The Trustee shall pay the principal, interest and premium, if any, represented by the 2026 Bonds only to the respective Owners or their respective 16 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 2026 Bonds to the extent of the sum or sums so paid. No person other than a Bond Owner shall receive a 2026 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 2026 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 2026 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 2026 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 2026 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 2026 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 2026 Bonds by providing the Trustee with a list showing the interests of the Depository System Participants in the 2026 Bonds, and by surrendering the 2026 Bonds, registered in the name of the Nominee, to the Trustee on or before the date such replacement 2026 Bonds are to be issued. The Depository, by accepting delivery of the 2026 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 2026 Bonds shall no longer be required to be registered in the Registration Books in the name of the Nominee, but shall be registered in whatever name or names the Owners transferring or exchanging 2026 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 2026 Bonds that they be able to obtain certificated 2026 Bonds, the City may notify the Depository System Participants of the availability of such certificated 2026 Bonds through the Depository. In such event, the Trustee will execute, transfer and exchange 2026 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 2026 Bonds to any Depository System Participant having 2026 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 2026 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 2026 Bond is registered in the name of the Nominee, all payments with respect to principal, interest and premium, if any, represented by such 2026 Bond and all notices with respect to such 2026 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. 17 ARTICLE III ISSUE OF 2026 BONDS; PARITY DEBT SECTION 3.01. Issuance of 2026 Bonds. Upon the execution and delivery of this Indenture, the City shall execute and deliver 2026 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 2026 Bonds. Upon the receipt of payment for the 2026 Bonds on the Closing Date in the amount of $____________ (being an amount equal to the principal amount of the 2026 Bonds ($[Principal Amount]), less underwriter’s discount ($________), plus [net] original issue premium ($______), 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 transfer to the 2009 Trustee for deposit in the Redemption Account established and held by the 2009 Trustee under the 2009 Indenture, as set forth in the Irrevocable Refunding Instructions, the amount of $_______ to provide for the defeasance and redemption of the 2009 Bonds. (b) 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. Cost of Issuance Fund. There is hereby created a fund to be known as the "City of Palo Alto Water Revenue Refunding Bonds, 2026 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 January 1, 2027, shall be transferred by the Trustee to the Debt Service Fund. SECTION 3.04. Issuance of Parity Debt. In addition to the 2026 Bonds, the City may, by Parity Debt Instrument, issue or incur other loans, advances or indebtedness payable from Net Revenues to be derived from the Water System, in such principal amount as shall be determined by the City. The City may issue or incur any such Parity Debt pursuant to a Parity Debt Instrument subject to the following specific conditions, which are hereby made conditions precedent to the issuance and delivery of such Parity Debt: (a) The City shall be in compliance with all covenants set forth in this Indenture. (b) The Net Revenues for the last audited Fiscal Year of the City, or for any consecutive twelve calendar month period during the eighteen calendar month period preceding the date of adoption by the City Council of the resolution authorizing the issuance of such Parity Debt or the date of the execution of such Parity Debt (the “Test Year”), shall have produced a sum equal to at least 125% of the Debt Service on the 2026 Bonds and outstanding Parity Debt for such Test Year. 18 (c) The Net Revenues for the Test Year, including adjustments to give effect as of the first day of such Test Year to increases or decreases in Charges for the service provided by the Water System approved and in effect as of the date of calculation, shall have produced a sum equal to at least 125% of: (i) the Debt Service on the 2026 Bonds and any Parity Debt outstanding in such Test Year; plus (ii) the Debt Service which would have accrued on any Parity Debt issued since the end of such Test Year, assuming that such Parity Debt had been executed or issued at the beginning of such Test Year; plus (iii) the Debt Service which would have accrued had such proposed additional Parity Debt been issued at the beginning of such Test Year. Notwithstanding the foregoing, Parity Debt issued to refund the 2026 Bonds or any outstanding Parity Debt may be delivered without satisfying the conditions set forth above if total Debt Service on the 2026 Bonds or any outstanding Parity Debt after the issuance of such refunding Parity Debt is not greater than total Debt Service would have been prior to the issuance of such refunding Parity Debt. (d) The Parity Debt Instrument providing for the issuance of such Parity Debt under this Section 3.04 shall provide that the proceeds of such Parity Debt shall be applied to the acquisition, construction, improvement, financing or refinancing of additional facilities, improvements or extensions of existing facilities within the Water System, or otherwise for facilities, improvements or property which the City determines are of benefit to the Water System, or for the purpose of refunding any Bonds or Parity Debt in whole or in part, including all costs (including costs of issuing such Parity Debt and including capitalized interest on such Parity Debt during any period which the City deems necessary or advisable) relating thereto. SECTION 3.05. Subordinate Debt. Nothing in this Indenture shall prohibit or impair the authority of the City to issue bonds or other obligations secured by a lien on Net Revenues which is subordinate to the lien established hereunder, upon such terms and in such principal amounts as the City may determine. SECTION 3.06. Validity of 2026 Bonds. The validity of the authorization and issuance of the 2026 Bonds shall not be affected in any way by any proceedings taken by the City for the refunding of the 2009 Bonds, or by any contracts made by the City in connection therewith, and the recital contained in the 2026 Bonds that the same are issued pursuant to the Refunding Law shall be conclusive evidence of their validity and of the regularity of their issuance. 19 ARTICLE IV PLEDGE OF NET REVENUES; FUNDS AND ACCOUNTS SECTION 4.01. Pledge of Net Revenues, Water Revenue Fund. (a) The City hereby transfers, places a charge upon, assigns and sets over to the Trustee, for the benefit of the Owners, the Net Revenues of the Water System. The Net Revenues of the Water System shall not be used for any other purpose while any of the 2026 Bonds remain Outstanding, except that out of Net Revenues of the Water System there may be apportioned and paid such sums for such purposes, as are expressly permitted by this Article. Said pledge shall constitute a first, direct and exclusive charge and lien on the Net Revenues of the Water System for the payment of the principal or Redemption Price of and interest on the 2026 Bonds in accordance with the terms thereof. (b) The Net Revenues of the Water System constitute a trust fund for the security and payment of the principal or Redemption Price of and interest on the 2026 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 2026 Bonds. The Owner of the 2026 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 2026 Bonds are not a debt of the City, nor a legal or equitable pledge, charge, lien or encumbrance, upon any of its property, or upon any of its income, receipts, or revenues except the Net Revenues of the Water System. SECTION 4.02. Receipt and Deposit of Revenues. The City covenants and agrees that all Gross Revenues, when and as received, will be received and held by the City in trust hereunder and will be deposited by the City in the Water Revenue Fund (which has heretofore been created and now exists in the City Treasury) and will be accounted for through and held in trust in the Water 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, as a special account therein, are hereby created for the 2026 Bonds. The Debt Service Fund and the Redemption Account therein shall be held and maintained by the Trustee. All Gross Revenues shall be held in trust by the City in the Water Revenue Fund and shall be applied, transferred, used and withdrawn only for the purposes hereinafter authorized in this Article. (a) Operating Costs. The City shall first pay from the moneys in the Water Revenue Fund the budgeted Maintenance and Operation Costs as they become due and payable. (b) Debt Service. On or before the third Business Day prior to each Interest Payment Date, the City shall transfer from the Water Revenue Fund to the Trustee for deposit in the Debt Service Fund (i) an amount equal to the aggregate amount of interest to become due and payable on all Outstanding 2026 Bonds on the next succeeding Interest Payment Date, plus (ii) beginning on the third Business Day prior to the initial Sinking Fund Installment set forth in Article II, an amount 20 equal to the aggregate amount of Principal Installments (including any Sinking Fund Installments) becoming due and payable on all Outstanding 2026 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 2026 Bonds. Following the issuance of Parity Debt, moneys shall be transferred from the Water Revenue Fund to the Debt Service Fund and the debt service fund for any Parity Debt without preference or priority and, in the event of any insufficiency of such moneys, shall be transferred on a pro rata basis based on the amount due on the 2026 Bonds and any Parity Debt on such Interest Payment Date and without regard to moneys available in a debt service reserve account. (c) Debt Service Reserve Accounts. After making the payments, allocations and transfers provided for in subsection (b) above, if the balance in a debt service reserve account for any Parity Debt is less than the required level, the deficiency shall be restored by transfers from the first moneys which become available in the Water Revenue Fund. In the event of any insufficiency of such moneys, shall be transferred on a pro rata basis to the debt service reserve accounts for any Parity Debt based on the amount required to be deposited into the debt service reserve account. (d) 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 Water Revenue Fund may at any time be treated as surplus and applied as provided in Section 4.06. 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 2026 Bonds when due, and is hereby authorized to apply the same to such payment upon presentation and surrender of the 2026 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. SECTION 4.05. Application of Redemption Account. On or before the date which is at least forty-five (45) days prior to any Interest Payment Date on which 2026 Bonds are subject to redemption pursuant to Section 2.02(a), as applicable, the City shall transfer from the Water Revenue Fund to the Trustee for deposit in the Redemption Account an amount at least equal to the Redemption Price (excluding accrued interest, which is payable from the Debt Service Fund) of such Bonds to be redeemed on such Interest Payment Date. In addition, the City shall transfer to the Trustee for deposit in the Redemption Account all amounts required to redeem any 2026 21 Bonds which are subject to redemption pursuant to Section 2.02 (b), 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 2026 Bonds to be redeemed pursuant to Sections 2.02 (a) or (b), as applicable. If after all of the 2026 Bonds have been paid or deemed to have been paid, there are moneys remaining in the Redemption Account, such moneys shall be transferred by the Trustee to the City for deposit in the Water Revenue Fund. SECTION 4.06. Surplus. Moneys remaining in the Water Revenue Fund after making the payments, allocations and transfers provided for in subsections (b) and (c) of Section 4.03 shall be applied by the City as required by applicable law. SECTION 4.07. Investments. All moneys in the Water Revenue Fund may be invested by the City from time to time in any investments permitted under State law. 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 shall hold such moneys uninvested. 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 (with respect to the Debt Service Fund). For purposes of acquiring any investments hereunder, the Trustee may commingle funds held by it hereunder with the written approval of the City. The Trustee may act as principal or agent in the acquisition of any investment. The Trustee shall incur no liability for losses 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 4.08. Valuation . (a) Method of Valuation, Frequency of Valuation. In computing the amount in any Fund or Account, Authorized Investments shall be valued at the market price, exclusive of accrued interest. With respect to all Funds and Accounts, valuation shall occur annually. (b) 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 2026 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. SECTION 4.09. Rate Stabilization Fund . The City has the right at any time to establish a rate stabilization fund (the “Rate Stabilization Fund”) to be held by it and administered in accordance with this Section 4.09, for the purpose of stabilizing the rates and charges imposed by the City with respect to the Water System. From time to time the City may deposit amounts in 22 the Rate Stabilization Fund, from any source of legally available funds, including but not limited to Net Revenues which are released from the pledge and lien which secures the 2026 Bonds and any Parity Debt, as the City may determine. The City may, but is not required to, withdraw from any amounts on deposit in a Rate Stabilization Fund and deposit such amounts in the Water Revenue Fund. Amounts so transferred from a Rate Stabilization Fund to the Water Revenue Fund shall be applied for the purposes of the Water Revenue Fund. Amounts on deposit in a Rate Stabilization Fund shall not be pledged to or otherwise secure the 2026 Bonds or any Parity Debt. The City has the right at any time to withdraw any or all amounts on deposit in a Rate Stabilization Fund and apply such amounts for any lawful purposes of the City. 23 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 2026 Bonds in strict conformity with the terms of the 2026 Bonds and of this Indenture, and will faithfully observe and perform all of the conditions, covenants and requirements of this Indenture and all Parity Debt Instruments. SECTION 5.02. Against Encumbrances. The City will not mortgage or otherwise encumber, pledge or place any charge upon the Water System or any part thereof, or upon any of the Net Revenues, except as provided in the Indenture; provided, however, that nothing in this Section 5.02 nor elsewhere in this Indenture shall be construed to prevent the City from entering into long-term contracts to finance supplies of water, gas, or electric energy, payments under which are accounted for as Maintenance and Operation Costs under the definition thereof in Section 1.01. SECTION 5.03. Discharge of Claims. The City covenants that in order to fully preserve and protect the priority and security of the 2026 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 the Water System which, if unpaid, may become a lien or charge upon the Net Revenues prior or superior to the lien of the 2026 Bonds and impair the security of the 2026 Bonds. The City shall also pay from the Net Revenues all taxes and assessments or other governmental charges lawfully levied or assessed upon or in respect of the Water System or upon any part thereof or upon any of the Net Revenues therefrom. SECTION 5.04. Acquisition, Construction or Financing of any Improvement to the Water System. The City will acquire, construct, or finance any Improvement to the Water System to be financed with the proceeds of any Parity Debt with all practicable dispatch, and such Improvement will be made in an expeditious manner and in conformity with laws so as to complete the same as soon as possible. SECTION 5.05. Maintenance and Operation of Water System in Efficient and Economical Manner. The City covenants and agrees to maintain and operate the Water System in an efficient and economical manner and to operate, maintain and preserve the Water System in good repair and working order. SECTION 5.06. Against Sale, Eminent Domain. (a) The City will not sell, lease or otherwise dispose of the Water System or any part thereof essential to the proper operation of the Water System or to the maintenance of the Net Revenues except as herein expressly permitted. The City will not enter into any lease or agreement which impairs the operation of the Water System or any part thereof necessary to secure adequate Net Revenues for the payment of the interest on and principal or Redemption Price, if any, on the 2026 Bonds, or which would otherwise impair the rights of the Holders with respect to the Net Revenues or the operation of the Water System. Any real or personal property which has become non-operative or which is not needed for the efficient and proper operation of the Water System, 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 Water Revenue Fund. 24 (b) If all or any part of the Water System shall be taken by eminent domain proceedings, the Net Proceeds thereof shall be deposited in an Insurance and Condemnation Fund established and held by the City and applied as follows: (a) If the City has determined that it needs to use the Net Proceeds to make Improvements to the Water System in order for the City to comply with Section 5.05, the City shall use such Net Proceeds to make such additions, betterments, extensions or improvements. If such Net Proceeds shall exceed the costs of such additions, betterments, extensions or improvements that are required for the City to comply with Section 5.05, the excess shall be applied to any lawful purpose of the Water System, including (i) the payment of Debt Service on the 2026 Bonds and payments on any Parity Debt, (ii) the early redemption of the 2026 Bonds in accordance with Section 2.02(b) and prepayments of any Parity Debt in accordance with the related Parity Debt Instrument and (iii) the payment of capital costs of Improvements to the Water System. Until such time as the 2026 Bonds have been redeemed or paid at maturity, any such use of the Net Proceeds shall comply with Section 5.14. (b) If the City has determined that it does not need to use the Net Proceeds to make Improvements to the Water System in order for the City to comply with Section 5.05, the City shall use such Net Proceeds for any lawful purpose of the Water System, including including (i) the payment of Debt Service on the 2026 Bonds and payments on any Parity Debt, (ii) the early redemption of the 2026 Bonds in accordance with Section 2.02(b) and prepayments of any Parity Debt in accordance with the related Parity Debt Instrument and (iii) the payment of capital costs of Improvements to the Water System. Until such time as the 2026 Bonds have been redeemed or paid at maturity, any such use of the Net Proceeds shall comply with Section 5.14 SECTION 5.07. Insurance. (a) The City covenants that it shall at all times maintain such insurance on the Water System as is customarily maintained with respect to works and properties of like character against accident to, loss of or damage to such works or properties. 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. (b) In the event of any damage to or destruction of the Water System caused by the perils covered by such insurance, the Net Proceeds of such insurance shall be deposited by the City in an Insurance and Condemnation Fund to be established and held by the City and applied to the repair, reconstruction or replacement of the damaged or destroyed portion of the Water System to the extent required for the City to comply with Section 5.05. The City shall cause such repair, reconstruction or replacement to begin promptly after such damage or destruction shall occur and to continue and to be properly completed as expeditiously as possible, and shall pay out of the Net Proceeds of such insurance all costs and expenses in connection with such repair, reconstruction or replacement so that the same shall be completed and the Water System shall be free and clear of all liens and claims. If the Net Proceeds received by reason of any such loss shall exceed the costs of such repair, reconstruction or replacement that is required for the City to comply with Section 5.05, the excess shall be applied to any lawful purpose of the Water System, including (i) the payment of Debt Service on the 2026 Bonds and payments on any Parity Debt, (ii) the early redemption of the 2026 Bonds in accordance with Section 2.02(b) and prepayments of any Parity Debt in accordance with the related Parity Debt Instrument and (iii) the payment of capital costs of Improvements to the Water System. Until such time as the 2026 Bonds have been redeemed or paid at maturity, any such use of the Net Proceeds shall comply with Section 5.14. 25 If the City has determined that any Net Proceeds received by reason of a loss are not required to be applied to the repair, reconstruction or replacement of the damaged or destroyed portion of the Water System in order for the City to comply with Section 5.07, then the City shall apply the Net Proceeds to any lawful purpose of the Water System, including (i) the payment of Debt Service on the 2026 Bonds and payments on any Parity Debt, (ii) the early redemption of the 2026 Bonds in accordance with Section 2.02(b) and prepayments of any Parity Debt in accordance with the related Parity Debt Instrument and (iii) the payment of capital costs of Improvements to the Water System. Until such time as the 2026 Bonds have been redeemed or paid at maturity, any such use of the Net Proceeds shall comply with Section 5.14. SECTION 5.08. Records and Accounts. The City covenants that it shall keep proper books of record and accounts of the Water System, separate from all other records and accounts, in which complete and correct entries shall be made of all transactions relating to the Water System. Said books shall, upon reasonable request, be subject to the inspection of the Owners of not less than ten percent (10%) of the Outstanding 2026 Bonds or their representatives authorized in writing. The City covenants that it will cause the books and accounts of the Water System to be audited annually by an Independent Certified Public Accountant and will make available for inspection by the Bond Owners, upon reasonable request, a copy of the report of such Independent Certified Public Accountant. The City covenants that it will cause to be prepared annually, not more than two hundred seventy (170) 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 2026 Bonds, the disbursements from the Gross Revenues and other funds in reasonable detail, and a general statement of the financial and physical condition of the Water System. The City shall furnish a copy of the statement to the Trustee, and upon written request, to any Bond Owner. The Trustee shall have no duty to review such statement. SECTION 5.09. Protection of Security and Rights of Owners. The City will preserve and protect the security of the 2026 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 the 2026 Bonds by the City, such 2026 Bonds shall be incontestable by the City. SECTION 5.10. 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 Water System. SECTION 5.11. Payment of Taxes, Etc. The City will pay and discharge all taxes, assessments and other governmental charges which may hereafter be lawfully imposed upon the Water System or any part thereof or upon any Revenues when the same shall become due. The City will duly observe and conform with all valid requirements of any governmental authority relative to the Water System or any part thereof, and will comply with all requirements with respect to any state or federal grants received to assist in paying for the costs of the acquisition, construction or financing of any Improvements to the Water System. SECTION 5.12. Rates and Charges. (a) To the fullest extent permitted by law, the City shall fix and prescribe, at the commencement of each Fiscal Year, Charges for the Water System which are reasonably expected to be at least sufficient to yield during such Fiscal Year Net Revenues (including amounts 26 transferred from the Rate Stabilization Fund to the Water Revenue Fund during such Fiscal Year) equal to one hundred twenty-five percent (125%) of Debt Service on the 2026 Bonds and all Parity Debt payable in such Fiscal Year. (b) The City may make adjustments from time to time in such rates and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Net Revenues, from such reduced rates and charges are reasonably expected to be sufficient to meet the requirements of this section. (c) So long as the City has complied with its obligations set forth in clause (a) and (b) above, the failure of Net Revenues to equal one hundred twenty-five percent (125%) of Debt Service at the end of a Fiscal Year shall not constitute a default or an Event of Default hereunder. 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 of principal or interest out of the Net Revenues over the 2026 Bonds. SECTION 5.14. Tax Covenants. (a) Private Activity Bond Limitation. The City will assure that the proceeds of the 2026 Bonds are not so used as to cause the 2026 Bonds to satisfy the private business tests of section 141(b) of the Tax Code or the private loan financing test of section 141(c) of the Tax Code. (b) Federal Guarantee Prohibition. The City will not take any action or permit or suffer any action to be taken if the result of such action would be to cause any of the 2026 Bonds to be "federally guaranteed" within the meaning of section 149(b) of the Tax Code. (c) Rebate Requirement. The City will take any and all actions necessary to assure compliance with section 148(f) of the Tax Code, relating to the rebate of excess investment earnings, if any, to the federal government, to the extent that such section is applicable to the 2026 Bonds. (d) No Arbitrage. The City will not take, or permit or suffer to be taken by the Trustee or otherwise, any action with respect to the proceeds of the 2026 Bonds which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the date of issuance of the 2026 Bonds would have caused the 2026 Bonds to be "arbitrage bonds" within the meaning of section 148 of the Tax Code. (e) Maintenance of Tax-Exemption. The City will take all actions necessary to assure the exclusion of interest on the 2026 Bonds from the gross income of the Owners of the 2026 Bonds to the same extent as such interest is permitted to be excluded from gross income under the Tax Code as in effect on the date of issuance of the 2026 Bonds. (f) Record Retention. The City will retain its records of all accounting and monitoring it carries out with respect to the 2026 Bonds for at least 3 years after the 2026 Bonds mature or are redeemed (whichever is earlier); however, if the 2026 Bonds are redeemed and refunded, the City will retain its records of accounting and monitoring at least 3 years after the earlier of the maturity or redemption of the obligations that refunded the 2026 Bonds. (g) Compliance with Tax Certificate. The City will comply with the provisions of the Tax Certificate and the Use of Proceeds Certificate with respect to the 2026 Bonds, which are incorporated herein as if fully set forth herein. The covenants of this Section will survive payment in full or defeasance of the 2026 Bonds. 27 SECTION 5.15. 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 2026 Bonds the rights and benefits provided in this Indenture. SECTION 5.16. Continuing Disclosure. The City will provide information on the financial condition of the Water System to any Bond Owner or other interested person upon request and with payment of the City-prescribed handling costs thereof. Such information will be limited to financial statements and staff reports which have previously been distributed to the City Council. Additionally, the City will file annually with the Trustee a copy of its audited financial reports. The Trustee shall have no duty to review such reports. 28 ARTICLE VI THE TRUSTEE SECTION 6.01. Appointment of Trustee. U.S. Bank Trust Company, 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 2026 Bonds are Outstanding. If such bank or trust company publishes a report of condition at least annually pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purpose of this Section 6.01 the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Trustee is hereby authorized to pay the 2026 Bonds when duly presented for payment at maturity, or on redemption or purchase prior to maturity, and to cancel all 2026 Bonds upon payment thereof. The Trustee shall keep accurate records of all funds administered by it and of all 2026 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 2026 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 2026 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 suffered in connection with any investment of funds made by it in accordance with Section 4.07. (d) The Trustee shall not be accountable for the use of any proceeds of sale of the 2026 Bonds delivered hereunder. The Trustee may become the Owner of 2026 Bonds 29 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 2026 Bonds, whether or not such committee shall represent the Owners of the majority in principal amount of the 2026 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 2026 Bond, shall be conclusive and binding upon all future Owners of the same 2026 Bond and upon 2026 Bonds issued in exchange therefor or in place thereof. The Trustee shall not be bound to recognize any person as an Owner of any 2026 Bond or to take any action at his request unless the ownership of such 2026 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 2026 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 2026 Bonds then Outstanding and all notices or 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 Water System, including all books, papers and records of the City pertaining to the Water System and the 2026 Bonds, and to take such 30 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 2026 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 2026 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 paid by the City and reimbursed by the City for reasonable fees for its services rendered hereunder and all advances, counsel fees (including expenses) and other expenses reasonably and necessarily made or incurred by the Trustee in connection with such services. Upon the occurrence of an Event of Default hereunder, but only upon an Event of Default, the Trustee shall have a first lien with right of payment prior to payment of any 2026 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 2026 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 2026 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 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 2026 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 2026 Bonds then Outstanding. SECTION 6.06. Removal of Trustee. The Owners of a majority in aggregate principal amount of the Outstanding 2026 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 (where applicable), whereupon the City or such Owners, as the case may be, shall 31 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. No resignation of the Trustee shall take effect until a successor is appointed and has accepted. SECTION 6.08. Appointment of Successor Trustee. In the event of the removal or resignation of the Trustee pursuant to Sections 6.06 or 6.07, respectively, the City shall promptly appoint a successor Trustee. In the event the City shall for any reason whatsoever fail to appoint a successor Trustee within forty-five (45) days following the delivery to the Trustee of the instrument described in Section 6.06 or within forty-five (45) days following the receipt of notice by the City pursuant to Section 6.07, the Trustee may apply to a court of competent jurisdiction for the appointment of a successor Trustee meeting the requirements of Section 6.01 hereof. Any such successor Trustee appointed by such court shall become the successor Trustee hereunder notwithstanding any action by the City purporting to appoint a successor Trustee following the expiration of such 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, 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 32 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 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. 33 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 2026 Bonds may be modified or amended at any time by a supplemental indenture which shall become binding when the written consent of the Owners of a majority in aggregate principal amount of the 2026 Bonds then Outstanding exclusive of 2026 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 2026 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 2026 Bond without the express written consent of the Owner of such 2026 Bond, (b) reduce the percentage of 2026 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 Bond Owners. This Indenture and the rights and obligations of the City and of the Owners of the 2026 Bonds may also be modified or amended at any time by a supplemental indenture 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 2026 Bonds; (c) to provide for the issuance of any Parity Debt, and to provide the terms and conditions under which such Parity Debt may be issued, including but not limited to the establishment of special funds and accounts relating to such Parity Debt and any other provisions relating solely to such Parity Debt, subject to and in accordance with the provisions of Section 3.04; 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 2026 Bonds. SECTION 7.03. Disqualified Bonds. 2026 Bonds owned or held by or for the account of the City (but excluding 2026 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 2026 Bonds in this article provided for, and shall not be entitled to consent to, or take any other action in this article provided for. SECTION 7.04. Endorsement or Replacement of 2026 Bonds After Amendment. After the effective date of any action taken as hereinabove provided, the City may determine that the 2026 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 2026 Bond for that purpose at the Trust Office of the Trustee, a suitable 34 notation as to such action shall be made on such 2026 Bond. If the City shall so determine, new 2026 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 2026 Bond Outstanding at such effective date such new 2026 Bonds shall be exchanged at the Trust Office of the Trustee, without cost to each Bond Owner, for 2026 Bonds then Outstanding, upon surrender of such Outstanding 2026 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 2026 Bond held by him, provided that due notation thereof is made on such 2026 Bond. 35 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 2026 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 2026 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 the 2026 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 2026 Bonds, by written notice to the City, declare the principal of the 2026 Bonds to be immediately due and payable, whereupon that portion of the principal of the 2026 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 2026 Bonds to the contrary notwithstanding. This provision, however, is subject to the condition that if, at any time after the principal of the 2026 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 2026 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 2026 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 2026 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 2026 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 2026 Bonds, rescind and annul such declaration and its consequences. However, no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon. SECTION 8.02. Application of Funds Upon Acceleration. All amounts received by the Trustee pursuant to any right given or action taken by the Trustee under the provisions of this 36 Indenture shall be applied by the Trustee in the following order upon presentation of the several 2026 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 2026 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 2026 Bonds, and in case such moneys shall be insufficient to pay in full the whole amount so owing and unpaid upon the 2026 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 2026 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 2026 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 upon the request of the Owners of a majority in principal amount of the 2026 Bonds then Outstanding, it shall have full power, in the exercise of its discretion for the best interests of the Owners of the 2026 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 2026 Bonds hereunder opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation. Any suit, action or proceeding which any Owner of 2026 Bonds shall have the right to bring to enforce any right or remedy hereunder may be 37 brought by the Trustee for the equal benefit and protection of all Owners of 2026 Bonds similarly situated and the Trustee is hereby appointed (and the successive respective Owners of the 2026 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 2026 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 2026 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 2026 Bonds, shall affect or impair the obligation of the City, which is absolute and unconditional, to pay the interest on and principal of the 2026 Bonds to the respective Owners of the 2026 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 2026 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 Refunding 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 2026 Bond issued hereunder shall have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon this Indenture, unless (a) such Owner shall have previously given to the Trustee written notice of the occurrence of an Event of Default; (b) the Owners of a majority in aggregate principal amount of all the 2026 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 2026 Bonds of any remedy hereunder; it being understood and intended that no one or more Owners of 2026 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 38 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 2026 Bonds. The right of any Owner of any 2026 Bond to receive payment of the principal of and interest and premium (if any) on such 2026 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. 39 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 2026 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 2026 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 2026 Bonds. SECTION 9.03. Discharge of Indenture. If the City shall pay and discharge any or all of the Outstanding 2026 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 2026 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 2026 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 2026 Bonds (including all principal, interest and redemption premiums, if any) at or before their respective maturity dates; and if such 2026 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 2026 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 2026 Bonds, and all other pecuniary obligations of the City under this Indenture with respect to all such 2026 Bonds, shall cease and terminate, except only the obligation of the City to pay or cause to be paid to the Owners of such 2026 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. 40 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 2026 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 2026 Bonds are no longer "Outstanding" under this Indenture; each Verification and defeasance opinion shall be acceptable in form and substance, and addressed, to the City and the Trustee. SECTION 9.04. Successor Is Deemed Included in All References to Predecessor. Whenever in this Indenture 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 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 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. 41 The ownership of 2026 Bonds shall be provided by the Bond Registration Books. Any request, consent or vote of the Owner of any 2026 Bond shall bind every future Owner of the same 2026 Bond and the Owner of any 2026 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 2026 Bonds have concurred in any demand, request, direction, consent or waiver under this Indenture, 2026 Bonds which are owned or held by or for the account of the City (but excluding 2026 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 2026 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 2026 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 the remaining covenants and agreements or portions thereof and shall in no way affect the validity of this Indenture or of the 2026 Bonds; but the Bond Owners shall retain all rights and benefits accorded to them under the Refunding 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 2026 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 2026 Bonds. Whenever in this Indenture provision is made for the surrender to the City of any 2026 Bonds which have been paid or cancelled pursuant to the provisions of this Indenture, the Trustee shall destroy such 2026 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 42 industry practices; in each case with due regard for the protection of the security of the 2026 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: City of Palo Alto City Hall 250 Hamilton Avenue Palo Alto, California 94301 Attention: Director of Administrative Services If to the Trustee: Attn.: Global Corporate Trust Services One California Street, Suite 1000 San Francisco, CA 94111 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 2026 Bonds which remain unclaimed for one (1) year after the date when such 2026 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 2026 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 2026 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 2026 Bonds, at their respective addresses appearing on the Bond Registration Books, a notice that said moneys remain unclaimed and that, after a date named in said notice, which date shall not be less than thirty (30) days after the date of mailing of such notice, the balance of such moneys then unclaimed will be returned to the City. SECTION 9.13. Execution in Several Counterparts. This Indenture may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original; and all such counterparts, or as many of them as the City and the Trustee shall preserve undestroyed, shall together constitute but one and the same instrument. SECTION 9.14. Governing Law. This Indenture shall be governed by and construed in accordance with the laws of the State of California. SECTION 9.15. Payment on Business Days. In any case where the date of the maturity of interest or of principal (and premium, if any) of the 2026 Bonds or the date fixed for redemption of any 2026 Bonds or the date any action is to be taken pursuant to this Agreement is other than a Business Day, the payment of interest or principal (and premium, if any) or the action need not be made on such date but may be made on the next succeeding day which is a Business Day with the same force and effect as if made on the date required and no interest shall accrue for the period from and after such date. 43 44 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 its seal to be affixed hereon and attested by its City Clerk, and U.S. Bank Trust Company, 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 [S E A L] Attest: By City Clerk U.S. BANK TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee By Authorized Officer A-1 EXHIBIT A FORM OF BOND UNITED STATES OF AMERICA STATE OF CALIFORNIA COUNTY OF SANTA CLARA $[PRINCIPAL AMOUNT] CITY OF PALO ALTO WATER REVENUE REFUNDING BONDS 2026 SERIES A NO.________ $ ________________ INTEREST RATE MATURITY DATE DATED DATE CUSIP June 1, REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: DOLLARS Under and by virtue of the charter of the City of Palo Alto (the “City”) and the provisions of Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code (the "Refunding Law") the City, for value received will (subject to any right of prior redemption hereinafter provided for), on the Maturity Date specified above, pay to the Registered Owner named above, or registered assigns (the "Owner"), the Principal Amount stated above, in lawful money of the United States of America, and pay interest thereon in like lawful money from the Interest Payment Date (as hereinafter defined) next preceding the date of authentication of this Bond (unless (i) this Bond is authenticated on an Interest Payment Date, in which event it shall bear interest from such date of authentication, or (ii) this Bond is authenticated prior to November 15, 2026, in which event it shall bear interest from the Dated Date stated above; provided, however, that if at the time of authentication of this Bond, interest is in default on this Bond, this Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment on this Bond) until payment of such Principal Amount in full, at the Interest Rate per annum stated above, payable on June 1 and December 1 in each year, commencing December 1, 2026 (each an "Interest Payment Date"), calculated on the basis of a 360-day year comprised of twelve 30-day months. Principal hereof and premium, if any, upon early redemption hereof are payable at the corporate trust office of U.S. Bank Trust Company, National Association (the "Trustee"). Interest hereon (including the final interest payment upon maturity or earlier redemption) is payable by check or draft of the Trustee mailed by first class mail to the Owner at the Owner's address as it appears on the registration books maintained by the Trustee as of the close of business on the fifteenth (15th) day of the month next preceding such Interest Payment Date (the "Record Date"); provided, that at the option of any Owner of at least $1,000,000 aggregate principal amount of the A-2 Bonds with respect to which written instructions have been filed with the Trustee prior to the Record Date, such interest may be paid by wire transfer. This Bond is one of a duly authorized issue of Bonds of the City designated as its "Water Revenue Refunding Bonds, 2026 Series A" (the "Bonds") issued under and pursuant to the Refunding Law and under and pursuant to an Indenture of Trust (the "Indenture") by and between the City and the Trustee, dated as of October 1, 2026, and approved by the City by Resolution No. ______, adopted by the Council of the City on ____, 2026. Copies of the Indenture are on file at the office of the City Clerk and at the above-mentioned office of the Trustee, and reference to the Indenture and any and all supplements thereto and modifications and amendments thereof and to the Refunding Law is made for a description of the terms on which the Bonds are issued, the provisions with regard to the nature and extent of the Net Revenues, as that term is defined below, and the rights of the Owners of the Bonds. All the terms of the Indenture and the Refunding Law are hereby incorporated herein and constitute a contract between the City and the Owner from time to time of this 2026 Bond, and to all the provisions thereof the Owner of this 2026 Bond, by acceptance hereof, consents and agrees. Each taker and subsequent Owner hereof shall have recourse to all of the provisions of the Refunding Law and the Indenture and shall be bound by all of the terms and conditions thereof. The Bonds are being issued for the following purposes: (i) to refund the outstanding Palo Alto Water Revenue Bonds, 2009 Series A, which were issued under Chapter 12.28 of the Palo Alto Municipal Code to finance improvements to the City’s water system (the "Water System") and (ii) to pay certain costs of issuing the Bonds. The Bonds are special obligations of the City and are secured by and payable from certain net revenues generated by the Water System (“Net Revenues”) in accordance with the Indenture. Neither the general fund, the full faith and credit, nor the taxing power of the City, the State of California or any other political subdivision thereof is pledged to the payment of the Bonds. The 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. No Optional Redemption. The 2026 Bonds are not subject to optional redemption prior to their stated maturity dates. Mandatory Sinking Fund Redemption. Bonds maturing on June 1, ____ 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, ______, 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 A-3 Special Mandatory Redemption From Insurance or Condemnation Proceeds. The Bonds are also subject to redemption as a whole on any date, or in part on any Interest Payment Date in inverse order of maturity and by lot within a maturity, to the extent of the Net Proceeds of hazard insurance not used to repair or rebuild the Water System or the Net Proceeds of condemnation awards received with respect to the Water System to be used for such purpose pursuant to the Indenture, at a Redemption Price equal to the principal amount of the Bonds plus interest accrued thereon to the date fixed for redemption, without premium. Notice of Redemption. Unless waived by any Owner of Bonds to be redeemed, notice of any redemption of 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 20 days and not more than 60 days prior to the date fixed for redemption to the Owner of the Bond or 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 Bonds. If this Bond is called for redemption and payment is duly provided therefor as specified in the Indenture, interest shall cease to accrue hereon from and after the date fixed for redemption. The Bonds are issuable as fully registered Bonds, without coupons, in denominations of $5,000 or any integral multiple thereof. Subject to the limitations and conditions and upon payment of the charges, if any, as provided in the Indenture, Bonds may be exchanged for a like aggregate principal amount of Bonds of other authorized denominations and of the same maturity. This Bond is transferable by the Owner hereof, in person, or by his attorney duly authorized in writing, at said office of the Trustee, but only in the manner and subject to the limitations provided in the Indenture, and upon surrender and cancellation of this Bond. Upon registration of such transfer a new Bond or Bonds, of any authorized denomination or denominations, for the same aggregate principal amount and of the same maturity will be issued to the transferee in exchange herefor. The City and the Trustee may treat the Owner hereof as the absolute Owner hereof for all purposes, and the City and the Trustee shall not be affected by any notice to the contrary. The Indenture may be amended without the consent of the Owners of the Bonds to the extent set forth in the Indenture. It is hereby certified that all of the things, conditions and acts required to exist, to have happened or to have been performed precedent to and in the issuance of this Bond do exist, have happened or have been performed in due and regular time and manner as required by the laws of the State of California and that the amount of this Bond, together with all other indebtedness of the City, does not exceed any limit prescribed by any laws of the State of California, and is not in excess of the amount of Bonds permitted to be issued under the Indenture. This Bond shall not become valid or obligatory for any purpose or be entitled to the benefits of the Indenture until the certificate of authentication and registration hereon shall have been manually signed by an authorized officer or signatory of the Trustee. A-4 IN WITNESS WHEREOF, the City of Palo Alto has caused this Bond to be executed in its name and on its behalf with the facsimile signatures of its Mayor and Director of Administrative Services and its seal to be reproduced hereon and attested by the facsimile signature of its City Clerk. CITY OF PALO ALTO By: Mayor By: Director of Administrative Services ATTEST: By City Clerk CERTIFICATE OF AUTHENTICATION This is one of the Bonds described in the within-mentioned Indenture. Dated: ________________, as Trustee By: Authorized Signatory A-5 ASSIGNMENT For value received the undersigned hereby sells, assigns and transfers unto __________________________________________ whose address and social security or other tax identifying number is ________________________, the within-mentioned Bond and hereby irrevocably constitute(s) and appoint(s) _____________________________________________ attorney, to transfer the same on the registration books of the Trustee with full power of substitution in the premises. Dated: Signature Guaranteed: Note: Signature(s) must be guaranteed by an eligible guarantor institution (banks, stockbrokers, saving and loan associations and credit unions with membership in an approved signature medallion program) pursuant to Securities and Exchange Agency Rule 17Ad-15. Note: The signature(s) on this Assignment must correspond with the name(s) as written on the face of the within Certificate in every particular without alteration or enlargement or any change whatsoever. B-1 EXHIBIT B Description of 2009 Water Project The 8-Hour Emergency Water Supply Project is intended to correct the deficiency in the City’s emergency water supply, as specified by the California Department of Health Services (DHS). The Project, when completed, will support eight hours of normal water use at the maximum day demand level and four hours of fire suppression at the design fire duration level. The proposed project is part of the City’s Water System Capital Improvement Plan (CIP). The CIP proposes the construction of new wells, the rehabilitation of old wells, and the construction of a new storage reservoir. The City currently relies on the San Francisco Public Utilities Commission (SFPUC) for its water supply. The Project consists of improvements to and expansion of its existing water storage and supply facilities to meet the emergency needs identified in the Palo Alto 2005 Urban Water Management Plan, in the City’s Enhancing the New Century: Palo Alto 1998-2010 Comprehensive Plan, and the DHS minimum recommendations for a stand-alone Palo Alto emergency water supply system for use in the event of a SFPUC outage. The Project will help the City meet three-fold DHS recommendations for an emergency water supply: (1) a stand-alone system; (2) that supplies eight hours of maximum day water demand; (3) while maintaining fire-fighting reserves. Currently there are emergency water supply deficiencies in three of the zones in the northern half of the City. To correct this deficiency, the Project will include upgrades to five existing wells and construction of up to three new wells; construction of one new water storage reservoir with an associated pump station; and upgrade of the existing Mayfield Pump Station. The five existing wells to be upgraded are Hale, Rinconada Park, Fernando, Peers Park, and Matadero wells. Upgrade of the five existing wells and construction of new wells will provide approximately 11,000 gallons per minute (gpm) of reliable well capacity. Construction of a new reservoir and associated pump station will provide 2.5 million gallons (MG) of water storage for emergency use. The Project will allow the City to meet the emergency needs identified in the City’s 2005 Urban Water Management Plan, in the City’s Comprehensive Plan, and the California DHS minimum recommendations for a stand-alone Palo Alto emergency water supply system. PRELIMINARY OFFICIAL STATEMENT DATED ________, 2026 NEW ISSUE – BOOK-ENTRY-ONLY RATING: S&P: “AAA” (See “RATING” herein.) In the opinion of Jones Hall LLP, San Mateo, California, Bond Counsel, subject, however to certain qualifications described herein, under existing law, the interest on the 2026 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. Interest on the 2026 Bonds may be subject to the corporate alternative minimum tax. In the further opinion of Bond Counsel, such interest is exempt from California personal income taxes. See “TAX MATTERS.” $14,500,000* City of Palo Alto Water Revenue Refunding Bonds, 2026 Series A Dated: Date of Delivery Due: As shown on inside front cover The City of Palo Alto, a chartered city and municipal corporation (the “City”), is issuing its Water Revenue Refunding Bonds, 2026 Series A (the “2026 Bonds”), pursuant to an Indenture of Trust, dated as of October 1, 2026 (the “Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as trustee (the “Trustee”), Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, and a resolution of the City Council, adopted on [September 14], 2026, authorizing the issuance of the 2026 Bonds. The 2026 Bonds are being issued to (i) refund and defease all of the outstanding City of Palo Alto Water Revenue Bonds, 2009 Series A (the “Prior Bonds”) and (ii) pay the costs of issuing the 2026 Bonds. See “REFUNDING PLAN.” The 2026 Bonds are special obligations of the City and are secured by, subject to certain restrictions set forth in the Indenture, a pledge of and lien on certain net revenues (the “Net Revenues”) generated by the existing water system of the City (the “Water System”), which is operated by the City through the City’s Utilities Department (the “Utilities Department”). See “SECURITY FOR THE 2026 BONDS” herein. The 2026 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 (“DTC”). DTC will act as securities depository for the 2026 Bonds. Beneficial ownership interests in the 2026 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 2026 Bonds. See “DESCRIPTION OF THE 2026 BONDS—Book-Entry-Only System” herein. The 2026 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, 2026. The 2026 Bonds are subject to mandatory redemption as described herein. See “DESCRIPTION OF THE 2026 BONDS—Redemption Provisions.” Additional indebtedness payable from Net Revenues may be issued on a parity with the 2026 Bonds, subject to the conditions contained in the Indenture. See “SECURITY FOR THE 2026 BONDS—Parity and Subordinate Debt” herein. NONE OF THE PROPERTIES OF THE WATER SYSTEM ARE SUBJECT TO ANY MORTGAGE OR OTHER LIEN FOR THE BENEFIT OF THE OWNERS OF THE 2026 BONDS AND NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION OR AGENCY OF THE STATE OF CALIFORNIA IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE 2026 BONDS. NEITHER THE 2026 BONDS NOR THE OBLIGATION TO PAY THE PRINCIPAL OF OR INTEREST THEREON CONSTITUTES A DEBT OF THE CITY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL LIMIT ON INDEBTEDNESS. This cover page is not intended to be a summary of the terms of, or the security for, the 2026 Bonds. Investors are advised to read this Official Statement in its entirety to obtain information essential to the making of an informed investment decision, giving particular attention to the matters discussed under “CERTAIN INVESTMENT CONSIDERATIONS” herein. Capitalized terms used on this cover page and not otherwise defined have the meanings set forth herein. The 2026 Bonds are offered, when, as and if issued by the City, subject to the approval of validity by Jones Hall LLP, Bond Counsel to the City, and to certain other conditions. Certain legal matters will be passed upon for the City by the Office of the City Attorney of the City. Certain legal matters will be passed upon for the City by Stradling Yocca Carlson & Rauth LLP, as Disclosure Counsel. It is expected that the 2026 Bonds in book-entry form will be available for delivery through the facilities of DTC on or about ______, 2026. Date of Official Statement: _______, 2026 * Preliminary, subject to change. MATURITY SCHEDULE $14,500,000* City of Palo Alto Water Revenue Refunding Bonds, 2026 Series A Maturity Date Principal Interest CUSIP Numbers†Yield Price 2027 1,205,000 $_______ – ______% Term Bonds due June 1, 20__; Yield: ____%; Price ____; CUSIP No.†: _______ * Preliminary, subject to change. † CUSIP® is a registered trademark of the American Bankers Association. CUSIP Global Services (CGS) is managed on behalf 4931-0398-6599v16/202059-0002 CITY OF PALO ALTO CITY COUNCIL MEMBERS Vicki Veenker, Mayor Greer Stone, Vice Mayor Patrick Burt, Council Member Ed Lauing, Council Member George Lu, Council Member Julie Lythcott-Haims, Council Member Keith Reckdahl, Council Member CITY STAFF Ed Shikada, City Manager Kiely Nose, Assistant City Manager Lauren Lai, Director of Administrative Services Christine Paras, Assistant Director of Administrative Services Jessie Deschamps, Senior Management Analyst Christopher Jensen, City Attorney Aylin Bilir, Assistant City Attorney Mahealani Ah Yun, City Clerk Utilities Department Alan Kurotori, Director of Utilities Lisa Bilir, Assistant Director of Utilities, Resource Management Utilities PROFESSIONAL SERVICES Jones Hall LLP Bond Counsel Stradling Yocca Carlson & Rauth LLP Disclosure Counsel PFM Financial Advisors LLC Municipal Advisor U.S. Bank Trust Company, National Association Trustee Causey Public Finance, LLC Verification Agent 4931-0398-6599v16/202059-0002 GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT No dealer, broker, salesperson or other person has been authorized by the City to give any information or to make any representations with respect to the offer or sale of the 2026 Bonds other than as set forth in this Official Statement and, if given or made, such other information or representation must not be relied upon as having been authorized by the City. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor will there be any sale of the 2026 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the 2026 Bonds. Statements contained in this Official Statement that involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts. The information set forth in this Official Statement has been obtained from official sources and other sources that are believed to be reliable, but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation of the City. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder will under any circumstances create any implication that there has been no change in the affairs of the City or the Utilities Department since the date hereof. This Official Statement is submitted in connection with the sale of the 2026 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. 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,” “budget” or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which 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. No assurance is given that actual results will meet the City’s or the Utilities Department’s forecasts in any way, regardless of the level of optimism communicated in the information. The City is not obligated to issue any updates or revisions to the forward-looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based occur. See “CONTINUING DISCLOSURE.” The Underwriter may offer and sell the 2026 Bonds to certain dealers, dealer banks and banks acting as agent at prices lower than the public offering prices stated on the inside cover page of this Official Statement, and those public offering prices may be changed from time to time by the Underwriter. The 2026 Bonds have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon an exemption from the registration requirements contained in the Securities Act. The 2026 Bonds have not been registered or qualified under the securities laws of any state. The City and the Utilities Department maintain websites and certain social media accounts. However, the information presented on such websites and such accounts is not a part of this Official Statement and should not be relied on in making an investment decision with respect to the 2026 Bonds. 4931-0398-6599v16/202059-0002 TABLE OF CONTENTS INTRODUCTION ................................................ 2 Historical Operating Results ...........................31 The City ............................................................ 2 Authority for Issuance ...................................... 2 Purpose of 2026 Bonds..................................... 2 Security for the 2026 Bonds ............................. 2 No Reserve Fund .............................................. 3 The Water System............................................. 3 Continuing Disclosure ...................................... 3 Forward-Looking Statements ........................... 3 Additional Information ..................................... 3 REFUNDING PLAN............................................ 4 Refunding of Prior Bonds................................. 4 Verification ....................................................... 5 ESTIMATED SOURCES AND USES OF FUNDS ................................................................. 5 DESCRIPTION OF THE 2026 BONDS .............. 5 Bond Terms....................................................... 5 Transfer and Exchange ..................................... 6 2026 Bonds Mutilated, Destroyed, Stolen or Lost................................................................... 6 Redemption Provisions..................................... 6 Book-Entry-Only System ................................. 7 SECURITY FOR THE 2026 BONDS.................. 8 Pledge of Net Revenues.................................... 8 Flow of Funds................................................... 8 Rate Stabilization Fund..................................... 9 Rate Covenant................................................. 10 Parity and Subordinate Debt........................... 10 DEBT SERVICE REQUIREMENTS................. 11 THE CITY AND CITY UTILITIES................... 11 The City ...........................................................11 City Utilities ................................................... 12 Management of the Utilities Department........ 12 Enterprise Staffing and Technology................ 13 Enterprise Management Policy....................... 14 Rates and Billing............................................. 14 Annual Financial Statements and Service Coverage.............................................35 Retiree Benefit Funding Policy .......................37 Retirement System ..........................................37 Pension Trust...................................................43 Other Post-Employment Benefits....................43 CONSTITUTIONAL LIMITATIONS ON TAXES AND WATER RATES AND CHARGES ..........................................................43 CONSIDERATIONS ..........................................46 Significant Accounting Policies...................... 14 THE WATER SYSTEM..................................... 15 History ............................................................ 15 Service Area.................................................... 16 Water Storage and Distribution System.......... 16 Sources of Water Supply................................. 16 Water Conservation Policies and Procedures.. 20 Historical Production and Deliveries.............. 21 Capital Improvement Program Summary....... 22 Water Rates, Fees and Charges....................... 23 Water Demand and Customer Base ................ 27 Management Discussion of Operations .......... 28 Statement of Net Position ............................... 29 APPENDIX A ANNUAL COMPREHENSIVE 4931-0398-6599v16/202059-0002 i APPENDIX C SUMMARY OF CERTAIN APPENDIX E DTC AND THE BOOK-ENTRY- INDENTURE OF TRUST APPENDIX D PROPOSED FORM OF BOND COUNSEL OPINION APPENDIX F FORM OF CONTINUING CERTIFICATE 4931-0398-6599v16/202059-0002 OFFICIAL STATEMENT $14,500,000* City of Palo Alto Water Revenue Refunding Bonds, 2026 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 $14,500,000* Water Revenue Refunding Bonds, 2026 Series A (the “2026 Bonds”). Certain capitalized terms used in this Official Statement and not otherwise defined have the meanings set forth under APPENDIX C—“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. 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 population of approximately 69,004 as of January 1, 2026. 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 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 seven City Council Members are elected at large for four-year, staggered terms. For more information regarding the City, see “THE CITY AND CITY UTILITIES” and APPENDIX B—“DEMOGRAPHIC AND ECONOMIC INFORMATION ABOUT THE CITY.” Authority for Issuance The 2026 Bonds are being issued pursuant to (a) Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, all as in effect on the Closing Date (the “Refunding Law”), (b) the terms and conditions of an Indenture of Trust, dated as of October 1, 2026 (the “Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as trustee (the “Trustee”), and (c) a resolution of the City Council, adopted on [September 14], 2026, authorizing the issuance of the 2026 Bonds. Purpose of 2026 Bonds The 2026 Bonds are being issued to (i) refund and defease all of the City’s outstanding City of Palo Alto Water Revenue Bonds, 2009 Series A (the “Prior Bonds”) and (ii) pay the costs of issuing the 2026 Bonds. See “REFUNDING PLAN.” Security for the 2026 Bonds Pledge of Net Revenues. The 2026 Bonds are special obligations of the City and are secured by, subject to certain restrictions set forth in the Indenture, a pledge of and lien on the Net Revenues generated by the Water System. See “SECURITY FOR THE 2026 BONDS—Pledge of Net Revenues.” None of the properties of the Water System are subject to any mortgage or other lien for the benefit of the owners of the 2026 Bonds and * Preliminary, subject to change. neither the full faith and credit nor the taxing power of the City, the State or any political subdivision or agency Parity and Subordinate Debt. Additional bonds and other indebtedness payable from Net Revenues may be issued on a parity with the 2026 Bonds subject to the conditions of the Indenture (“Parity Debt”). Nothing in the Indenture prohibits the City from incurring obligations secured by Net Revenues on a basis subordinate to the 2026 Bonds. See “SECURITY FOR THE 2026 BONDS—Parity and Subordinate Debt.” No Reserve Fund The City will not establish or maintain a debt service reserve fund for the 2026 Bonds. See “SECURITY FOR THE 2026 BONDS.” The Water System The “Water System” includes 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. The Water System does not include any facilities, properties or improvements constituting any portion of the City’s gas system (the “Gas System”), the City’s storm and surface water drainage system (the “Storm Drain System”), the City’s sanitary sewer system (the “Sewer System”), the City’s electric utility (the “Electric System”), the City’s fiber optics system (the “Fiber Optics System”), or the City’s refuse utility (the “Refuse System”). For more information on the Water System, see “THE WATER SYSTEM” herein. Continuing Disclosure In connection with the issuance of the 2026 Bonds, the City Council will agree to provide, or to cause to be provided, to the Municipal Securities Rulemaking Board (“MSRB”) through its Electronic Municipal Market Access system (“EMMA”), for purposes of Rule 15c2-12(b)(5) (“Rule 15c2-12”) adopted by the U.S. Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended, certain annual financial information and operating data relating to the City and the Water System, and notice of certain enumerated events. These covenants will be made in order to assist the Underwriter (as defined herein) in complying with Rule 15c2-12. See “CONTINUING DISCLOSURE” and “APPENDIX F—FORM OF CONTINUING DISCLOSURE CERTIFICATE.” Forward-Looking Statements This Official Statement contains statements relating to future results that are forward-looking statements. When used in this Official Statement, the words “estimate,” “anticipate,” “forecast,” “project,” “intend,” “propose,” “plan,” “expect” and similar expressions identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. Additional Information Brief descriptions of the 2026 Bonds, the Indenture and certain other documents are included in this Official Statement and the appendices hereto. Such descriptions do not purport to be comprehensive or 4931-0398-6599v16/202059-0002 3 definitive. All references herein to such documents and any other documents, statutes, laws, reports or other REFUNDING PLAN The proceeds of the 2026 Bonds will be used to (i) refund and defease the Prior Bonds and (ii) pay the costs of issuing the 2026 Bonds. Refunding of Prior Bonds* The Prior Bonds were issued pursuant to an Indenture of Trust, dated as of October 1, 2009 (the “2009 Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as successor in interest to U.S. Bank National Association, as trustee (the “2009 Trustee”). A portion of the proceeds of the 2026 Bonds will be used to refund and defease the Prior Bonds. All of the Prior Bonds will be redeemed on [October 23], 2026 (the “Redemption Date”), at a redemption price equal to 100% of the principal amount thereof, plus accrued interest to the date of redemption (the “Redemption Price”). Certain information with respect to the Prior Bonds is set forth in the table below. City of Palo Alto Water Revenue Bonds, 2009 Series A (Taxable Direct Payment Build America Bonds) Maturity Date CUSIP Numbers*Principal Amount Interest Rate 2027 $1,555,000 4.700%697388 AK2 * CUSIP® numbers are provided for convenience of reference only. None of the City, the Utilities Department, the Pursuant to Irrevocable Refunding Instructions to be given by the City to the 2009 Trustee (the “Instructions”), concurrently with delivery of the 2026 Bonds, the City will cause a portion of the proceeds of 2026 Bonds to be transferred to the 2009 Trustee, which amount the 2009 Trustee will then deposit in the Debt Service Fund maintained under the 2009 Indenture (the “2009 Debt Service Fund”). The 2009 Trustee will apply amounts deposited to the 2009 Debt Service Fund, along with other available moneys under the 2009 Indenture, to pay the Redemption Price of the Prior Bonds on the Redemption Date. Amounts in the 2009 Debt Service Fund are pledged to secure payment of the Prior Bonds and are not pledged to, or available for, payment of the 2026 Bonds. * Preliminary, subject to change. 4931-0398-6599v16/202059-0002 4 Verification Prior to the delivery of the 2026 Bonds, Causey Public Finance, LLC (the “Verification Agent”), will deliver a report on the mathematical accuracy of certain computations based upon certain information and assertions provided to them by the Underwriter relating to the adequacy of the moneys on deposit with the 2009 Trustee to pay the Redemption Price of the Prior Bonds on the Redemption Date. ESTIMATED SOURCES AND USES OF FUNDS The proceeds of the 2026 Bonds will be used for the following purposes: Sources of Funds Principal Amount of 2026 Bonds (1) Total Sources Uses of Funds Redemption of Prior Bonds (2) Total Uses (1) Moneys on deposit in the debt service reserve fund maintained for the Prior Bonds. (2)Includes Underwriter’s discount, fees of Trustee, Municipal Advisor, Bond Counsel, Disclosure Counsel, and Verification DESCRIPTION OF THE 2026 BONDS Bond Terms General. The 2026 Bonds will be issued in the original principal amount of $14,500,000*. The 2026 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 inside front cover page of this Official Statement. Interest on the 2026 Bonds is payable on each June 1 and December 1, commencing December 1, 2026 (each, an “Interest Payment Date”). Registered Form. The 2026 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 (“DTC”). Beneficial owners of the 2026 Bonds will not receive physical certificates representing the 2026 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 2026 Bonds, principal of and premium, if any, and interest evidenced and represented by the 2026 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 2026 Bonds. See “DESCRIPTION OF THE 2026 BONDS—Book-Entry-Only System.” Principal of and premium, if any, on the 2026 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 2026 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 2026 Bonds with respect to which written instructions have been filed with the Trustee prior to the Record Date, by wire transfer, * Preliminary, subject to change. 4931-0398-6599v16/202059-0002 5 at the address of the owner as it appears on the Bond Registration Books. Principal of and premium (if any) on So long as Cede & Co., is the registered holder of the 2026 Bonds, references to the holders or owners or registered holders or owners of the 2026 Bonds means Cede & Co. and not the beneficial owners of the 2026 Bonds. Transfer and Exchange Any 2026 Bond may, in accordance with its terms, be transferred upon the Bond Registration Books by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of the 2026 Bond for cancellation, accompanied by delivery of a written instrument of transfer in a form approved by the Trustee, duly executed. Whenever any 2026 Bond is so surrendered for transfer, the City will execute and the Trustee will authenticate and deliver to the transferee a new 2026 Bond or 2026 Bonds of like tenor, maturity and aggregate principal amount. If a notice of redemption of any 2026 Bonds has been mailed pursuant to the redemption provisions of the Indenture, those 2026 Bonds will not be subject to transfer. The 2026 Bonds may be exchanged at the Trust Office of the Trustee, for 2026 Bonds of the same tenor and maturity and of other authorized denominations. 2026 Bonds Mutilated, Destroyed, Stolen or Lost If any 2026 Bond becomes mutilated, the City, at the expense of the Owner of that 2026 Bond, will execute, and the Trustee will authenticate and deliver, a new 2026 Bond of like maturity and principal amount in exchange and substitution for the 2026 Bonds so mutilated, but only upon surrender to the Trustee of the 2026 Bond so mutilated. The Trustee will cancel every mutilated 2026 Bond so surrendered, and will deliver those canceled 2026 Bonds to, or upon the order of, the City. If any 2026 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 2026 Bond of like maturity and principal amount in lieu of and in substitution for the 2026 Bond so lost, destroyed or stolen. (If any such 2026 Bond matures or is called for redemption, instead of issuing a substitute 2026 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 2026 Bond issued and the reimbursement of any expenses incurred by the City or the Trustee. Any 2026 Bond issued in lieu of any 2026 Bond alleged to be lost, destroyed or stolen will constitute an original contractual obligation on the part of the City whether or not the 2026 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 2026 Bonds secured by the Indenture. Redemption Provisions* No Optional Redemption. The 2026 Bonds are not subject to optional redemption prior to their stated maturity date. Mandatory Sinking Fund Redemption. The 2026 Bonds maturing on June 1, 20__ are subject to mandatory redemption in part from sinking fund payments to be made by the City on June 1, 20__, and on each * Preliminary, subject to change. 4931-0398-6599v16/202059-0002 6 June 1 thereafter up to and including June 1, 20__, at a redemption price equal to 100% of the principal amount 2026 Bonds Maturing June 1, 20__ June 1 of the Year Principal Amount *Final Maturity Date. Special Mandatory Redemption from Insurance or Condemnation Proceeds. The 2026 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, Notice of Redemption. Unless waived by any Owner of 2026 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 20 days and not more than 60 days prior to the date fixed for redemption to the Owner of the 2026 Bond or 2026 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 2026 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 2026 Bonds are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the 2026 Bonds to be redeemed, (iv) that on the redemption date the Redemption Price will become due and payable with respect to each such 2026 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 2026 Bonds are to be surrendered for payment of the Redemption Price, which places of payment may include the corporate trust office of the Trustee. On or 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 2026 Bonds or portions of 2026 Bonds which are to be redeemed on that date. So long as the 2026 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 2026 Bonds. Purchase in Lieu of Redemption. In lieu of mandatory redemption as described under “—Mandatory Sinking Fund Redemption” above, amounts in the Redemption Account of the Debt Service Fund may be used for the purchase of 2026 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 2026 Bonds. Book-Entry-Only System While the 2026 Bonds are subject to the book-entry system, the principal, interest and any redemption premium with respect to a 2026 Bond will be paid by the Trustee to The Depository Trust Company (“DTC”), which in turn is obligated to remit such payment to its DTC Participants for subsequent disbursement to 4931-0398-6599v16/202059-0002 7 Beneficial Owners of the 2026 Bonds, as described in APPENDIX E—“DTC AND THE BOOK-ENTRY- SECURITY FOR THE 2026 BONDS Pledge of Net Revenues General. The 2026 Bonds are special obligations of the City payable solely from and secured by a pledge of Net Revenues in accordance with the Indenture. “Net Revenues” are defined in the Indenture to mean, with respect to the Water System, for any period of computation, the amount of the Gross Revenues received from the Water System during such period, less the amount of Maintenance and Operation Costs of the Water System becoming payable during that period. “Gross Revenues” are defined in the Indenture to mean for any period of computation, all gross charges received for, and all other gross income and revenues derived by the City from, the ownership or operation of the Water System or otherwise arising from the Water System during that period, including but not limited to (a) all Charges received by the City for use of the Water System, (b) all receipts derived from the investment of funds held by the City or the Trustee under the Indenture, (c) transfers from any Rate Stabilization Fund into the Water Revenue Fund, and (d) all moneys received by the City from other public entities whose inhabitants are served pursuant to contracts with the City. Gross Revenues for a period of computation shall not include amounts deposited into the Rate Stabilization Fund during such period of computation, but only to the extent such deposits are made from amounts that would otherwise constitute Gross Revenues that were received by the City during such period of computation. “Maintenance and Operation Costs” are defined in the Indenture to mean the reasonable and necessary costs spent or incurred by the City for maintaining and operating the Water System, calculated in accordance with sound accounting principles. Maintenance and Operation Costs include the cost of supply of water, gas and electric energy under contracts or otherwise, the funding of reasonable operating reserves, and all reasonable and necessary expenses of management and repair and other expenses to maintain and preserve the Water System in good repair and working order. Maintenance and Operation Costs further include all reasonable and necessary administrative costs of the City attributable to the Water System and the 2026 Bonds, such as salaries and wages and the necessary contribution to retirement of employees, overhead, insurance, taxes (if any), expenses, compensation and indemnification of the Trustee, and fees of auditors, accountants, attorneys or engineers, and all other reasonable and necessary costs of the City or charges required to be paid by it to comply with the terms of the Indenture or any Parity Debt Instrument. Maintenance and Operation Costs do not include depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature. “Charges” is defined in the Indenture to mean fees, tolls, assessments, rates and rentals prescribed by the City Council for the services and facilities of the Water System furnished by the City. Flow of Funds The City covenants and agrees in the Indenture that all Gross Revenues will be received and held by the City in trust and will be deposited by the City in the Water Revenue Fund which exists in the City Treasury. The Gross Revenues will be accounted for separately and apart from all other money, funds, accounts or other resources of the City. The Indenture provides that all Gross Revenues in the Water Revenue Fund will be applied, transferred, used and withdrawn in the order listed: 4931-0398-6599v16/202059-0002 8 (i)Operating Costs. The City will first apply Gross Revenues on deposit in the Water Revenue Fund to the payment of the budgeted Maintenance and Operation Costs when due and payable. (ii)Debt Service. On or before the third day other than a Saturday, Sunday or a day on which the Trustee is authorized by law to remain closed (“Business Day”) prior to each Interest Payment Following the issuance of Parity Debt, if any, moneys will be transferred from the Water Revenue Fund to the Debt Service Fund and the debt service fund for any Parity Debt without preference or priority and, in the event of any insufficiency of such moneys, will be transferred on a pro rata basis based on the amount due on the 2026 Bonds and any Parity Debt on such Interest Payment Date and without regard to moneys available in a debt service reserve account. (iii)Debt Service Reserve Accounts. After making the payments, allocations and transfers provided for in subsection (ii) above, if the balance in a debt service reserve account for any Parity Debt (iv)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 amounts remaining in the Water Revenue Fund may Rate Stabilization Fund The Indenture permits but does not require the City to establish and maintain a Rate Stabilization Fund, to be held by the City and administered in accordance with the Indenture, for the purpose of stabilizing the rates and charges imposed by the City with respect to the Water System. From time to time the City may deposit amounts in the Rate Stabilization Fund, from any source of legally available funds, including but not limited to Net Revenues which are released from the pledge and lien which secures the 2026 Bonds and any Parity Debt, as the City may determine. The City may, but is not required to, withdraw from any amounts on deposit in a Rate Stabilization Fund and deposit such amounts in the Water Revenue Fund in any Fiscal Year for the purpose of paying principal and interest coming due and payable in such Fiscal Year. Amounts so transferred from a Rate Stabilization Fund to the Water Revenue Fund will be applied for the purposes of the Water Revenue Fund. Amounts on deposit in a Rate Stabilization Fund will not be pledged to or otherwise secure the 2026 Bonds or any Parity Debt. The City has the right at any time to withdraw any or all amounts on deposit in a Rate Stabilization Fund and apply such amounts for any lawful purposes of the City. The Rate Stabilization Fund, if established by the City, would be a separate and distinct fund from the City’s Rate Stabilization Reserve (the “RSR”). (See the caption “THE WATER SYSTEM—Reserves for the 4931-0398-6599v16/202059-0002 9 Water System” for information regarding the City’s Water System reserve funds.) At this time, the City has not Rate Covenant The City has covenanted in the Indenture to fix and prescribe, at the commencement of each Fiscal Year, Charges for the Water System which are reasonably expected to be at least sufficient to yield during each Fiscal Year Net Revenues (including amounts transferred from the Rate Stabilization Fund to the Water Revenue Fund during such Fiscal Year) equal to one hundred twenty-five percent (125%) of Debt Service on the 2026 Bonds and all Parity Debt payable in such Fiscal Year. The City may make adjustments from time to time in such rates and charges and may make such classification of such rates and charges as it deems necessary, but the City will not reduce the rates and charges then in effect unless the Net Revenues, from such reduced rates and charges are reasonably expected to be sufficient to meet the requirements of the Indenture. As long as the City has complied with its obligations set forth in above, the failure of Net Revenues to equal one hundred twenty-five percent (125%) of Debt Service at the end of a Fiscal Year will not constitute a default or an Event of Default under the Indenture. Parity and Subordinate Debt In addition to the 2026 Bonds, the City may issue or incur Parity Debt pursuant to a Parity Debt Instrument subject to the following conditions precedent: (a)The City must be in compliance with all covenants set forth in the Indenture. The Net Revenues for the last audited Fiscal Year of the City, or for any consecutive twelve calendar month period during the eighteen calendar month period preceding the date of adoption by the City (c)The Net Revenues for the Test Year, including adjustments to give effect as of the first day of such Test Year to increases or decreases in Charges for the service provided by the Water System approved and Notwithstanding the foregoing, Parity Debt issued to refund the 2026 Bonds or any outstanding Parity Debt may be delivered without satisfying the conditions set forth above if total Debt Service on the 2026 Bonds or any outstanding Parity Debt after the issuance of such refunding Parity Debt is not greater than total Debt Service would have been prior to the issuance of such refunding Parity Debt. (d)The Parity Debt Instrument providing for the issuance of such Parity Debt must provide that the proceeds of such Parity Debt will be applied to the acquisition, construction, improvement, financing or 4931-0398-6599v16/202059-0002 10 See “APPENDIX C - Summary of Certain Provisions of the Indenture of Trust” for the definition of Debt Service. Subordinate Debt. The Indenture authorizes the City to issue Bonds or other obligations secured by Net Revenues of the Water System on a basis subordinate to the pledge of Net Revenues to the 2026 Bonds, upon such terms and in such principal amounts as the City may determine. DEBT SERVICE REQUIREMENTS The following table sets forth the debt service funding requirements for the 2026 Bonds, assuming no redemptions prior to maturity. Year Ended June 1 Principal*Interest Total 2026 *Includes mandatory sinking fund installments. 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 69,004. 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 700-acre Stanford Research Park includes prestigious and innovative high-tech leaders such as Hewlett-Packard, Rivian, Tesla, Google and the Electric Power Research Institute. The City is also a major employment center, that includes Stanford University, Stanford Hospital and Clinic, Hewlett Packard, U.S. Department of Veterans Administration Hospital, Broadcom, Simon Property Group, Stanford Shopping Center, and the law offices of Wilson Sonsini Goodrich and Rosati. 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 seven 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. 4931-0398-6599v16/202059-0002 11 City Utilities The City operates the following utility systems: the Water System, the Refuse System, and 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 2026 BONDS”), the 2026 Bonds will be secured by a pledge of, and lien on, the Net Revenues of the Water System. The 2026 Bonds are not secured by revenues of any other City utility. 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 and the Refuse System). The Utilities Department is currently staffed by the following individuals, among others: Alan Kurotori, Director of Utilities. Alan Kurotori was selected as Utilities Director for the City in May 2025, bringing over 30 years of executive leadership experience in municipal utilities and city government. Prior to his appointment, he served as the City’s Utilities Chief Operating Officer, where he advanced key strategic initiatives, including the Foothill Fire Mitigation Project electrical undergrounding and the development of a new 115kV transmission line serving the City. Before joining the City, Mr. Kurotori held several senior leadership roles with the City of Santa Clara, including Water & Sewer Utilities Director, Assistant City Manager during the construction of Levi’s Stadium, and Assistant Director of Electric Utility (Silicon Valley Power). He has also held executive positions with Valley Water and the City of Mountain View, as well as private sector experience as an engineering consultant in water supply, wastewater, recycled water, and public works. Mr. Kurotori currently serves on the Board of Governors of the California Municipal Utilities Association and is a registered professional civil engineer in California. He holds a bachelor’s degree in civil engineering from the University of California, Berkeley. Terry Crowley, Chief Operating Officer. Terry Crowley is the Utilities Chief Operating Officer. Prior to his current position, Mr. Crowley served for 14 years as the Utilities Director for the City of Healdsburg, where he oversaw the electric, water, and wastewater utilities. He previously held engineering and operational roles with the City of Redding and Pacific Gas and Electric Company. Mr. Crowley holds a Bachelor of Science degree in Electrical Engineering from Washington State University and is a licensed Professional Electrical Engineer in the State of California. 4931-0398-6599v16/202059-0002 12 Tom Auzenne, Assistant Director of Utilities, Customer Support Services. Tom Auzenne is the Assistant Director of Utilities for Customer Support Services for the City. He has served in this role for more than 20 years, overseeing customer service, credit, and collections. Prior to joining the City, Mr. Auzenne held management, supervisory, and field positions at Pacific Gas and Electric Company in program marketing, energy efficiency, customer service, quality control, governmental affairs, pipeline operations, and communications. Mr. Auzenne holds a Bachelor of Arts in Sociology from San Francisco State University. Rekha Ippagunta, Assistant Director of Utilities, Water, Gas, and Wastewater Engineering and Operations. Rekha Ippagunta serves as the Utilities Assistant Director of Engineering and Operations for Water, Gas, and Wastewater for the City. Ms. Ippagunta has more than 20 years of experience in the utility sector, spanning municipal, public and investor-owned utilities, and private consulting. She held leadership roles at the Alameda County Water District, where she was responsible for development and execution of a $1.7 billion capital improvement plan. Previously, at California Water Service Company, she was responsible for capital program planning and delivery including managing and delivering capital projects across 23 water districts, notably completing high-priority water infrastructure projects and innovative treatment plant installations. She also worked as an engineering consultant and contributed to the design of water and wastewater infrastructure. Ms. Ippagunta holds a Bachelor of Science degree in Civil Engineering and a Master of Science in Civil and Environmental Engineering from S.V. University, India. She is a registered Civil Engineer and a member of American Water Works Association. Lisa Bilir, Assistant Director of Utilities, Resource Management. Lisa Bilir serves as the Assistant Director of Utilities of Resource Management for the City. Since joining the City in 2017, Ms. Bilir has overseen water supply planning and led financial forecasting and rate development across the electric, gas, water, and wastewater utilities. Her background includes 13 years of leadership in utility resource management and ratepayer advocacy at the California Public Utilities Commission. Ms. Bilir holds a Bachelor of Science degree in Biology from Stanford University and Master of Public Policy degree from the University of California, Berkeley. Enterprise Staffing and Technology The City employs approximately 44 full-time equivalent employees to operate its water utility. Thirty four employees are represented by Service Employees International Union (“SEIU”) in all matters pertaining to wages, benefits and working conditions. The current two-year agreement with this union, which is in the form of a memorandum of understanding, expires on December 31, 2027. Management employees receive substantially the same fringe benefit package as the SEIU members, and are represented by the Utilities Management and Professional Association of Palo Alto (“UMPAPA”). UMPAPA was originally established in 2009 and currently represents approximately 10 management employees. Their current two-and-a-half-year contract is set to expire June 30, 2028. The City’s wage and fringe benefits are generally comparable to those offered by other local public agencies. The City covers substantially all of its permanent employees under the California Public Employees Retirement System (“CalPERS”). Pension costs are funded by monthly contributions to CalPERS. Employees of the Department of Utilities participate in the Miscellaneous Plan, which is part of the Public Agency portions of CalPERS. In addition to providing pension benefits, the City participates in the California Public Employees Medical and Health Care Act to provide certain health care benefits for retired employees (“OPEB”), including employees of the Department of Utilities. Employees who retire directly from the City are eligible for benefits if they retire on or after age 50 with 5 years of service and are receiving a monthly pension from CalPERS. In fiscal year 2007-08, the City implemented the provisions of Governmental Accounting Standards Board Statement No. 45, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (“OPEB”), and elected to participate in an irrevocable trust to provide a funding mechanism for its OPEB liability. As a result, the City maintains a Net OPEB Asset for funds placed in irrevocable trust in excess of its actuarially required contribution. See “WATER SYSTEM FINANCIAL INFORMATION – Other Post- Employment Benefits” below. 4931-0398-6599v16/202059-0002 13 Enterprise Management Policy Treated as enterprise funds, the Electric, Gas, Refuse, Water, Fiber Optics, Sewer and Storm Drain, Wastewater Collection, and Wastewater Treatment Systems are financed and operated in a manner comparable to private business enterprises. The City prepares a Five-Year Financial Forecast in connection with the development of 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. 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. The Utilities and Public Works Departments are expected to continue meeting all of their financial obligations while charging retail rates to their customers that are comparable to those charged in neighboring cities. Careful budgeting and sound financial planning have been and will continue to be important factors in maintaining competitive rates. The Utilities Department recognizes the importance of minimizing wholesale commodity costs which is the largest expenditure category. Much time and effort are spent in dealing with the various commodity suppliers, regulatory agencies and commissions to help ensure reasonable and economical wholesale commodity costs. Rates and Billing The City Council has the authority to set utility rates for the Water 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 the Water System and the City’s other utilities are coordinated to assure adequate funding, minimize consumer impacts, and promote rate stability. To provide for rate stability and to ensure funds are available to cover any unforeseen cost contingencies, the City funds an Operating Reserve for the Water System. The City also funds a Rate Stabilization Reserve for the Water System (the “RSR”) from surplus net water sales revenues and withdraws money from the RSR in subsequent periods to supplement retail water sales revenue as needed. The RSR is a separate and distinct fund from the “Rate Stabilization Fund” authorized under the Indenture. 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 0.32% of the amount billed. In 2007, the City Council approved a project to implement a new utilities customer information system using SAP, the City’s core business system, also known as their Enterprise Resource Planning (ERP) system. 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. The City has improved the system over the years including continual upgrades of the system and additional features that allow for extended support hours. 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. 4931-0398-6599v16/202059-0002 14 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, 2025. Copies of prior reports are available on the City’s website (https://www.paloalto.gov/Departments/Administrative- Services/Financial-Reporting) or upon request to the Administrative Services Department, City of Palo Alto, 250 Hamilton Avenue, Palo Alto, CA 94301. Governmental accounting systems are organized and operated on a fund basis. A fund is defined as an independent fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein. Funds are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations and restrictions. As indicated above, the various Systems are accounted for as enterprise funds. Enterprise funds are used to account for operations (i) that are financed and operated in a manner similar to private business enterprises (where the intent of the governing body is that the costs and expenses, including depreciation, of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges), or (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 MGO to include the audited financial statements as an appendix to this Official Statement. Accordingly MGO 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 potable 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. The City also uses some recycled water produced at the City- operated Regional Water Quality Control Plant (“RWQCP”). Over the years, the City has added four additional SFPUC pipeline connections. Additionally, in 2019 the City signed a 76-year agreement with Santa Clara Valley Water (“Valley Water”) and the City of Mountain View (“Mountain View”). The agreement includes Valley Water funding for a salt-removal facility at the RWQCP which will improve the quality of the recycled water. The recycled water is used in the City of Palo Alto for the irrigation of the municipal golf course, a park, and other minor applications. 4931-0398-6599v16/202059-0002 15 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 water supply connections or turnouts from the SFPUC’s Hetch Hetchy system. The distribution system average pressure is 72 pounds per square inch, 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 231 miles of main 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, seven booster pump stations and seven storage reservoirs ranging from 1.0 MG to 4.0 MG (with a total storage capacity of 13 MG). City water is distributed to approximately 24,000 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 (the City of East Palo Alto, Mountain View, Stanford, and Purissima Hills Water District). The City maintains eight groundwater wells, made up of 1 active well and 7 stand-by wells, with a 15.05 MGD capacity to provide near- normal water supply in case of SFPUC water supply interruption. The City also operates several tanks used to moderate pressure and deal with peaks in flow and demand (due to fire suppression, heavy usage times, etc.). The sources of the City’s water 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” (“WSA”), which is a master agreement between the City and County of San Francisco and the 26 Wholesale Customers (the “Wholesale Customers”), 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 “Supply Assurance”) collectively to all of the SFPUC’s 24 permanent Wholesale Customers. The SFPUC has agreed to deliver water to the Wholesale Customers up to the amount of the Supply Assurance, and this agreement is perpetual and survives the expiration of the WSA. The Supply Assurance is, however, subject to reduction due to water shortage, drought, scheduled regional water system (“RWS”) maintenance activities, and emergencies. In 2009, the SFPUC and the Wholesale Customers agreed to maintain the existing allocation methodology that divides the Supply Assurance among the individual Wholesale Customers. Twenty-three of the 24 permanent Wholesale Customers have an “Individual Supply Guarantee” (ISG), which represents their dedicated individual share of the 184 mgd Supply Assurance. The ISGs are also perpetual and survive the expiration of the WSA. Palo Alto’s ISG is 16.575 million gallons per day, or 8,333,000 hundred cubic feet 4931-0398-6599v16/202059-0002 16 (CCF) per year(1). In May 2018, the City’s ISG was lowered to 16.575 million gallons per day from 17.075 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 is debt funded. The total estimated cost of the WSIP, which includes the SFPUC infrastructure to serve the City of San Francisco and its wholesale customers, including inflation and contingencies, is approximately $4.8 billion. The Water Supply Agreement specifies the repayment method and the amount that is to be borne by the wholesale customers (including the City). As of June 30, 2025, 99.3% of the WSIP regional construction contracts are complete. The currently estimated WSIP completion date is June 2032. The City anticipates that purchased water costs will continue to increase due to inflationary increases in operating costs and a gradual increase in debt service. SFPUC wholesale water rates for Fiscal Year 2025-26 were $5.80 per hundred cubic feet. SFPUC held a public hearing on April 28, 2026 and adopted the Fiscal Year 2026-27 Wholesale Water Rate of $6.23 per hundred cubic feet. The SFPUC continues to evaluate its aging system for other needed infrastructure improvements; future major improvements include dam safety and Mountain Tunnel repairs. The wholesale water rates for the past five years are as follows: Fiscal Year Rate per CCF 2021 $4.10 The latest forecast of wholesale water prices from the SFPUC incorporates the expected cost, schedule, and debt payment for the WSIP. San Francisco’s Utilities Advisory Commission voted in April 2026 to pass the recommended 7% increase in water rates, which take effect July 1, 2026. The price forecast is as follows: Fiscal Year Rate per CCF 2027 $6.23 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 the City of East Palo Alto (“East Palo Alto”). These interconnections are available for use in cases of water distribution system emergencies. The City has the following interties with the other agencies: 1 intertie with East Palo Alto 6 inches in diameter, 2 interties with the City of Mountain View 6 inches in diameter, 2 (1) 1 CCF equals 748 gallons. 4931-0398-6599v16/202059-0002 17 interties with Stanford University campus 8 inches in diameter, and 2 interties with Purissima Hills Water Water Allocation Plan. The Water Supply Agreement includes a Water Shortage Allocation Plan (“WSAP”, also known as the “Tier 1 Shortage Plan”). The Tier 1 Shortage Plan describes the method for allocating water from the RWS between the SFPUC’s Retail Customers, on the one hand, and the Wholesale Customers collectively, on the other, during system-wide shortages caused by drought. The Tier 1 Shortage Plan applies only when the SFPUC determines that a system-wide water shortage due to drought exists, as set forth in a declaration of water shortage emergency by the SFPUC Commission. In the absence of such a declaration, the SFPUC also may opt to request voluntary cutbacks from its Retail and Wholesale Customers to achieve water use reductions. The SFPUC and the Wholesale Customers most recently amended the Tier 1 Shortage Plan in 2025. Tier 1 Shortage Plan. The SFPUC allocates water under the Tier 1 Shortage Plan when it determines that the projected available water supply is less than projected system-wide water purchases for the upcoming Supply Year, defined as the period from July 1 through June 30. The following table shows the Retail Customers’ share and the Wholesale Customers’ share of the annual water supply available during shortages depending on the level of system-wide reduction in water use that is required. If the SFPUC determines that the level of system-wide reduction required during a shortage is greater than 20 percent, the SFPUC and the Wholesale Customers will meet to discuss the appropriate Retail and Wholesale Customers’ shares of available water. The Retail and Wholesale Customers’ shares of available water are also known as the Retail and Wholesale Customers’ Tier 1 Allocations. The Wholesale Customers’ Tier 1 Allocation will be apportioned among the individual Wholesale Customers based on a separate methodology, known as the Tier 2 Drought Response Implementation Plan (“Tier 2 Plan”), which is separately adopted by all the Wholesale Customers without the SFPUC’s involvement as discussed further below. Level of System‐Wide Reduction in Water Use Required Share of Available Water SFPUC Share Wholesale Customers Share 5% or less 35.5%64.5% 6% through 10% 11% through 15% 16% through 20% The Tier 1 Shortage Plan allows for voluntary transfers of shortage allocations between the SFPUC and any Wholesale Customer as well as between Wholesale Customers themselves. In addition, voluntary transfers of water “banked” by the SFPUC or a Wholesale Customer, through reductions in usage greater than required, may occur. Under the Tier 1 Shortage Plan, if the Retail Customers’ Tier 1 Allocation results in the Retail Customers receiving a “positive allocation” (i.e., a supply of additional water rather than a required reduction in water use), then the excess percentage for Retail is re-allocated to the Wholesale Customers’ Tier 1 Allocation. The Retail Customers are also required to conserve a minimum of 5% for any level of reduction in system-wide water use. The additional water conserved by Retail Customers up to the minimum 5% level is deemed as remaining in RWS storage for inclusion in the calculation of projected available water in future successive dry years. The Tier 1 Shortage Plan will expire at the end of the term of the WSA in 2034, unless the SFPUC and the Wholesale Customers mutually agree to revise or terminate it prior to that date. Tier 2 Drought Allocations. The Wholesale Customers negotiated and adopted the latest Tier 2 Plan in 2025, which allocates the Wholesale Customers’ Tier 1 Allocations from the Tier 1 Shortage Plan among each of the 26 Wholesale Customers. These Tier 2 Allocations are based on a formula that takes into account multiple 4931-0398-6599v16/202059-0002 18 factors for each Wholesale Customer including residential population, non-residential “base” (i.e., indoor) use, The Tier 2 Plan employs a structured, sequential, five-step method to allocate water to each Wholesale Customer. The allocations are constrained by minimum and maximum cutbacks, which establish the maximum final allocation and minimum guaranteed final allocation, respectively. No agency's final allocation can fall outside of these bounds. The allocation prioritizes indoor uses then allocates the remaining available water based on different customer demands. First focusing on indoor demand, water is allocated based on an agency’s residential population and the State residential efficient indoor standard (47 gallons per person per day (GPCD) in 2025), followed by an allocation based on non-residential “base” (i.e., indoor) use. A limited amount of water is allocated based on seasonal use (e.g., cooling towers and irrigation). Finally, the remaining supply is allocated based on a weighted share of two-thirds RWS purchases in the recent non-drought years and one-third ISG. Upon implementation of the Tier 2 Plan, each Wholesale Customers’ proportion would be expressed as a percentage of the available Tier 1 Allocation (the “Allocation Factor”). The Tier 2 Plan requires that the Allocation Factors be calculated each year in preparation for a potential water shortage emergency. As the Wholesale Customers change their water use characteristics (e.g., increases or decreases in RWS purchases and use of other water sources, changes in monthly water use patterns, or changes in population), the Allocation Factor for each Wholesale Customer will also change. For long-term planning purposes, each Wholesale Customer may use the value identified in the Tier 2 Plan as its Allocation Factor. Emergency Wells. Due to the critical need to ensure sufficient water supplies are provided under emergency conditions, in accordance with City Council direction, the City accelerated the construction of the projects recommended in 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 maintains five existing deep wells, three new wells, a 2.5 million gallon storage reservoir and associated pump station were constructed between 2009 and 2013 as part of an Emergency Water Supply and Storage Project. The primary goal was to correct the deficiency in the City’s emergency water supply. The well system can now support a minimum of eight hours of normal water use at the maximum day demand level and four hours of fire suppression at the design fire duration level. The groundwater system may also be used to a limited extent for water supply during drought conditions (up to 1,500 acre feet per year) and is capable of providing normal wintertime supply needs during extended shutdowns of the SFPUC system. Up to 11,000 gpm of reliable well capacity is available for emergency use as well as 13 million gallons of storage. PFAS. Per- and poly-fluoroalkyl substances (“PFAS”) refers to a group of thousands of human-made chemicals that resist heat, oils, stains and water. They have been widely used in consumer products like nonstick cookware, stain resistant carpets and fabrics, waterproofing clothing, and food packaging. They have also been used in industrial processes and firefighting foams. PFAS are often called “forever chemicals” because they break down very slowly and can accumulate in humans, animals and the environment. PFAS have been found in water, air, and soil worldwide. Perfluorooctanoic acid (“PFOA”) and perfluorooctane sulfonic acid (“PFOS”) are two common PFAS chemicals. The Utilities Department monitors and tests its water supply sources to ensure full compliance with state and federal regulations. The City’s primary source of water is imported from the SFPUC Hetch Hetchy system. SFPUC conducts comprehensive testing for PFAS and other regulated constituents on the drinking water supplied to the City before it enters the local distribution system. The City maintains groundwater wells intended primarily for emergency back-up supply. The Utilities Department actively monitors and samples water from the City’s groundwater wells in accordance with California Division of Drinking Water (DDW) General Order DW-2022-0001-DDW. No PFAS contaminants have been detected in either the primary imported water supply from SFPUC or the City’s supplemental groundwater supply. The water provided by the City fully complies with federal Maximum Contaminant Levels (MCLs) as well as state reporting requirements. Because testing confirms no detectable levels or levels within allowable limits for different PFAS constituents, no additional 4931-0398-6599v16/202059-0002 19 treatment or infrastructure modifications for PFAS mitigation are required at this time. The City will continue Bay Area Water Supply and Conservation Agency (BAWSCA). The City is a member of a regional water district with 26 other entities, the Bay Area Water Supply and Conservation Agency (“BAWSCA”). BAWSCA was created on May 27, 2003 to represent the interests of 24 cities and water districts and two private utilities in Alameda, Santa Clara and San Mateo counties that purchase water on a wholesale basis from the San Francisco regional water system. It has the power to issue debt and plan, finance, construct, and operate water supply, transmission, reclamation, and conservation projects on behalf of its members. BAWSCA’s financial statements can be obtained from BAWSCA, 155 Bovet Road, Suite 650, San Mateo, California 94402. In 2013 the City participated in a debt issuance by BAWSCA. The debt was issued to repay certain long-term costs associated with the SFPUC water supply contract. The City’s share of BAWSCA’s annual debt service was $1.6 million in Fiscal Year 2024-25 and $1.5 million in Fiscal Year 2025-26; the City’s annual financial obligation to BAWSCA varies based on the City’s annual water purchases compared to other BAWSCA agencies. Water Conservation Policies and Procedures The City Council adopts an Urban Water Management Plan (“UWMP”) every five years. The latest update to the UWMP was adopted in June 2026 (the “2025 UWMP”). The 2025 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 six water shortage stages culminating in Stage VI, which is a critical water shortage where water supplies are reduced by more than 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, and modifications of water rate structures or rationing programs. In a water shortage situation, the City would select the appropriate mix of actions to respond to the severity of the water shortage. The City has had extensive experience implementing programs to reduce customer use of water in water shortage situations. In the drought that occurred between 2012 and 2016, the City implemented mandatory restrictions and residents reduced water usage by 30%. This was followed by the drought that occurred in 2020-2023 during which the City reduced water use by 15% in response to voluntary water reductions measures. The most recent droughts have led to sustained reductions in water demand, and the City believes that additional reductions during future droughts are unlikely to be as dramatic as those achieved during the 2015 drought. Water conservation programs are primarily administered by Valley Water. They include landscape audits for both residents and businesses, 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. AMI meters and customer portals provide customers with timely leak alerts and high-usage notifications to reduce water loss. Water Supply Reliability. Since the City relies on the SFPUC RWS for its potable water supplies, the City’s water supply reliability mirrors that of the RWS. During a water supply shortage, contractually agreed upon allocation methods apply in limited circumstances. The amount of water available to San Francisco’s Retail Customers (the residential and commercial customers in the City of San Francisco) and wholesale customers will be impacted by the outcome of the Water Quality Control Plan for the San Francisco Bay/Sacramento-San Joaquin Delta Estuary (Bay Delta Plan Amendment or Bay Delta Plan). The 2025 UWMP assumes the Bay Delta Plan and associated unimpaired flow requirements for the Tuolumne River will be implemented as adopted by the state. Given the City’s forecasted water demand and projections of water supply availability provided by the SFPUC, the City anticipates the need to implement water use reductions of up to 38% in the first dry year post 4931-0398-6599v16/202059-0002 20 Bay Delta Plan implementation. During the drought that occurred in 2012-16 (the “2015 Drought”), the City In 2020, the City completed the One Water Plan, which presents a framework for evaluating water supply and water conservation alternative portfolios that may mitigate the impact of future water supply uncertainties such as severe multi-year drought, changes in climate, water demand, and regulations. The One Water Plan takes into consideration long-term reliability and dry year needs as well as cost, quality, and public acceptance. Short-term emergency water needs will be met with the City’s groundwater wells and storage system, which was recently renovated to provide adequate fire protection following a disaster such as a major earthquake. See “ — Sources of Water Supply — Emergency Wells.” 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 2020-21 through 2026-27 2026-27 2025-26 Adopted 2020-21 2021-22 2022-23 2023-24 2024-25 Wholesale Water Purchases 4,785,384 4,709,184 4,210,399 4,319,814 4,543,561 4,466,055 4,510,198 Source: City of Palo Alto, Utilities Department. 4931-0398-6599v16/202059-0002 21 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 $73 million. The following table displays these projects. The City is currently evaluating whether to rehabilitate or replace two of its reservoir tanks. Rehabilitation of both tanks would cost approximately $5.5 million. Replacement of both tanks would cost approximately $17 million. In the event that the City decides to replace one or both tanks, it may consider bond financing for all or a portion of the project costs. Table 2 WATER SYSTEM WATER SYSTEM CAPITAL IMPROVEMENT PROGRAM SUMMARY Adopted Adopted Adopted Adopted Adopted Project Total Use of Funds Water Fund Administration $ 1,694,824 $ 1,733,372 $ 1,759,453 $ 1,790,832 $ 1,820,056 $ 8,798,537 Water System Customer Connections 0 0 0 0 0 5,450,000 0 530,000 0 0 11,060,000 0 0 590,000 $ 4,366,839 $ 5,450,000 $530,000 $11,060,000 $590,000 $21,996,839 Water Distribution System Improvements $370,000 $520,000 250,000 $250,000 260,000 $ 1,650,000 683,186 500,000 420,290 150,000 1,380,990 100,000 474,520 4,128,986 800,000 500,000 399,270 600,000 2,489,000 550,000 520,000 6,428,270 1,400,000 280,000 308,270 0 1,000,000 8,780,000 400,000 12,468,270 450,000 475,000 840,000 7,780,000 660,000 10,365,000 630,000 2,480,000 TOTAL USES $11,430,649 $14,891,642 $16,077,723 $16,690,832 $14,165,056 $73,255,902 Source of Funds Water System Customer Connections $ 1,573,940 $ 3,101,600 $ 3,141,600 $ 3,181,600 $ 3,211,600 $14,210,340 Transfer from Wastewater Collection Fund 186,400 9,483,909 $11,430,649 194,000 11,402,042 $14,891,642 200,000 12,536,123 $16,077,723 210,800 13,087,632 $16,690,832 222,183 10,509,090 $14,165,056 1,013,383 57,018,796 $73,255,902TOTAL SOURCES Source: City of Palo Alto Utilities Department. 4931-0398-6599v16/202059-0002 22 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 about 55% 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 was implemented on July 1, 2026. The City’s rate structure consists of distribution rates and a commodity rate. The distribution rates are based on the water utility’s cost of service, which are reviewed and approved by the City on an annual basis. The commodity rate is a pass-through of the SFPUC’s wholesale rate. The City has a practice of approving 5-year pass-through provisions for the SFPUC wholesale rate. As previously discussed, SFPUC is projecting annual rate increases for the next five years. Adjustments to the City’s water rates are subject to the noticing and public hearing requirements of Proposition 218. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND WATER RATES AND CHARGES — Articles XIIIC and XIIID; Proposition 218.” Approximately 15% of the Water System’s total revenues come from fixed charges. The following table sets forth proposed and projected water rate increases. Table 3 WATER SYSTEM HISTORIC AND PROPOSED WATER RATE INCREASES FOR ALL CUSTOMER CLASSES(1) Year Increase 2020-21 0% 5 10 (1)The percentages in this table represent overall average rate increases, which include both the City’s distribution rates and Source: City of Palo Alto, Utilities Department. Water Rate Structure. The City has five rate schedules: separately metered residential customers (W-1), commercial and master-metered multi-family residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in buildings and private hydrants (W-3), and service to fire hydrant rental meters used for construction (W-2). All customers pay a monthly service charge based on the size of their inlet meter. This charge represents meter reading, billing, and other customer service costs, and also the cost of maintaining the capability to deliver a peak flow for that customer based on their meter size. All customers are also charged for each CCF (one hundred cubic feet) of water used. Separately metered residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF for a 30-day billing period) charged at the first-tier price per CCF, and all additional units charged a higher tier price per CCF. Commercial customers, including most multi-family customers, pay a uniform price for each CCF used. A separate rate per CCF exists for separately metered irrigation service. 4931-0398-6599v16/202059-0002 23 The following tables set forth the Water System rates for the following: General Residential Water Service, Residential Master-Metered and General Non-Residential Water Service, and Non-Residential Irrigation Water Services. Water Rate Structure (1) monthly service charges, (2) commodity rate, (3) distribution rate and (4) drought surcharges. The rates shown below are per CCF of water usage. General Residential Water Service. The schedule below applies to separately metered single-family residential dwellings receiving water service from the City. Table 4 WATER SYSTEM GENERAL RESIDENTIAL WATER SERVICE In Effect Since July 1, 2026 Monthly Customer Charge Per Meter Per Month Residential: $29.92 96.69 2-inch meter 149.57 317.04 563.87 1,154.44 2,124.06 3,358.10 4,415.87 Per Hundred Volumetric Rates Commodity Rate: Water delivery charge from SFPUC Distribution Rate: $ 6.23 Tier 1 Usage 3.77 Source: City of Palo Alto, Utilities Department. A drought surcharge will be added to the customer’s applicable commodity rate for Tier 1 and Tier 2 Water usage when the City Council has determined that a water reduction level is in effect for the City. The drought surcharges in the table below are measured in dollars per CCF. Water Usage Reduction level Tier 1 Level 1 (10/15%) 0.20 Level 2 0.43 Level 3 0.64 Tier 2 0.58 1.21 1.85 Source: City of Palo Alto, Utilities Department. Temporary unmetered service to residential $6.00 Source: City of Palo Alto, Utilities Department. 4931-0398-6599v16/202059-0002 24 Residential Master-Metered and General Non-Residential Water Service. The schedule below applies to Water Services to non-residential buildings, and multi-family residential dwellings served through a Master- Meter. Table 5 WATER SYSTEM RESIDENTIAL MASTER-METERED AND GENERAL NON-RESIDENTIAL WATER SERVICE In Effect Since July 1, 2026 Monthly Customer Charge Per Meter Per Month 5/8-inch meter $26.16 96.69 149.57 317.04 563.87 1,154.44 2,124.06 3,358.10 4,415.87 Per Hundred Cubic Feet Volumetric Rates Commodity Rate: Water delivery charge from SFPUC Distribution Rate: $6.23 A drought surcharge will be added to the customer’s applicable commodity rate when the City Council has determined that a water reduction level is in effect for the City. The drought surcharges in the table below are measured in dollars per CCF. Water Usage Reduction level Surcharge Level 1 (10/15%) 0.26 Level 2 0.53 Level 3 0.77 Source: City of Palo Alto, Utilities Department. Non-Residential Irrigation Water Services. The schedule below applies to non-residential Water Service supplying dedicated irrigation meters. 4931-0398-6599v16/202059-0002 25 Table 6 WATER SYSTEM NON-RESIDENTIAL IRRIGATION WATER SERVICES In Effect Since July 1, 2026 Monthly Customer Charge 5/8-inch meter $26.16 96.69 149.57 317.04 563.87 1,154.44 2,124.06 3,358.10 4,415.87 Per Hundred Cubic Feet Volumetric Rates Commodity Rate: Water delivery charge from SFPUC Distribution Rate: $6.23 A drought surcharge will be added to the customer’s applicable commodity rate when the City Council has determined that a water reduction level is in effect for the City. The drought surcharges in the table below are measured in dollars per CCF. Water Usage Reduction level Surcharge Level 1 (10/15%) 0.53 Level 2 1.25 Level 3 2.02 Source: City of Palo Alto, Utilities Department. Projected Rates. Beginning in Fiscal Year 2027-28, rates are projected to increase by 9%, 9%, 7% and 6% per year for each of the next four years, respectively. These projected rate increases could change depending on the future projections, and will largely depend on capital projects and restoration of reserves, as well as the future cost 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 9 hundred cubic feet by water suppliers serving neighboring communities for fiscal year 2025-26. 4931-0398-6599v16/202059-0002 26 Table 7 WATER SYSTEM COMPARATIVE RATES FOR AVERAGE MONTHLY RESIDENTIAL SERVICE Average Water Provider Monthly Rate (1) Mountain View Palo Alto $101.14 $125.19 Average excluding Palo Alto $126.76 (1) Represents rate for typical residential users based on consumption of 9 CCF plus a service charge for a 5/8” meter. Water Demand and Customer Base On average, the City’s water customers consume 8.8 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 2024-25, the Water System sold approximately 428.45 million cubic feet of water to approximately 20,600 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 and the estimated number of accounts as of June 30, 2026. Table 8 WATER SYSTEM NUMBER OF ACCOUNTS As of June 30, 2021 through 2025 Fiscal Number of 2020-21 (1) 22,393 (1) Estimated. 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 2024-25. 4931-0398-6599v16/202059-0002 27 Table 9 WATER SYSTEM SUMMARY OF WATER ACCOUNTS AND USAGE BY USER TYPE Fiscal Year 2024-25 Consumption Number of Consumption User Type Billings Single Family Residences 15,589 $24,745,884 1,893,605 44% 14 23 19 100Total Source: City of Palo Alto, Utilities Department. Largest Water Customers. For Fiscal Year 2024-25, total consumption was 4,284,538 CCF, and total operating revenues were $56.5 million. The ten largest customers accounted for approximately 21.32% of total consumption and 20.09% of total operating revenue. The largest customer (other than the City) accounted for 4.24% of total consumption and 2.12% of total operating revenue. Residential customers make up 58% of the Water System consumption. The following table lists the ten largest customers of the Water System for fiscal year 2024-25, in alphabetical order: Table 10 WATER SYSTEM TEN LARGEST CUSTOMERS Fiscal Year 2024-25 Primary Business Activity Name Government City of Palo Alto Financial Services OCA Holdings LLC Palo Alto Hills Golf & Country Club Education Real Estate Medical Apartment/Hotel Technology Source: City of Palo Alto, Utilities Department. 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. The Palo Alto City Council approved the 2018 Utilities Strategic Plan on March 19, 2018. The Strategic Plan provides a road map to guide the CPAU efforts. The four priority focus areas are workforce, collaboration, technology and financial and resource optimization. 4931-0398-6599v16/202059-0002 28 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 $46.7 million in fiscal year 2020-21 to $53.5 million in fiscal year 2024-25. This represents a compound annual growth rate of 3.4% over this period. Annual change in water rates is provided in Table 3. In fiscal years 2025-26 and 2026-27, adopted water rates were of 10% and 8%, respectively, to recover rising wholesale purchase costs and distribution operating and capital costs. Between fiscal year 2027-28 and fiscal year 2030-31, average water rates are projected to increase by 9%, 9%, 7% and 6% annually to fund capital projects and offset rising wholesale water purchase costs. 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 seismic upgrades. See “THE WATER SYSTEM—Capital Improvement Program Summary” above. This includes water main replacements, water tank seismic upgrades and rehabilitation, water system supply improvements, and other critical infrastructure maintenance. Statement of Net Position The following table sets forth the balance sheets of the Water System for fiscal years 2020-21 through 2024-25. These numbers are excerpted from the audited financial statements of the City which were prepared in accordance with generally accepted accounting principles. 4931-0398-6599v16/202059-0002 29 Table 11 WATER SYSTEM STATEMENT OF NET POSITION Fiscal Years Ended June 30, 2021 through 2025 (Dollars in Thousands) 2020-21 2021-22 2022-23 2023-24 2024-25 ASSETS CURRENT ASSETS: $ 46,602 $43,523 $34,369 $26,263 $23,789 6,178 7,277 7,920 -58 2,906 $ 56,372 2,906 52,868 2,813 43,657 2,678 36,454 2,553 34,468TOTAL CURRENT ASSETS $$$ NON-CURRENT ASSETS: 67 ---- Nondepreciable Depreciable, net Total noncurrent assets TOTAL ASSETS 17,926 115,588 133,581 $189,953 17,644 120,209 137,853 24,400 118,378 142,778 22,570 127,244 149,814 25,279 127,826 143,105 $ 190,721 $ 186,435 $ 186,268 $ 187,575 DEFERRED OUTFLOWS OF RESOURCES: $65 2,660 757 $52 2,434 905 $39 4,178 1,248 5,465 $26 3,905 1,631 5,562 $13 3,090 1,262 4,3653,482 3,391 LIABILITIES CURRENT LIABILITIES: $2,175 $5,288 $4,306 $6,024 $1,755 - 40 - - -2,008 2,087 2,172 TOTAL LIABILITIES $4,203 $7,559 $6,739 $8,416 $4,385 NONCURRENT LIABILITIES: $ 16,803 11,564 16,962 17,115 16,242 4,009 - ---15 Long term debt, net of unamortized 26,051 24,083 22,038 19,917 17,707 Total noncurrent liabilities 46,863 $ 51,066 38,194 42,413 40,868 38,063 $$$$ DEFERRED INFLOWS OF RESOURCES: - 802 - 4,072 207 859 1,066 92 509 601 - 228 -TOTAL DEFERRED INFLOWS OF RESOURCES NET POSITION Net Investment in capital assets $105,676 $ 111,567 $ 118,520 $ 127,780 $ 132,412 Debt service Unrestricted (deficit) TOTAL NET POSITION 2,906 32,985 $141,657 2,906 27,827 $ 142,300 2,813 20,349 $ 141,682 2,678 11,487 $ 141,945 2,553 14,297 $ 149,262 Source: City of Palo Alto Comprehensive Annual Financial Statements, 2021-25. 4931-0398-6599v16/202059-0002 30 Historical Operating Results The following table is a summary of operating results and debt service coverage of the Water System for the last five fiscal years. These results have been derived from the audited financial statements of the City for fiscal years 2020-21 through 2024-25. See APPENDIX C—COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2025. 4931-0398-6599v16/202059-0002 31 Table 12 WATER SYSTEM SUMMARY STATEMENT OF HISTORICAL REVENUES, EXPENSES AND CHANGES IN FUND NET POSITIONS Fiscal Years 2020-21 through 2024-25 (Dollars in Thousands) 2020-21 2021-22 2022-23 2023-24 2024-25 OPERATING REVENUES: Sales of Utilities: Customers $ 44,154 $ 40,587 $ 39,823 $ 44,824 $ 51,167 OPERATING EXPENSES: Purchase of Utilities $ 21,935 $ 21,249 $ 21,744 $ 24,651(2) 7,844 $ 27,856(2) 6,689Administration and General 638 1,428 9,121 2,483 652 1,105 8,615 2,244 Depreciation and Amortization 3,930 3,959 $ 50,095 $ 51,120 Operating Income (Loss)$ 6,474 $ 4,189 $492 $44 $ 5,388 NON-OPERATING REVENUES Investment earnings $366 (1,476) $ (2,915)$435 (1,332) $ 2,460 $ 2,009 Capacity Fees Loss on Disposal of Capital Assets (8) 462 (656) (72) 676 $ (3,764) (43) 421 (519) (168) 403 $ 1,444 (57) 395 $ 1,137$$ INCOME (LOSS) BEFORE OPERATING Capital contributions Operating Transfers In Operating Transfers (Out)(4) $ 5,818 (3) $425 123 323 (138) 733 (27) 131 $ 1,488 (3) $ 6,525 (3) - (722) Change in net position $$$263 Net Revenues Available for Debt Service(1)$ 11,251 $ 5,828 $ 4,510 $ 5,612 $ 12,543 2009 Water Revenue Bonds 656 657 658 656 654 Total Debt Service $ 3,219 $ 3,220 $ 3,223 $ 3,220 $ 3,219 Debt Service Coverage 3.50x 1.81x 1.40x 1.74x 3.90x NET POSITION, BEGINNING OF YEAR, AS $141,945 $134,927 $141,567 $142,300 $141,682 [Footnotes appear on following page] 4931-0398-6599v16/202059-0002 32 [Footnotes to Table 12] (1) Depreciation and amortization, unrealized gain and loss on investments, loss on disposal of fixed asset and Interest Expense have been added back. (2) Significant increases due to SFPUC wholesale water rates increasing by 10% in Fiscal Year 2023-24 and 9% in and Fiscal (3) Capital contributions represent capacity fees for new services. For these years, there were larger developments and connections. (4) In general, Operating Transfers (Out) are for (i) centralized costs and (ii) the Water System's cost share of projects led by another utility. The large transfers out in Fiscal Year 2023-24 were due to overcollection and repayment of contribution for Source: City of Palo Alto. Reserves for the Water System The City uses reserves to protect against contingencies and to manage other aspects of its operations and regularly assesses the adequacy of these reserves and the management practices governing their operation. The City’s formal reserve management practices for its Water Utility consist of the following: The Reserve for Commitments is set to an amount equal to the total remaining spending authority for all contracts in force for the Water Utility at the end of each fiscal year. The Reserve for Re-appropriations is set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re-appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090. The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. Staff manages the CIP Reserve according to the following practices: a)The following guideline levels are set forth for the CIP Reserve. These guideline levels are Minimum Level:20% of the maximum CIP Reserve guideline level Average annual (12 month) CIP budget, for 48 months of budgeted b)Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Minimum Level: If, at the end of any fiscal year, the minimum guideline is not met, staff shall d)Maximum Level: If there are funds in this reserve in excess of the maximum level staff must 4931-0398-6599v16/202059-0002 33 ratepayers, or designate a specific use of the funds for CIP investments that will be made by The RSR may be funded by action of the City Council and is intended to help manage the trajectory of future year rate increases. Withdrawal of funds from the RSR requires Council action. If there are funds in the RSR at the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the withdrawal of all funds from this RSR by the end of the next Financial Planning Period. The Council may approve exceptions to this requirement, when proposed by staff to provide greater rate stabilization to customers. The RSR is a separate and distinct fund from the “Rate Stabilization Fund” authorized under the Indenture. The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves described above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth below. Staff manages the Operations Reserve according to the following practices: a)The following guideline levels are set forth for the Operations Reserve. These guideline levels Minimum Level:60 days of O&M and commodity expense 90 days of O&M and commodity expense Maximum Level:120 days of O&M and commodity expense b)If, at the end of any fiscal year, the funds remaining in the Operations Reserve are lower than the minimum level set forth above, staff shall present a plan to the City c)Target Level:If, at the end of any fiscal year, the Operations Reserve is higher or lower than the target level, any Financial Plan created for the Water Utility shall be designed to return the Maximum Level:If, at any time, the Operations Reserve reaches its maximum level, no funds may be added to this reserve. Any further increase in the Water Utility’s Fund Balance The Unassigned Reserve holds any further additions to the Water Utility’s Fund Balance once the Operations Reserve has reached its maximum level. If there are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council must include a plan to assign them to a specific purpose or return them to the Water Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period. For example, if there were funds in the Unassigned Reserves at the end of Fiscal Year 2014-15, and the next Financial Planning Period is Fiscal Year 2015-16 through Fiscal Year 2020-21, the Financial Plan shall include a plan to return or assign any funds in the Unassigned Reserve by the end of Fiscal Year 2015-16. Staff may present an alternative plan that retains these funds or returns them over a longer period of time. 4931-0398-6599v16/202059-0002 34 Approximately $9.1 million was spent on capital projects in Fiscal Year 2023-24, excluding customer connection projects funded by connection fees, the largest of which were water main replacements, AMI water meters, and water regulation station improvements. Additionally, the water fund had large one-time expenses to comply with the federal lead and copper rule and pay for vehicle replacement costs, which reduced net operating cash flow for Fiscal Year 2023-24 and contributed to additional draws on reserves. The table below sets forth actual levels of the Water System Fund Reserves as of June 30 for the last five fiscal years. Table 13 WATER SYSTEM FUND RESERVES 2020-21 2021-22 2022-23 6,961 2023-24 3,500 2024-25 3,500CIP$ 10,707 $ 10,707 $$$ 6,069 4,000 4,000 16,350Operations & Unassigned 20,773 14,420 Total Reserves(1)$ 40,550 $ 34,196 $ 20,988 $ 14,577 $ 23,850 (1) Excludes Reserve for Commitments and Reserve for Re-appropriations. See also APPENDIX C—“COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2025.” As of June 30, 2025, the System had approximately $23.8 million in unrestricted reserve (185 days cash at hand). Additionally, in December 2025, the City engaged Baker Tilly to perform a Utility Reserve Assessment. The assessment was reviewed by City Council on June 15, 2026 and the City anticipates that it will update the Water System’s reserve policies based on recommendations made in the Baker Tilly Utility Reserve Assessment. 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, 2026, through June 30, 2031. 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 reflects growing revenue to fund the expected operating and capital expenses over the next five years. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material. 4931-0398-6599v16/202059-0002 35 Table 14 WATER SYSTEM ESTIMATED AND PROJECTED REVENUES, EXPENSES AND NET REVENUES (Dollars in Thousands) 2025-26(1)2026-27(2)2027-28 2028-29 2029-30 2030-31 OPERATING REVENUES: (3) (4) (5) (6) (7) $57,398 $ 62,364 $ 68,227 $ 73,819 $ 78,264 $ 82,250 $59,119 1,056 377 345 1,778 60,897 $1,077 $1,098 $1,120 $1,143 $1,165 266 1,342 $ 65,449 422 1,520 $ 72,649 444 1,565 $ 78,322 455 1,598 $ 82,837 467 1,632 $ 86,896$ OPERATING EXPENSES (8) (9) 27,610 $ 29,938 $ 32,054 $ 32,788 $ 33,382 $ 34,523 Transfers Out(10)525 538 426 562 513 NON-OPERATING EXPENSES (11)943 51,756 960 $ 55,040 610 $ 57,778 610 $ 59,137 610 $ 60,626 610 $ 62,501$ Net Revenues Available for Debt Service 9,141 $ 10,410 $ 14,871 $ 19,185 $ 22,211 $ 24,395 2009 Water Revenue Bonds 2,563 350 - 1,678 2,028 5.1x ---- 2011 Utility Revenue Refunding Bonds (Water System Portion) 1,950 1,975 2,012 2,043 $3,219 $$1,950 $1,975 $2,012 $2,043 Debt Service Coverage 2.8x Net Revenues After Debt Service $5,922 8,382 $ 12,921 $ 17,210 $ 20,199 $ 22,352 Reserve Balance As of Year End(12) Capital Reserve Operations Reserve RSR 9,000 12,175 4,000 $ 11,000 $ 11,000 $ 11,000 $ 11,000 $ 13,500 Total Reserve Balance 25,176 $ 23,324 $ 29,312 [Footnotes appear on following page] 4931-0398-6599v16/202059-0002 36 [Footnotes to Table 14] (1) [Estimated actual.][to come] (2) [Budgeted.] (3) Sales of water for Fiscal Years 2027-28 through 2030-31 are assumed to increase as a result of rate increases described under Projected Rates” and “—Management Discussion of Operations—Sales Revenues.” [Is consumption projected to remain constant?] (4) Service Connection Charge and Capacity Fees for Fiscal Years 2027-28 through 2030-31 are assumed to _________. (5) Other Operating Revenues and Transfers In includes _____________________. (6) Series 2009 Water Revenue Build America Bonds interest subsidy. (7) Other Transfers In includes _____________________. (8) Purchase of Water for Fiscal Years 2027-28 through 2030-31 is assumed to increase by _____ annually due to _________. (9) Administration and General/Engineering/ Resource Mgmt/O&M for Fiscal Years 2027-28 through 2030-31 is assumed to (10) Transfers Out includes _____________________. (11) Other Transfers Out includes _____________________. (12) See the caption “—Reserves for the Water System.” Source: City of Palo Alto. Retiree Benefit Funding Policy The City has taken strategic steps to address rising pension costs and long-term liabilities; including cost-sharing in labor agreements, implementing State Public Employees’ Pension Reform Act (PEPRA) lower benefit plans; establishing an irrevocable Section 115 Pension Trust (“Pension Trust”); and adopting the Retiree Benefit funding Policy. The Retiree Benefit Funding Policy is an evergreen policy that automatically renews until goals are complete, subject to modification at the City Council’s direction. The policy identifies a path forward for the City to address its pension obligations on an ongoing basis, ensures prudent and proactive financial planning, and avoids significant impacts to service delivery. The Retiree Benefit Funding Policy sets the goals of reaching a 90% funded status level of CalPERS determined liability Fiscal Year 2036 and budgets ‘pay go’ costs, also known as Normal Cost (NC), of annual pension costs at discount rate of 5.3%, more conservative than the CalPERS rate of 6.8%. Retirement System This caption contains certain information relating to the California Public Employees Retirement System (“CalPERS”). The information is primarily derived from information produced by CalPERS, its independent accountants and actuaries. The City has not independently verified the information provided by CalPERS and makes no representations nor expresses any opinion as to the accuracy of the information provided by CalPERS. The annual comprehensive financial reports of CalPERS are available on its Internet website at www.calpers.ca.gov. CalPERS makes its actuarial valuation reports and other information concerning benefits and other matters available on its website. Such information is not incorporated by reference herein. The City cannot guarantee the accuracy of such information. Actuarial assessments are “forward-looking” statements that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Actuarial assessments will change with the future experience of the pension plans. Plan Description. Substantially all qualified permanent and probationary employees are eligible to participate in the Public Agency Cost-Sharing Multiple-Employer Defined Benefit Pension Plan (the “Plan”) administered by the California Public Employees’ Retirement System (the “CalPERS”). The Plan consists of individual rate plans (benefit tiers) within a safety risk pool (police and fire) and a miscellaneous risk pool (all others). Plan assets may be used to pay benefits for any employer rate plan of the safety and miscellaneous pools. Accordingly, rate plans within the safety or miscellaneous pools are not separate plans under GASB 4931-0398-6599v16/202059-0002 37 Statement No. 68. Individual employers may sponsor more than one rate plan in the miscellaneous or safety risk On September 12, 2012, the California Governor signed the California Public Employees’ Pension Reform Act of 2013 (“PEPRA”) into law. PEPRA took effect January 1, 2013. Among other things, PEPRA: (1) established PEPRA which applies to all public employers and public pension plans on and after January 1, 2013 (except specific exemptions); (2) established new retirement tiers/benefits for new public employees; (3) prohibited certain cash payment from being counted as compensation; and (4) increased retirement age for all new public employees. For fiscal year 2026-27, the estimated total employer contribution, as a percent of projected payroll is 82.41% for all employees under the Safety Plan and 37.63% for all employees under the Miscellaneous Plan. Benefits provided. CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of credited service, equal to a fixed percentage of their highest annual salary formula as determined by the benefit program they participate in. Members with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. All members are eligible for non-duty disability benefits after 10 years of service. The death benefit is one of the following: the Basic Death Benefit, the 1957 Survivor Benefit, or the Optional Settlement 2W Death Benefit. The Plans’ provisions and benefits in effect as of June 30, 2026, are summarized in the following table. Contribution rates are based on the Actuarial Valuation Report as of June 30, 2025. Safety Plan Fire Fighters,Fire Fighters, Association, Police Officers Fire Fighters, Fire Chief Association Police Officers, Police Management Association, Police Officers Hire Date (1) Prior to June 8, 2012 On or after June 8, 2012 On or after Dec. 8, 2012 On or after Jan 1, 2013 (1) 3% at 55 5 years service monthly for life 50 3% at 55 5 years service monthly for life 55(1) 3% at 50 5 years service monthly for life 55(1) Monthly benefit as % of eligible compensation 3% 9% 82.41% 3% 9% 82.41% 3% 9% 82.41% 2.7% 11.75% 82.41% Miscellaneous Plan Hire Date Prior to July 17, 2010 (2) (2) On or after July 17, 2010 (2) On or after Jan 1, 2013 (3) 5 years service monthly for life 60(2) 5 years service monthly for life 62(3) Monthly benefit as % of eligible (2) 2.70%2.0% - 2.418%2% Employee contribution rate 8% 37.63% 7% 37.63% 6.25% 37.63% (1)Employees can retire at age 50 with reduced benefits of 2.4% - 2.88% if hired before Jan 1, 2013, or 2.0% - 2.6% if hired on or after Jan 1, Employees can retire at age 52 with reduced benefits of 1.0% - 1.9%. Source: CalPERS Miscellaneous Plan and Safety Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2025. 4931-0398-6599v16/202059-0002 38 Employees Covered. As of the June 30, 2025 actuarial valuation date, the following employees were covered by the benefit terms: Description Miscellaneous Safety Plan Active members 833 1,393 927 172 Inactive employees or beneficiaries currently receiving benefits 3,153 Source: CalPERS Miscellaneous Plan and Safety Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2025. Contributions. Section 20814(c) of the California Public Employees’ Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Funding contributions for the Plan is determined annually on an actuarial basis as of June 30 by CalPERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The City is required to contribute the difference between the actuarially determined rate and the contribution rate of the employees. For the year ending in June 30, 2025, the City’s actuarial determined contributions were $38.3 million and $19.6 million for the Miscellaneous Plan and Safety Plan, respectively. The required employer contribution is comprised of a Normal Cost component and a component equal to an amortized amount of the unfunded liability or annual Unfunded Accrued Liability (“UAL”) Payment. The Normal Cost is the annual cost of service earned by active employees for the upcoming fiscal year, which is expressed as a percentage of payroll. Employer Normal Cost contribution rates may change if plan contracts are amended. PEPRA employees contribute 50% of the base total normal cost established by the plan. The annual UAL Payment is the amortized dollar amount needed to fund past service credit earned (or accrued) for members who are currently receiving benefits, active members, and for members entitled to deferred benefits, as of the valuation date. The UAL Payment is a fixed dollar annual payment that is either billed monthly or at the option of each agency may be paid in a lump sum at the beginning of each fiscal year to achieve a cost savings. The City has historically paid the annual UAL in a lump sum at the beginning of each year. Beginning in fiscal year 2016 for pooled plans, CalPERS began collecting employer contributions for the Plan as a percentage of payroll for the normal cost portion and as a dollar amount for contributions toward the unfunded liability and side fund. According to CalPERS, this change was designed to improve long-term funding stability. For the year ended June 30, 2025, the City’s total required UAL contributions were $31,148,575 for the Miscellaneous Plan and $16,015,933 for the Safety Plan. The City’s required UAL contributions in fiscal year 2025-26 were $31,719,724 for the Miscellaneous Plan and $17,945,551 for the Safety Plan, and the City has made such UAL payments. The City’s required UAL contributions in fiscal year 2026-27 are estimated by CalPERS to be $30,430,626 for the Miscellaneous Plans and $19,668,377 for the Safety Plans. Water System Share of CalPERS Plan. Salary and benefit costs of the Water System include funding of retirement benefits for employees assigned to the Water System who, as City employees, participate in the City’s Miscellaneous CalPERS Plan. City employees assigned to the Water System constitute approximately 4.3% of all City employees and payments made by the City to CalPERS from Revenues amounted to approximately $2,240,089 in Fiscal Year 2024-25, or approximately 3.5% of the City’s total payments to CalPERS in 2024-25. The information under this caption “—Employees’ Retirement Plan – CalPERS” describes the City’s overall Safety and Miscellaneous CalPERS plans; however, only the portion of the Miscellaneous CalPERS plan attributable to City employees assigned to the Water System is payable from Net Revenues. 4931-0398-6599v16/202059-0002 39 The tables below are derived from the City’s Annual Valuation Reports with valuation dates as of June 30, 2025 and delivered in August 2026 (the “2026 Reports”) and show the required and projected employer contributions for the next six fiscal years. Such projections also assume that all actuarial assumptions will be realized and that no further changes to assumptions, contributions, benefits, or funding will occur during the projection period. The projected normal cost percentages in the projections below does not reflect that the normal cost will decline over time as new employees are hired into PEPRA or other lower cost benefit tiers. The projections set forth below assume the investment return for fiscal year 2025-26 and beyond would be 6.8%. CalPERS announced a preliminary investment return of 14.8% for fiscal year 2025-26. As a result, the actual contribution requirements for the following fiscal years shown below may differ from such projections. No assurance can be provided that the City’s CalPERS plan expenses will not increase significantly in the future. Miscellaneous Risk Pool Projected Employer Contribution Required Contribution Projected Future Employer Contributions (Assumes 6.80% Return for fiscal year 2026-27 and Beyond) 2027-28 10.36% $31,091,460 2028-29 10.1% $33,033,000 2029-2030 9.9% $32,426,000 2030-31 9.6% $31,716,000 2031-32 9.4% $29,607,000 2032-33 9.2% $29,134,000 Normal Cost % Total as a % of Payroll 35.65%36.2%34.7%33.3%30.8%29.7% $122,931,042 $126,618,973 $130,417,542 $134,330,069 $138,359,971 $142,510,771 Source: CalPERS Miscellaneous Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2025. Safety Risk Pool Projected Employer Contribution Required Contribution Projected Future Employer Contributions (Assumes 6.80% Return for fiscal year 2026-27 and Beyond) 2027-28 2028-29 2029-30 2030-31 2031-30 2032-33 Normal Cost %19.65%19.0%18.4%17.8%17.2%16.7% $20,286,655 $21,356,000 $21,181,000 $20,959,000 $20,966,000 $20,888,000 Total as a % of Payroll Source: CalPERS Safety Risk Pool Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2025. Net Pension Liability. The City’s net pension liability for the Plan is measured as the proportionate share of the net pension liability. The net pension liability of the Plan is measured as of June 30, 2024, and the total pension liability for the Plan used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2023, rolled forward to June 30, 2024, using standard update procedures. The City’s proportion of the net pension liability was based on a projection of the City’s long-term share of contributions to the pension plan relative to other projected contributions of all participating employers, actuarially determined. Sensitivity of Proportionate Share of the Net Pension Liability to Changes in the Discount Rate. The following presents the City’s proportionate share of the net pension liability for the Plan, calculated using the discount rate for the Plan, as well as what the City’s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower or 1 percentage point higher than the current rate: 4931-0398-6599v16/202059-0002 40 City’s Proportionate Share of 1% Decrease (5.90%) Current Discount Rate (6.90%) 1% Increase (7.90%)(in thousands) Miscellaneous plan $437,682 $294,630 $176,130 Source: CalPERS Miscellaneous Plan and Safety Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2025. Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions. On June 25, 2012, the Governmental Accounting Standards Board approved GASB Statement No. 68 (“GASB 68”) with respect to pension accounting and financial reporting standards for state and local governments and pension plans. GASB 68 states that, for pensions within the scope of the statement, a cost-sharing employer that does not have a special funding situation is required to recognize a net pension liability, deferred outflows of resources, deferred inflows of resources related to pensions, and pension expense based on its proportionate share of the net pension liability for benefits provided through the pension plan. While the accounting standard changed financial statement reporting requirements, they do not impact funding policies of the pension systems. The audited financial statements of the City for fiscal year 2024-25 attached hereto as Appendix C reflect the application of the GASB 68. At June 30, 2025, the City reported deferred outflows of resources and deferred inflows of resources related to pensions for the combined Plans from the following resources: Deferred Outflows Miscellaneous Plan (in thousand) Pension contribution subsequent to measurement date $42,293 9,925 Balance reported as of June 30, 2025 $62,522 Deferred Outflows Safety Plan (in thousand) Pension contribution subsequent to measurement date $22,118 4,883 35,118Balance reported as of June 30, 2025 Source: The City of Palo Alto Audited Financial Statements for Fiscal Years 2024-25. The $64.4 million reported as deferred outflows of resources related to contributions paid by the City from the year ended June 30, 2025, which is subsequent to the measurement date of June 30, 2024 for both the Miscellaneous and Safety Plans. This amount will be recognized as a reduction of the net pension liability in the year ending June 30, 2026. The net differences reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in future pension expenses as follows: 4931-0398-6599v16/202059-0002 41 Deferred Outflows (Inflows) of Resources (in thousands) Year Ending June 30, 2026 2027 2028 2029 Total: $10,721 $ Source: The City of Palo Alto Audited Financial Statements for Fiscal Years 2024-25. Funded Status. The tables below are derived from the 2025 Reports and show the recent history of the actuarial accrued liability, share of the pools’ market value of assets, unfunded accrued liability, funded ratio, and annual covered payroll of the City’s defined benefit pension plan as of the valuation dates shown. Miscellaneous Plan Accrued Unfunded Accrued Liability (UAL) Annual Covered Payroll Fair Value of Assets (FVA) Funded Valuation Date 06/30/2016 $ 730,382,476 $468,702,245 $ 261,680,231 64.2%$ 75,345,962 511,805,893 260,720,776 Source: CalPERS Miscellaneous Plan of the City of Palto Alto Annual Valuation Report as of June 30, 2025. Safety Plan Funding History Accrued Fair Value Unfunded Accrued Liability (UAL) Annual Covered Payroll Valuation Funded 06/30/2016 $392,911,774 $249,886,581 $143,025,193 63.6%$ 21,268,028 Source: CalPERS Safety Risk Pool Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2024. 4931-0398-6599v16/202059-0002 42 Pension Trust In 2017, the City established a Section 115 Pension Trust (“Pension Trust”) to help address the long- term costs of its pension obligations to CalPERS. City Council approved the creation of the Pension Trust following a review of rising employer contribution rates and volatility of CalPERS investment returns, which were expected to increase the City’s unfunded actuarial liability over time. The Pension Trust is administered by Public Agency Retirement Services (PARS). The City elected the PARS Pension trust Balance Index Strategy with an asset mix of equity (50%-70%), fixed income (10% to 30%) and cash (0-20%). For the year ended June 30, 2025, the City’s total contributions to the Pension Trust were $87.4 million. Of this amount, $2.9 million or 3.2% was contributed by the Water Fund. Under the City’s Retiree Benefit Policy, the Pension Trust is intended to maintain a balance equal to approximately one year of required employer contributions, with amounts above that threshold available for transmission to CalPERS to help manage pension costs, reduce unfunded liability, and mitigate future spikes in employer contribution rates. As of June 30, 2025, the Pension Trust balance was approximately $100 million, compared to the fiscal year 2026 required employer contribution of about $70 million, placing the trust above the policy target. Consistent with policy, Council approved use of excess trust funds for transmission to CalPERS, beginning with a $10.0 million Additional Discretionary Payment in fiscal year 2026. Continued implementation of this policy is reflected in the fiscal year 2027 Adopted Budget through a $20.0 million Additional Discretionary Payment and use of the $6.0 million in trust funds to offset the Actuarially Determined Contribution. Savings resulting from these actions are allocated across departments and funds in proportion to their respective contributions to the Pension Trust. Other Post-Employment Benefits Post-Retirement Health Benefits. In addition to providing pension benefits, the City participates in the California Public Employees’ Medical and Healthcare Act program to provide certain health care benefits for retired employees: The City’s Other Post-Employment Benefit plan is an agent multiple-employer defined benefit plan. Employees who retire directly from the City are eligible for retiree health benefits if they retire on or after age 50 with 5 years of service are receiving a monthly pension from CalPERS. Details of benefits to retirees are noted in the following table: The employees covered by the benefit term as of June 30, 2025 includes: 1,047 inactive employees or beneficiaries currently receiving benefits; 94 inactive employees entitled to but not yet receiving benefits; and 94 active employees. The City made benefit payments of $19.4 million in fiscal year 2024-25, $16.8 million in fiscal year 2023-24, $16.3 million in fiscal year 2022-23, and $17.8 million in fiscal year 2021-22. Water System Share of OPEB Plan. Salary and benefit costs of the Water System include funding of other post-employment benefits for employees assigned to the Water System who, as City employees, participate in the City’s OPEB Plan. City employees assigned to the Water System constitute approximately 4.3% of all City employees and payments made by the City pursuant to the OPEB Plan from Revenues amounted to $647,278 in fiscal year 2024-25, or approximately 3.9% of the City’s total OPEB Plan payments in 2024-25. The information under this caption “—Other Post-Employment Benefits” describes the City’s overall OPEB Plan; however, only the portion of the OPEB Plan attributable to City employees assigned to the Water System is payable from Net Revenues. 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 4931-0398-6599v16/202059-0002 43 purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment,” subject to 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 City’s water or wastewater user rates or Capacity Fees were determined by a court to exceed the reasonable cost of providing service, the City 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.” Article XIIIB Article XIIIB of the State 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 2026 Bonds, the City believes that such moneys are not subject to the annual appropriations limit of Article XIIIB. Articles XIIIC and XIIID; Proposition 218 On November 5, 1996, the voters of the State approved Proposition 218, known as the “Right to Vote on Taxes Act” (“Proposition 218”). Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of the local governments to levy and collect both existing and future taxes, assessments, fees, and charges. The City is a local government within the meaning of Articles XIIIC and XIIID. Section 3 of Article XIIIC expressly extended 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 expanded 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 was 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 taxes, assessments or fees and charges imposed prior to November 6, 1996. “Fees” and “charges” were not expressly defined in Article XIIIC or in Senate Bill 919, the Proposition 218 4931-0398-6599v16/202059-0002 44 Omnibus Implementation Act (“SB 919”), which was enacted in 1997 to prescribe specific procedures and Bighorn-Desert View Water Agency v. Verjil (the “Bighorn In the Bighorn Decision, the California Supreme Court stated that nothing in Section 3 of Article XIIIC authorized initiative measures that impose voter-approval requirements for future increases in fees or charges for water delivery. The California Supreme Court stated that water providers 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 California 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 provided that the initiative power provided for in Proposition 218 “will 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. However, no assurance can be given that the City’s voters will not, in the future, approve an initiative which reduces or repeals local taxes, assessments, fees or charges. 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. 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 will not exceed the funds required to provide the property-related service; (ii) such revenues will not be used for any purpose other than that for which the fee or charge was imposed; (iii) the amount of a fee or charge imposed upon any parcel or person as an incident of property ownership will 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. The City believes that it has complied with the requirements of Proposition 218 with respect to the charges that it currently imposes. Such compliance included mailing of notices to affected property owners (and separately, to ratepayers) in connection with rate changes implemented subsequent to the Bighorn Decision. The City expects to continue to comply with the requirements of Proposition 218 with respect to future proposed rate increases. 4931-0398-6599v16/202059-0002 45 In the event that proposed increased rates or charges cannot be imposed as a result of a majority protest or an initiative, such circumstances may adversely affect the ability of the City to generate revenues sufficient to pay the principal of or the interest on the 2026 Bonds. As discussed above, Article XIIIC removes limitations on the initiative power in matters of local taxes, assessments, fees, and charges. In addition, a California court has held that utility rates are not subject to the same constitutional restrictions that are applied to the use of the initiative process for tax measures. Consequently, the voters of the City could, by future initiative, repeal, reduce, or prohibit the future imposition or increase of any local tax, assessment, fee, or charge. While 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, or the Utilities Department’s water rates in such event, the City may set rates to service obligations payable from the Water Revenue Fund, subject to its rate adjustment procedures. Future Initiatives Articles XIIIA, XIIIB, XIIIC, and XIIID of the Constitution were each adopted as measures that qualified for the ballot pursuant to California’s initiative process. The City cannot provide any assurances as to the effect of the implementation or judicial interpretations of such measures on the finances of the City or the Water System. From time to time other initiative measures could be adopted, which may affect the ability of the City to levy and maintain special taxes. CERTAIN INVESTMENT CONSIDERATIONS The ability of the Utilities Department to pay principal of and interest on the 2026 Bonds depends primarily upon the receipt of revenues from the Water System. Some of the events which could prevent the Utilities Department from receiving a sufficient amount of revenues to enable it to pay the principal of and interest on the 2026 Bonds are summarized below. The following description of investment considerations is not intended to be an exhaustive list associated with the purchase of the 2026 Bonds and the order of the investment considerations set forth below does not necessarily reflect the relative importance of the various risks. Special Obligations The 2026 Bonds are special limited obligations of the City payable solely from and secured by a pledge of and lien upon Net Revenues derived by the City Council from the operations of the Water System and certain other funds pledged under the Indenture. Neither the 2026 Bonds nor the obligation to pay principal of or interest thereon constitutes a debt of the City, the State or any of its political subdivisions within the meaning of any Constitutional limitation on indebtedness, or a pledge of the full faith and credit of the City. The 2026 Bonds are not secured by a pledge of the taxing power of the City. See “SECURITY FOR THE 2026 BONDS.” No assurance can be made that revenues of the Water System, estimated or otherwise, will be realized by the Utilities Department in amounts sufficient to pay the principal of and interest on the 2026 Bonds. Among other matters, drought, general and local economic conditions and changes in law and government regulations (including initiatives and moratoriums on growth) could adversely affect the amount of revenues realized by the Utilities Department. In addition, the realization of future revenues is subject to, among other things, the capabilities of management of the Utilities Department, the ability of the Utilities Department to provide water to its customers, and the ability of the Utilities Department to establish, maintain and collect rates and charges sufficient to pay the Operation and Maintenance Costs of the Water System and the principal of and interest on the 2026 Bonds. See “THE WATER SYSTEM — Water Rates, Fees and Charges” herein. 4931-0398-6599v16/202059-0002 46 Reliance on Projections Table 12 in this Official Statement contains certain assumptions and forecasts. The notes following Table 12 should be read for a discussion of certain assumptions and rationale underlying the forecasts. Any forecast is subject to uncertainties. There will usually be differences between actual and forecast results because not all events and circumstances occur as expected, and those differences may be material. Accordingly, the projections contained in Table 12 and elsewhere in the Official Statement, and any projections that may be contained in any future certificate of the City or a consultant, are not necessarily indicative of future performance, and the City does not assume any responsibility for the failure to meet such projections. In addition, certain assumptions with respect to future business and financing decisions of the City are subject to change. No representation is made or intended, nor should any representation be inferred, with respect to the likely existence of any particular future set of facts or circumstances, and prospective purchasers of the 2026 Bonds are cautioned not to place undue reliance upon any projections or requirements for projections. If actual results are less favorable than the results projected, or if the assumptions used in preparing such projections prove to be incorrect, then the amount of Net Revenues may be materially less than expected. Consequently, the ability of the City to make timely payments of the principal of and interest on the 2026 Bonds may be materially adversely affected. Neither the City’s independent auditors nor any other independent accountants have compiled, examined, or performed any procedures with respect to any forecasts or projection contained in the Official Statement. The City’s independent auditors assume no responsibility for, and disclaim any association with, the Water System Net Revenues forecast; they have not expressed any opinion or any form of assurance on such information or its achievability, and they assume no responsibility for, and disclaim any association with, the Water System Net Revenue forecast. See “THE WATER SYSTEM — Projected Operating Results and Debt Service Coverage.” Increasing Water Rates Although the City has covenanted pursuant to the Indenture to fix rates, subject to the approval of the City Council, for service from the Water System, and collect charges for such service, such as to provide revenues that, together with the other available funds of the Utilities Department, will be at least sufficient to pay, as the same become due, the principal of and interest on the 2026 Bonds, in addition to paying, as the same become due, the necessary expenses of operating and maintaining the Water System and all other obligations payable out of the Water Revenue Fund, there can be no assurance that such amounts will be collected in the amounts and at the times necessary to pay the principal of and interest on the 2026 Bonds. Rate-Setting Process Under Proposition 218 The projected operating results in Table 12 assume that rates will be increased each year during the projection period. Proposition 218, which added Articles XIIIC and XIIID to the State Constitution, affects the Utilities Department’s ability to impose future rate increases, and no assurance can be given that future rate increases will not encounter majority protest opposition or be challenged by initiative action authorized under Proposition 218. In the event that future proposed rate increases cannot be imposed as a result of majority protest or initiative, the Utilities Department might thereafter be unable to generate sufficient revenues to pay the principal and interest on the 2026 Bonds. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND WATER RATES AND CHARGES—Articles XIIIC and XIIID; Proposition 218” herein. Notwithstanding the foregoing, the City has covenanted to fix rates and collect charges for water service at a level at least sufficient to meet its debt service requirements, as set forth under “SECURITY FOR THE 2026 BONDS—Rate Covenant” herein. The Projected Operating Results in Table 12 assume that rates will be increased each year during the projection period. The current water rates set by the City and approved by City Council have been imposed in compliance with Proposition 218. 4931-0398-6599v16/202059-0002 47 Statutory and Regulatory Compliance Laws and regulations governing treatment and delivery of drinking water are enacted and promulgated by federal, state and local government agencies. Compliance with laws and regulations governing the treatment and delivery of drinking water may be costly, and, as more stringent standards may be enacted to protect the environment and water quality, these costs will likely increase. Existing conditions, as well as anticipated regulatory requirements, could require significant increases in capital and/or operating costs of the Utilities Department. See “THE WATER SYSTEM—Sources of Water Supply—PFAS.” Claims against the Water System for failure to comply with applicable laws and regulations could be significant. Such claims would be payable from the Water Revenue Fund. In addition to claims by private parties, changes in the scope and standards for public agency water systems such as the Water System also may lead to administrative orders issued by federal or State regulators. Future compliance with such orders can also impose substantial additional costs on the Water Revenue Fund. No assurance can be given that the cost of compliance with such laws, regulations and orders would not adversely affect the ability of the Water System to generate revenues sufficient to pay the principal and interest on the 2026 Bonds. Risks Relating to the Water Supply The Utilities Department’s water supply and the cost thereof are affected by many factors, including but not limited to annual snowpack and rainfall, population growth, water use, groundwater basin quality and recharge trends, federal and State environmental rules and regulations, environmental restoration commitments, water quality, climate change, and area of origin issues. Sustained drought conditions or continued low water levels could adversely affect the Utilities Department’s water supply, impact operational expenses of the Water System and demand for water services from the Water System. Additionally, any natural disaster or other physical calamity, including acts of terrorism, earthquake, earth movements, floods, extreme weather or gradual climate change, may have the effect of reducing water availability, quality and/or distribution capabilities of the Utilities Department, impair the financial stability of the Utilities Department, affect infrastructure and other public improvements and private improvements and the continued habitability and enjoyment of such private improvements thus affecting revenues of the Utilities Department through damage to the Water System and to the economy of the surrounding area. Drought Risks. The ability of the Water System to operate effectively is affected by the water supply available to the Utilities Department. If the water supply decreases significantly, whether by drought, operation of mandatory supply restrictions, prohibitively high water costs or otherwise, Enterprise sales will diminish and revenues available to pay the debt service on the 2026 Bonds, may be adversely affected. See “THE WATER SYSTEM—Sources of Water Supply.” Future droughts could again result in reduced deliveries of water to the Utilities Department and mandatorily enforced conservation measures and other mitigations, that could have a material adverse impact on the revenues of the Water System available to pay the debt service on the 2026 Bonds. Reliance on Water Purchased from the SFPUC. Since 1962, the City began supplying 100% of its potable water from the SFPUC. In Fiscal Year 2025, water deliveries from the SFPUC constituted 100% of the Utilities Department’s total potable water supply. The Utilities Department expects to continue to purchase 100% of its potable water from the SFPUC in an average year. Material reductions in the amount of water delivered from the SFPUC to the Utilities Department may adversely affect the operations and finances of the Water System. See “THE WATER SYSTEM—Sources of Water Supply” herein and “— Environmental Rules and Regulations” below. Environmental Rules and Regulations. Various federal and State rules and regulations and court decisions have affected and will continue to affect the amount of water available to the Utilities Department. The Utilities Department cannot predict if future federal and State rules and regulations will be enacted or if 4931-0398-6599v16/202059-0002 48 future court decisions will further restrict water deliveries to the Utilities Department and what affect such Climate Change. One of the factors that may pose a risk to the future availability of water in the City is climate change. Rising temperatures could result in earlier runoff and cause California’s rivers to carry a heavier flow of water. This could possibly trigger floods which would place pressure on California levees. Rising sea levels may further impact hydrology including, without limitation, the salinity levels in estuaries such as northern California’s Bay-Delta region. Such conditions may lead to the failure of levees and consequently the disruption of water flow throughout California’s various water systems. Rising temperatures may also result in decreased precipitation levels that could amplify the effects of drought conditions on water supply. Finally, rising temperatures may cause a reduction in the Sierra Nevada snowpack, a major source of water in California, and may result in reduced water deliveries. The Utilities Department is unable to predict whether or when any such conditions may occur or their impact on the Utilities Department. While the Utilities Department seeks to better understand the potential impact that climate change may have on its water supply, efforts are underway to develop water resources and implement efficient water management strategies that will create a sustainable source of future water supply for the City. Above-Normal Precipitation. Just as too little water can negatively affect the revenues of the Water System, above-normal precipitation also can negatively affect the revenues of the Water System. In years where the City receives above-normal levels of precipitation, the residents of the City do not need to purchase as much water which can lead to reduced enterprise revenues. Seismic Activity. The City, like much of California, is subject to seismic activity that could result in interference with operation of the Water System. 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 Water System during its 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 Water System resulting in a temporary reduction in the amount of Net Revenues available to pay the principal of and interest on the 2026 Bonds when due. Security of the Water System. Military conflicts and terrorist activities may adversely impact the operations and finances of the Water System. All critical sites are equipped with video surveillance and perimeter intrusion detection systems. These physical protection systems are monitored continuously in the Utilities Department’s control room. The Utilities Department’s emergency response plan is reviewed annually and updated as needed. The Utilities Department also regularly participates in exercises designed to test the ability to prepare for, respond to, recover from and mitigate the impacts of natural, man-made and technological disasters. Although the Utilities Department actively maintains these safeguards, no assurance can be given that existing or additional safety and security measures will prove adequate in the event that terrorist activities are directed against the Water System to prevent a disruption of the Utilities Department’s ability to deliver water to its customers. SFPUC, the supplier of 100% of the City’s potable water, has also taken actions to increase the security of its water facilities. The safety of SFPUC’s water enterprise is maintained through a combination of regular inspections by SFPUC employees, electronic monitoring, and analysis of unusual incident reports. Most above- ground facilities operated and maintained by the SFPUC are controlled-access facilities with fencing, gates, closed circuit television systems and security officers at certain points. Smaller, above-ground and subterranean pumping stations operated and maintained by the SFPUC are locked with padlock or internal locking mechanisms, and most are monitored via access/intrusion alarms. Security improvements are evaluated on an ongoing basis. The electronic operations and controls have been evaluated and designed to reduce exposure using a series of technology systems enhancements and integration. 4931-0398-6599v16/202059-0002 49 Costs of Capital Improvement Program As described herein, the Utilities Department’s CIP with respect to the Water System includes water and recycled water projects expecting to cost approximately $73.3 million between fiscal year 2027 and 2031, with annual costs ranging from approximately $11.4 million to approximately $16.7 million. The City may finance a portion of such projects as described in Table 2 under the caption “THE WATER SYSTEM—Capital Improvement Program Summary.” The actual cost of constructing the various components of the capital improvements to the Water System will depend on a variety of factors, including but not limited to potential rising costs or shortages of labor or materials, the discovery of unforeseen subsurface conditions, earthquake, flood or other natural disasters, severe weather conditions, access to the financial markets or other events outside of the control of the Utilities Department. There can be no assurance that costs for construction of the capital improvements to the Water System will not significantly exceed the amounts projected by the Utilities Department. Cybersecurity The City relies on computers and technology to conduct City operations, including operations of the Utilities Department. As with any public sector agency, the City continually faces cyber threats including, but not limited to, hacking, viruses, malware and other attacks on City technology assets. The City maintains an active cybersecurity program which provides guidelines for proper use of its network and systems by City employees. The City coordinates with the City’s IT to comply with cybersecurity protocols which includes stationing servers on-premise and an air-gapped environment with no internet access. The City also hires a SCADA Cyber Security Red Team. The City maintains multi-layer VPN, DMZ, and firewalls while also limiting access to their servers. Protection protocols also include manual override mode and disaster recovery program. The City also employes the Department of Homeland Security to conduct third-party tests on their networks. All City employees are required to participate in annual cybersecurity education and awareness training. The City requires VPN and two-factor authentication for employees. Notwithstanding the City’s cybersecurity efforts, there can be no assurances that future cybersecurity incident will not materially adversely impact the City, including the Utilities Department. Limitations on Remedies Upon the occurrence and continuance of an event of default under the Indenture, the owners of the 2026 Bonds have limited remedies. Enforceability of the rights and remedies of the owners of the 2026 Bonds, and the obligations incurred by the City, may become subject to the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditor’s rights generally, now or hereafter in effect, equity principles which may limit the specific enforcement under State law of certain remedies, the exercise by the United States of America of the powers delegated to it by the Constitution, the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate public purpose, and the limitations on remedies against counties in the State. Bankruptcy proceedings, or the exercise of powers by the Federal or State government, if initiated, could subject the owners of the 2026 Bonds to judicial discretion and interpretation of their rights in bankruptcy or otherwise and consequently may entail risks of delay, limitation, or modification of their rights. The opinion to be delivered by Bond Counsel concurrently with the issuance of the 2026 Bonds will be subject to such limitations, and the various other legal opinions to be delivered concurrently with the issuance of the 2026 Bonds will be similarly qualified. See Appendix D. 4931-0398-6599v16/202059-0002 50 LITIGATION Absence of Litigation At the time of delivery of and payment for the 2026 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 2026 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 2026 Bonds, or in any way contesting or affecting the validity or enforceability of the 2026 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 2026 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 2026 Bonds or any action of the City contemplated by any of those documents. CERTAIN LEGAL MATTERS The validity of the 2026 Bonds and certain other legal matters are subject to the approving opinion of Jones Hall LLP, Bond Counsel to the City. A complete copy of the proposed form of Bond Counsel’s opinion is contained in Appendix D attached hereto. Bond Counsel has not undertaken any responsibility for the accuracy, completeness or fairness of this Official Statement or other offering materials relating to the 2026 Bonds and expresses no opinion relating thereto. Certain legal matters in connection with the 2026 Bonds will be passed upon for the City by the Office of the City Attorney of the City. Certain legal matters in connection with this Official Statement will be passed upon for the City by Stradling Yocca Carlson & Rauth LLP, Disclosure Counsel to the City. All of the fees of Bond Counsel and Disclosure Counsel with regard to the issuance of the 2026 Bonds are contingent upon the issuance and delivery of the 2026 Bonds. TAX MATTERS Federal Tax Status In the opinion of Jones Hall LLP, San Mateo, California, Bond Counsel, subject, however to the qualifications set forth below, under existing law, the interest on the 2026 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. Interest on the 2026 Bonds may be subject to the corporate alternative minimum tax. The opinions set forth in the preceding paragraph are subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended (the “Tax Code”) that must be satisfied subsequent to the issuance of the 2026 Bonds in order that the interest thereon be, and continue to be, excludable from gross income for federal income tax purposes. The City has made certain representations and covenants in order to comply with each such requirement. Inaccuracy of those representations, or failure to comply with certain of those covenants, may cause the inclusion of such interest in gross income for federal income tax purposes, which may be retroactive to the date of issuance of the 2026 Bonds. Tax Treatment of Original Issue Discount and Premium If the initial offering price to the public at which a 2026 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 at which a 2026 Bond is sold is greater than the amount payable at maturity thereof, then such difference constitutes “bond premium” for purposes of federal income taxes and State of California personal income taxes. 4931-0398-6599v16/202059-0002 51 Under the Tax 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 2026 Bond on the basis of a constant interest rate compounded on each interest or principal payment date (with straight-line interpolations between compounding dates). The amount of original issue discount accruing during each period is added to the adjusted basis of such 2026 Bonds to determine taxable gain upon disposition (including sale, redemption, or payment on maturity) of such 2026 Bond. The Tax Code contains certain provisions relating to the accrual of original issue discount in the case of purchasers of the 2026 Bonds who purchase the 2026 Bonds after the initial offering of a substantial amount of such maturity. Owners of such 2026 Bonds should consult their own tax advisors with respect to the tax consequences of ownership of 2026 Bonds with original issue discount, including the treatment of purchasers who do not purchase in the original offering to the public at the first price at which a substantial amount of such 2026 Bonds is sold to the public. Under the Tax Code, bond premium is amortized on an annual basis over the term of the 2026 Bond (said term being the shorter of the 2026 Bond’s maturity date or its call date). The amount of bond premium amortized each year reduces the adjusted basis of the owner of the 2026 Bond for purposes of determining taxable gain or loss upon disposition. The amount of bond premium on a 2026 Bond is amortized each year over the term to maturity of the 2026 Bond on the basis of a constant interest rate compounded on each interest or principal payment date (with straight-line interpolations between compounding dates). Amortized 2026 Bond premium is not deductible for federal income tax purposes. Owners of premium 2026 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 2026 Bonds. California Tax Status In the further opinion of Bond Counsel, interest on the 2026 Bonds is exempt from California personal income taxes. Other Tax Considerations Current and future legislative proposals, if enacted into law, clarification of the Tax Code or court decisions may cause interest on the 2026 Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent beneficial owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such legislative proposals, clarification of the Tax Code or court decisions may also affect the market price for, or marketability of, the 2026 Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, such legislation would apply to bonds issued prior to enactment. The opinions expressed by Bond Counsel are based upon existing legislation and regulations as interpreted by relevant judicial and regulatory authorities as of the date of such opinion, and Bond Counsel has expressed no opinion with respect to any proposed legislation or as to the tax treatment of interest on the 2026 Bonds, or as to the consequences of owning or receiving interest on the 2026 Bonds, as of any future date. Prospective purchasers of the 2026 Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. Owners of the 2026 Bonds should also be aware that the ownership or disposition of, or the accrual or receipt of interest on, the 2026 Bonds may have federal or state tax consequences other than as described above. Other than as expressly described above, Bond Counsel expresses no opinion regarding other federal or state tax consequences arising with respect to the 2026 Bonds, the ownership, sale or disposition of the 2026 Bonds, or the amount, accrual or receipt of interest on the 2026 Bonds. The form of Bond Counsel’s opinion to be delivered on the Closing Date is attached hereto as Appendix D. 4931-0398-6599v16/202059-0002 52 RATING S&P Global Ratings (“S&P”), has assigned the 2026 Bonds a rating of “AAA.” Such credit rating reflects only the view of such organization and any desired explanation of the meaning and significance of such credit rating, including the methodology used and any outlook thereon, should be obtained from S&P. Generally, a rating agency bases its credit rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance that the rating will remain in effect for any given period of time or that any such rating will not be revised, either downward or upward, or withdrawn entirely, or a positive, negative or stable outlook announced, if, in its judgment, circumstances so warrant. Any downward revision or withdrawal or announcement of negative outlook could have an adverse effect on the market price of the 2026 Bonds. Maintenance of the rating will require periodic review of current financial data and other updating information by S&P. CONTINUING DISCLOSURE At the time of issuance of the 2026 Bonds, the City will execute a Continuing Disclosure Certificate (the “Continuing Disclosure Certificate”), which will provide for disclosure obligations on the part of the City. Under the Continuing Disclosure Certificate, the City will covenant for the benefit of Owners and Beneficial Owners of the 2026 Bonds to provide certain financial information and operating data relating to the City and the Water System by not later than each March 31 following the end of the City’s fiscal year (which ends on June 30), commencing with the report for the 2025-26 Fiscal Year (the “Annual Reports”), and to provide notices of the occurrence of certain enumerated events (the “Listed Events”). The Annual Reports and the notices of Listed Events will be filed with the MSRB through its EMMA System. Currently the City’s Annual Report is filed as part of the City’s required continuing disclosure filings. See “APPENDIX F—FORM OF CONTINUING DISCLOSURE CERTIFICATE.” These covenants will be made in order to assist the Underwriter for the 2026 Bonds in complying with Rule 15c2-12. Within the last five years, the City has not failed to comply in any material respect with its continuing disclosure obligations under Rule 15c2-12. UNDERWRITING The 2026 Bonds were sold at a competitive sale on _________, 2026. The 2026 Bonds were awarded to __________ (the “Underwriter”). The Underwriter has agreed, subject to certain conditions, to purchase all of the 2026 Bonds at a price of $__________ (which amount represents the principal amount of the 2026 Bonds, plus a net original issue premium of $__________, less an underwriter’s discount of $__________). The Underwriter may offer and sell the 2026 Bonds to certain dealers and others at prices lower than the offering prices stated on the inside cover page hereof. MUNICIPAL ADVISOR PFM Financial Advisors LLC (the “Municipal Advisor”) has assisted the City with various matters relating to the planning, structuring and delivery of the 2026 Bonds. The Municipal Advisor has not been engaged, nor have they undertaken, to make an independent verification or assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. The Municipal Advisor is an independent municipal advisory firm and is not engaged in the business of underwriting or distributing municipal securities or other public securities. INDEPENDENT AUDITORS The financial statements of the Water System as of June 30, 2025 are included in this Official Statement as Appendix A. These financial statements have been audited by Macias, Gini & O’Connell LLP, Certified Public Accountants (“MGO”), as stated in their report appearing therein. MGO was not requested to consent to 4931-0398-6599v16/202059-0002 53 the inclusion of its report in Appendix A and it has not undertaken to update its report or to take any action 4931-0398-6599v16/202059-0002 54 MISCELLANEOUS The covenants and agreements of the City for the benefit of the Owners of the 2026 Bonds are set forth in the Indenture, and reference is made to the Indenture for a statement of the rights of the Owners of the 2026 Bonds and the covenants and obligations of the City. All references to the 2026 Bonds are qualified in their entirety to the definitive form thereof and the information with respect thereto included in the Indenture. This Official Statement is not a contract with the Owners of any of the 2026 Bonds. The summaries of and references to all documents, statutes, reports and other instruments referred to herein do not purport to be complete, comprehensive, or definitive and each such summary and reference is qualified in its entirety by reference to each document, statute, report, or instrument. The capitalization of any word not conventionally capitalized, or otherwise defined herein, indicates that such word is defined in a particular agreement or other document and, as used herein, has the meaning given it in such agreement or document. Any statements in this Official Statement involving matters of opinion and all estimates, whether or not expressly so stated, are intended as such and not as representations of facts and are not to be construed as representations that they will be realized. The City Council of the City has authorized the execution and delivery of this Official Statement by an authorized signatory of the City. CITY OF PALO ALTO By Director of Administrative Services 4931-0398-6599v16/202059-0002 55 APPENDIX A ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR 4931-0398-6599v16/202059-0002 A-1 APPENDIX B DEMOGRAPHIC 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 population of approximately 69,004 as of January 1, 2026. It is part of 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 seven 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. 4931-0398-6599v16/202059-0002 B-1 Population The following table shows a historical comparison of the respective populations of the City, the County and the State of California since 1990. CITY OF PALO ALTO, SANTA CLARA COUNTY, AND STATE OF CALIFORNIA City of Palo Alto 55,900 58,598 64,403 65,260 66,172 67,145 67,494 67,880 68,526 68,820 68,607 68,392 68,253 67,802 67,573 68,078 68,280 68,919 69,004 Percent Santa Clara Percent State of Percent Year California 1,497,577 4.8 1.3 1.5 1.5 1.2 1.2 0.8 0.4 0.3 0.01 -0.02 -1.3 -1.0 0.8 0.4 0.7 0.2 0.9 0.4 -0.3 0.1 -0.4 Sources: U.S. Department of Commerce, Bureau of the Census (1990 and 2000); State of California, Department of Finance, E-4 Assessed Valuations The following table provides a five-year record of assessed valuations for the City. CITY OF PALO ALTO ASSESSED VALUATIONS OF TAXABLE PROPERTY 2020-21 through 2024-25 (In Thousands) Fiscal Secured Valuation (Net of Exemptions) 46,933,430 Public Unsecured Total Assessed 2020-21 42,353,926 49,086,493 Source: City of Palo Alto, Annual Comprehensive Financial Report 2024-25. 4931-0398-6599v16/202059-0002 B-2 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 TEN LARGEST PROPERTY OWNERS Fiscal Year ending June 30, 2025 (In Thousands) Assessed Company Leland Stanford Jr University Google Inc. Property Valuation ARE-San Francisco 80 LLC 312,011 Park Village Peninsula LLC 130,744 SI 45 LLC 89,941 Source: City of Palo Alto, Annual Comprehensive Financial Report 2024-25. 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 the following: 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, 2025, are as follows: CITY OF PALO ALTO TEN LARGEST EMPLOYERS Fiscal Year ending June 30, 2025 Employer Stanford (University and Healthcare) Broadcom Inc. (VMware Inc) Varian Medical Systems Hewlett-Packard Company Veteran's Affairs Palo Alto Health Care System Wilson Sonsini Goodrich Rosati City of Palo Alto Number of Employees 18,000 Roche Palo Alto 714 Source: ReferenceUSA.com & Palo Alto Weekly, as published in City of Palo Alto Annual Comprehensive Financial Report 2025-25. 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. 4931-0398-6599v16/202059-0002 B-3 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 2021 through 2025. According to the California Employment Development Department, the County’s unemployment rate was 4.2% in 2024, down from 5.0% in 2021. The following table sets forth certain information regarding employment in the San Jose-Sunnyvale-Santa Clara MSA from calendar year 2021 through 2024, as well as certain information for calendar year 2025 as of March 2025. 4931-0398-6599v16/202059-0002 B-4 SAN JOSE-SUNNYVALE-SANTA CLARA MSA (San Benito and Santa Clara Counties) INDUSTRY EMPLOYMENT & LABOR FORCE - BY ANNUAL AVERAGE March 2025 Benchmark 2021 2022 2023 2024 2025 Civilian Labor Force 1,020,000 1,043,000 1,056,200 1,057,600 N/A 5.0%2.9%3.6%4.2% Total Farm 5,000 1,097,700 177,500 51,900 4,800 1,151,000 187,100 54,000 4,700 1,154,100 185,200 54,100 4,900 1,150,600 179,800 53,400 5,000 1,158,200 51,700 53,800 53,900 53,200 52,500 Manufacturing 125,700 133,200 131,100 126,400 127,500 37,800 36,700 36,700 290,400 282,800 277,200 22,800 25,400 Government 93,300 95,800 98,200 100,400 101,700 1,102,800 1,155,800 1,158,800 1,155,500 1,163,100Total All Industries(1) (1)Totals may not add due to independent rounding. Source: California Employment Development Department, Labor Market Information Division. CITY OF PALO ALTO AVERAGE ANNUAL CIVILIAN LABOR FORCE EMPLOYMENT AND UNEMPLOYMENT Calendar Years 2019-2023 Unemployment Year 2019 2020 2021 2022 Labor Force Employment Number Rate 700 32,000 1,400 2023(1)33,300 32,200 1,100 3.2 (1)Most recent available reported data. Source: California Employment Development Department. 4931-0398-6599v16/202059-0002 B-5 Construction Activity The following table reflects the history of building permit valuation for the City from 2020 to 2024. CITY OF PALO ALTO BUILDING PERMITS AND VALUATION (Dollars in Thousands) 2020 2021 2022 2023 2024 Valuation $87,620 $76,007 $94,879 $ 172,367 $ 139,375 $ 117,898 $ 136,818 $ 181,045 Units Single Family 68 114 133 49 208 257 57 125 182 Note:Totals may not add due to independent rounding. Source: Construction Industry Research Board: “Building Permit Summary.” Personal Income The following table sets forth certain yearly median household income for the City, the County, the State of California, the United States. The median residential bill representing only 0.66% of median household income. CITY OF PALO ALTO, COUNTY OF SANTA CLARA, Santa Clara Year Palo Alto County California United States 2020 174,003 130,890 78,672 84,907 91,551 95,521 100,149 64,994 Source: U.S. Census Bureau, American Community Survey (ACS) Commercial Activity Taxable sales in the City of Palo Alto exceed $2.3 billion annually. The following summary shows the annual volume of taxable sales within the City since 2021. During 2025, retail sales totaled $1,806,145 and total taxable sales reached $2,610,627. 4931-0398-6599v16/202059-0002 B-6 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 2025. CITY OF PALO ALTO TAXABLE TRANSACTIONS ($000s) 2021 2022 2023 2024 2025 Building Material and Garden Equipment and 19,998 19,113 21,913 43,415 49,854 Clothing and Clothing Accessories Stores 290,294 308,260 346,577 358,174 419,057 General Merchandise Stores 108,223 122,250 128,349 141,114 151,199 296,978 142,329 1,123,428 1,332,076 2,455,505 221,805 136,738 1,418,888 1,407,710 2,826,599 213,841 133,214 1,511,650 1,476,578 2,988,228 220,801 135,560 1,350,629 1,564,822 2,915,452 354,514 128,687 804,481 1,806,145 2,610,627 Source: California Department of Tax and Fee Administration. Transportation The City is served by the Bayshore Freeway (U.S. Highway 101), which runs southeast from San Francisco to Los Angeles and is the major freeway connecting San Francisco and San Jose; Highway 84 - the Dumbarton Bridge and Highway 92, the Hayward-San Mateo Bridge; and Interstate 280, which runs north/south to San Francisco and State Highway 82. These freeways link the City to all parts of northern California. Air transportation is available at both the San Francisco International Airport, approximately 40 miles to the north, and the San Jose Airport, approximately 20 miles to the south. Rail service is provided by Union Pacific Railroad, on a north/south track linking San Jose and San Francisco, and Cal Train commuter service to Gilroy and San Francisco. Within the City, commuter rail transportation is conveniently located and the Palo Alto stop is one of the most used in the CalTrain system. Alternative transportation options include numerous bike paths throughout the City and an internal shuttle service is also available. 4931-0398-6599v16/202059-0002 B-7 APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE OF TRUST 4931-0398-6599v16/202059-0002 C-1 APPENDIX D PROPOSED FORM OF BOND COUNSEL OPINION ____, 2026 City of Palo Alto OPINION:$______ City of Palo Alto Water Revenue Refunding Bonds, 2026 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 captioned bonds (the “Bonds”) under (i) Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, (ii) an Indenture of Trust dated as of October 1, 2026, by and between the City and U.S. Bank Trust Company, National Association, as trustee (the “Indenture”), and (iii) a resolution of the City Council of the City adopted on [September 14], 2026. In such capacity, we have examined such law and such certified proceedings, opinions, certifications and other documents as we deem necessary to render this opinion. Regarding questions of fact material to our opinion, we have relied on representations of the City contained in the Indenture, and in the certified proceedings and other certifications of public officials furnished to us, without undertaking to verify the same by independent investigation. Regarding certain questions of law material to our opinion, we have assumed the correctness of certain legal conclusions contained in the written opinions of the City Attorney, and others, without undertaking to verify the same by independent investigation. Based upon the foregoing, we are of the opinion, under existing law, that: 1.The City is a duly created and validly existing municipal corporation and chartered city with the power to enter into the Indenture and to perform the agreements on its part contained therein. 2.The Indenture has been duly authorized, executed and delivered by the City, and is valid, binding and enforceable against the City in accordance with its terms. 3.The Indenture creates a valid lien on the Net Revenues of the Water System (as such terms are defined in the Indenture) and other funds pledged by the Indenture for the security of the Bonds on a parity basis 4.The Bonds have been duly authorized and executed by the City and constitute valid and binding special obligations of the City, payable solely from Net Revenues of the Water System (as such terms are defined 5.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. It should be noted however 4931-0398-6599v16/202059-0002 D-1 that interest on the Bonds may be subject to the corporate alternative minimum tax. The opinions set forth in 6. The interest on the Bonds is exempt from personal income taxation imposed by the State of California. We express no opinion regarding any other tax consequences arising with respect to the ownership, sale or disposition of, or the amount, accrual or receipt of interest on, the Bonds. The rights of the owners of the Bonds and the enforceability of the Bonds and the Indenture are limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally, and by equitable principles, whether considered at law or in equity. This opinion is given as of the date hereof, and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention, or any changes in law that may hereafter occur. Moreover, our opinions are not a guarantee of a particular result, and are not binding on the Internal Revenue Service or the courts; rather, our opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions, and any assumptions expressed herein, and in reliance upon the representations, covenants and opinions referenced above. Our engagement with respect to this matter has terminated as of the date hereof. Respectfully submitted, 4931-0398-6599v16/202059-0002 D-2 APPENDIX E DTC AND THE BOOK-ENTRY-ONLY SYSTEM The description that follows of the procedures and record keeping with respect to beneficial ownership interests in the 2026 Bonds, payments of principal, premium, if any, and interest on the 2026 Bonds to DTC, its nominee, Participants, or Beneficial Owners, confirmation and transfer of beneficial ownership interests in the 2026 Bonds and other bond-related transactions by and between DTC, Participants and Beneficial Owners is based solely on information furnished by DTC. The City cannot and does not give any assurances that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners either (a) payments of interest, principal or premium, if any, with respect to the 2026 Bonds, or (b) certificates representing ownership interest in or other confirmation of ownership interest in the 2026 Bonds, or that they will so do on a timely basis or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Official Statement. The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are on file with DTC. The Depository Trust Company (“DTC”) will act as securities depository for the 2026 Bonds. The 2026 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 2026 Bond certificate will be issued for each maturity of each Series of the 2026 Bonds, each in the aggregate principal amount of such Series and maturity and will be deposited with DTC. DTC, the world’s largest securities depository, is a limited purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of the Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. The information on such website is not incorporated into this Official Statement. Purchases of the 2026 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for such 2026 Bonds on DTC’s records. The ownership interest of each actual purchaser of each 2026 Bond (the “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 2026 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 2026 Bonds, except in the event that use of the book-entry system for the 2026 Bonds is discontinued. 4931-0398-6599v16/202059-0002 E-1 To facilitate subsequent transfers, all 2026 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 2026 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2026 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such 2026 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. So long as a book-entry system is used for determining beneficial ownership of the 2026 Bonds, the Trustee is to send redemption notice to DTC or to Cede & Co., as partnership nominee for DTC. Any failure of DTC to advise any Participant, or of any Direct Participant or Indirect Participant to notify the actual purchaser of each 2026 Bond, or any such notice of its content or effect does not affect the validity of the redemption of the 2026 Bonds called for redemption or any other action premised on that notice. In the event of a call for optional redemption, the City’s notification to DTC initiates DTC’s standard call; and if a partial call, DTC’s practice is to determine by lot the amount of the interest of each Participant in the 2026 Bonds to be redeemed, and each such Participant then selects by lot the ownership interest in such 2026 Bonds to be redeemed. When DTC and its Participants allocate the call, the Beneficial Owners of the book-entry interests called are to be notified by the broker or other organization responsible for maintaining the records of those interests and subsequently credited by that organization with the proceeds once the 2026 Bonds are redeemed. THE TRUSTEE, AS LONG AS A BOOK-ENTRY ONLY SYSTEM IS USED FOR THE 2026 BONDS, WILL SEND ANY NOTICE OF REDEMPTION OR OTHER NOTICES ONLY TO DTC. ANY FAILURE OF DTC TO ADVISE ANY PARTICIPANT, OR OF ANY PARTICIPANT TO NOTIFY ANY BENEFICIAL OWNER OF ANY NOTICE AND OF ITS CONTENT OR EFFECT WILL NOT AFFECT THE VALIDITY OR SUFFICIENCY OF THE PROCEEDINGS RELATING TO THE REDEMPTION OF THE 2026 BONDS CALLED FOR REDEMPTION OR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the 2026 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 City 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 2026 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the 2026 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 City or Trustee, on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Trustee, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City 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. 4931-0398-6599v16/202059-0002 E-2 DTC may discontinue providing its services as depository with respect to the 2026 Bonds at any time by giving reasonable notice to the City or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, 2026 Bond certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, 2026 Bond certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof. NEITHER THE CITY NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DTC PARTICIPANTS, TO INDIRECT PARTICIPANTS, OR TO ANY BENEFICIAL OWNER WITH RESPECT TO (i) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDE & CO., ANY DTC PARTICIPANT, OR ANY INDIRECT PARTICIPANT; (ii) ANY NOTICE THAT IS PERMITTED OR REQUIRED TO BE GIVEN TO THE OWNERS OF THE 2026 BONDS; (iii) THE SELECTION BY DTC OR ANY DTC PARTICIPANT OR INDIRECT PARTICIPANT OF ANY PERSON TO RECEIVE PAYMENT IN THE EVENT OF A PARTIAL REDEMPTION OF THE 2026 BONDS; (iv) THE PAYMENT BY DTC OR ANY DTC PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT WITH RESPECT TO THE PRINCIPAL OR REDEMPTION PREMIUM, IF ANY, OR INTEREST DUE WITH RESPECT TO THE 2026 BONDS; (v) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS THE OWNER OF THE 2026 BONDS; OR (vi) ANY OTHER MATTER. 4931-0398-6599v16/202059-0002 E-3 APPENDIX F FORM OF CONTINUING DISCLOSURE CERTIFICATE This CONTINUING DISCLOSURE CERTIFICATE (the “Disclosure Certificate”) is executed and delivered by the CITY OF PALO ALTO, CALIFORNIA (the “City”) in connection with the issuance of its Water Revenue Refunding Bonds, 2026 Series A (the “2026 Bonds”). The 2026 Bonds will be issued pursuant to an Indenture of Trust, dated as of October 1, 2026 (the “Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as trustee (the “Trustee”). In consideration of the Participating Underwriter’s purchase of the 2026 Bonds, the City 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 “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” shall mean 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. “Financial Obligation” shall mean a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term Financial Obligation shall not include municipal securities as to which a final official statement has been provided to the MSRB consistent with the Rule. “Listed Events” shall mean any of the events listed in Section 5(a) or 5(b) of this Disclosure Certificate. “MSRB” shall mean 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 2026 Bonds required to comply with the Rule in connection with offering of the 2026 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 2026 Bonds and in order to 4931-0398-6599v16/202059-0002 F-1 assist the Participating Underwriter in complying with Securities and Exchange Commission Rule 15c2- Section 3.Provision of Annual Reports. (a) Delivery of Annual Report. The City shall, or shall cause the Dissemination Agent to, not later than nine months after the end of the City’s fiscal year (which currently ends on June 30), commencing with the (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 (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 (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 (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 Section 4.Content of Annual Reports. (a)The Annual Report for each fiscal year shall contain or incorporate by reference the following information, for the most recently completed fiscal year: (1)Financial Statements. Audited financial statements of the City’s Water System (which may be part of the audited financial statements of the City, or the City’s Utilities Department) for the (2)To the extent not included in the audited financial statements or the Annual Comprehensive Financial Report (ACFR) of the City, the Annual Report shall also include operating 4931-0398-6599v16/202059-0002 F-2 (i)Discussion of any changes in the rate and fee structure with respect to the (ii)Description of any Parity Bonds or subordinate debt issued during the most (iii)Total actual Gross Revenues and Net Revenues generated by the Water (iv)Updated information on the collective total billings of the top ten customers (b)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 (c)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 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 2026 Bonds: (1)Principal and interest payment delinquencies. Rating changes. Tender offers. Bankruptcy, insolvency, receivership or similar event of the obligated person. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or 4931-0398-6599v16/202059-0002 F-3 other material notices or determinations with respect to the tax status of the security, (10)Default, event of acceleration, termination event, modification of terms, or other Note: For the purposes of the event identified in subparagraph (8), the event is considered to occur when any of the following occur: the appointment of a receiver, trustee or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person. (a)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 2026 Bonds, if material: (1)Non-payment related defaults. Modifications to rights of security holders. The release, substitution, or sale of property securing repayment of the securities. The consummation of a merger, consolidation, or acquisition involving an obligated (6)Appointment of a successor or additional trustee, or the change of name of a trustee. Incurrence of a Financial Obligation, or agreement to covenants, events of default, (a)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 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 2026 Bonds. 4931-0398-6599v16/202059-0002 F-4 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 (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 (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 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 (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 (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 (c)Consent of Bondowners; 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 4931-0398-6599v16/202059-0002 F-5 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 Section 11.Default. In the event of a failure of the City to comply with any provision of this Disclosure Certificate, the Insurer or any Certificate owner or Beneficial Owner may take such actions as may 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 Section 13.Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Dissemination Agent, the Insurer, the Participating Underwriter and the Owners and Beneficial Owners from Date: _______, 2026 CITY OF PALO ALTO, CALIFORNIA By: Authorized Officer 4931-0398-6599v16/202059-0002 F-6 EXHIBIT A NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT Name of Obligor:City of Palo Alto, California Date of Issuance: NOTICE IS HEREBY GIVEN that the Obligor has not provided an Annual Report with respect to the above- Date: ________________ CITY OF PALO ALTO, CALIFORNIA, By: Authorized Officer 4931-0398-6599v16/202059-0002 F-7 IRREVOCABLE REFUNDING INSTRUCTIONS Relating to $35,015,000 City of Palo Alto Water Revenue Bonds, 2009 Series A These IRREVOCABLE REFUNDING INSTRUCTIONS (these “Instructions”), dated October 6, 2026, are given by the CITY OF PALO ALTO, a charter city and municipal corporation organized and existing under the Constitution and the laws of the State of California (the “City”), to U.S. BANK TRUST COMPANY, NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America, acting as trustee (the “2009 Bonds Trustee”) for the captioned bonds (the “2009 Bonds”); WlTNES SETH: WHEREAS, the City operates facilities for the collection, transmission, transportation, treatment and distribution of water (the “Water System”); and WHEREAS, the City previously issued the 2009 Bonds pursuant to an Indenture of Trust, dated as of October 1, 2009 (the “2009 Indenture”), by and between the City and the 2009 Bonds Trustee for the purpose of financing certain improvements to the Water System; and WHEREAS, the 2009 Bonds are subject to prior redemption on any date without a redemption premium pursuant to Section 2.02(a)(i) of the 2009 Indenture; and WHEREAS, the City, after due investigation and deliberation, has determined that it is in the interests of the City at this time to issue its City of Palo Alto Water Revenue Refunding Bonds, 2026 Series A (the “2026 Refunding Bonds”) pursuant to an Indenture of Trust, dated as of October 1, 2026 (the “2026 Refunding Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as trustee (the “2026 Refunding Trustee”), for the purpose of refunding the 2009 Bonds; and WHEREAS, the City desires to give these Instructions to the 2009 Bonds Trustee for the purpose of providing the terms and conditions relating to the deposit and application of moneys to provide for the payment and redemption of all of the 2009 Bonds pursuant to Section 2.03(a)(i) of the 2009 Indenture; and WHEREAS, together, these Instructions and the 2009 Indenture constitute an escrow deposit agreement for purposes of Section 9.03 of the 2009 Indenture. NOW, THEREFORE, the City hereby irrevocably instructs the 2009 Bonds Trustee as follows: Section 1. 2009 Bonds Debt Service Fund; Redemption Account. Pursuant to Section 4.03 of the 2009 Indenture, the City established an account held by the 2009 Bonds Trustee known as the “Debt Service Fund” (the “2009 Bonds Debt Service Fund”), and within -2- the 2009 Bonds Debt Service Fund a Reserve Account and Redemption Account. All cash and securities deposited in or transferred to the 2009 Bonds Debt Service Fund and the Redemption Account and the Reserve Account therein pursuant to these Instructions are hereby irrevocably pledged as a special trust fund for the redemption of all of the 2009 Bonds on October 23, 2026 (the “Redemption Date”), in accordance with the 2009 Indenture. The 2009 Bonds Trustee shall have no lien upon or right of set off against the securities and cash at any time on deposit in the 2009 Bonds Debt Service Fund or the accounts therein, and such amounts shall be applied only as provided herein. Section 2. Deposit and Transfer into 2009 Bonds Service Fund and Redemption Account therein; Investment of Amounts. Concurrently with delivery of the 2026 Refunding Bonds, the City shall cause to be transferred to the 2009 Bonds Trustee the amount of $_______ in immediately available funds to be derived from a portion of the proceeds of sale of the 2026 Refunding Bonds, which amount the 2009 Bonds Trustee shall then deposit in the 2009 Bonds Debt Service Fund for the 2009 Bonds in the amount of $_______ (to pay accrued interest on the 2009 Bonds on the Redemption Date) and the Redemption Account for the 2009 Bonds in the amount of $_______ (to pay principal of the 2009 Bonds on the Redemption Date). Concurrently, the 2009 Bonds Trustee will transfer $______ from the Reserve Account for the 2009 Bonds and $_______ from the other funds and accounts held by the 2009 Bonds Trustee under the 2009 Indenture (for a total transfer by the 2009 Bonds Trustee of $________) to the Redemption Account for the 2009 Bonds. The 2009 Bonds Trustee shall hold all amounts deposited in the 2009 Bonds Debt Service Fund and Redemption Account for the 2009 Bonds in cash, uninvested, pursuant to these Instructions. The City confirms that by making the deposits described herein, it is discharging all of the 2009 Bonds pursuant to Section 9.03(b) of the 2009 Indenture. Section 3. Proceedings for Redemption of 2009 Bonds. The City hereby irrevocably elects, and directs the 2009 Bonds Trustee, to redeem, on the Redemption Date, all of the 2009 Bonds pursuant to the provisions of Section 2.03(a)(i) of the 2009 Indenture. The City previously instructed the 2009 Bonds Trustee to mail a notice of redemption to the owners of the 2009 Bonds in substantially in the form attached hereto as Exhibit A. The 2009 Bonds Trustee is hereby instructed to file on the date hereof the notice substantially in the form attached hereto as Exhibit B on the Municipal Securities Rulemaking Board’s EMMA System. Section 4. Application of Funds to Redeem the 2009 Bonds. The 2009 Bonds Trustee shall apply the amounts on deposit in the 2009 Bonds Debt Service Fund and the Redemption Account to redeem all of the 2009 Bonds on the Redemption Date, at a price equal to 100% of the principal amount thereof, plus accrued interest. Section 5. Transfer of Remaining Funds. On the Redemption Date, following the payment and redemption of the 2009 Bonds, the 2009 Bonds Trustee shall withdraw any amounts remaining on deposit in the 2009 Bonds Debt Service Fund and the Redemption Account for the 2009 Bonds and transfer such amounts to the 2026 Refunding Bonds Trustee for deposit into the Debt Service Fund established under the Indenture for the 2026 Refunding Bonds to be used solely for the purpose of paying interest on the 2026 Refunding Bonds. Section 6. Amendment. These Instructions shall be irrevocable by the City. These Instructions may be amended or supplemented by the City, but only if the City shall file with the 2009 Bonds Trustee (a) an opinion of nationally recognized bond counsel engaged by the City -3- stating that such amendment or supplement will not, of itself, adversely affect the exclusion from gross income of interest represented by the 2009 Bonds or the 2026 Refunding Bonds under federal income tax law, and (b) a certification of an independent accountant or independent financial adviser engaged by the City stating that such amendment or supplement will not affect the sufficiency of funds invested and held hereunder to make the payments required by Section 4. [Signature page to Irrevocable Refunding Instructions ] Section 7. Governing Law. These Instructions shall be construed in accordance with and governed by the laws of the State of California. CITY OF PALO ALTO By: Director of Administrative Services ACCEPTED: U.S. BANK TRUST COMPANY, NATIONAL ASSOCIATION, as 2009 Bonds Trustee By: Authorized Representative ACCEPTED with respect to Section 5: U.S. BANK TRUST COMPANY, NATIONAL ASSOCIATION as 2026 Refunding Bonds Trustee By: Authorized Representative Exhibit A EXHIBIT A FORM OF CONDITIONAL NOTICE OF FULL OPTIONAL REDEMPTION Conditional Notice of Redemption City of Palo Alto Water Revenue Bonds, 2009 Series A Date of Issuance: October 28, 2009 Maturity Date (September 1) Original Principal Amount Interest Rate *CUSIP No. for Redeemed Bonds 2027 $10,665,000 4.700% 697388 AK2 2030 5,170,000 5.650 697388 AL0 2035 10,815,000 5.950 697388 AM8 NOTICE IS HEREBY GIVEN that all of the above described bonds (the “Bonds“) have been called for optional redemption on October 23, 2026 (the “Redemption Date”) pursuant to that certain Indenture of Trust, dated as of October 1, 2009 (“Indenture”), by and between the City of Palo Alto (the “City”) and U.S. Bank Trust Company, National Association, as successor trustee (the Trustee”), at a redemption price equal to the principal amount thereof, plus accrued interest to the redemption date, without premium (the “Redemption Price”). On the Redemption Date, there will become due and payable on each of the Bonds the Redemption Price. Interest will not accrue on the Bonds after the Redemption Date. The City will pay the Redemption Price with, among other things, proceeds of its City of Palo Alto Water Revenue Refunding Bonds, 2026 Series A (the “2026 Refunding Bonds”), which the City expects to issue on or about October 6, 2026. The redemption of the Bonds is conditional upon the receipt by the Trustee on or prior to the Redemption Date of moneys that are sufficient to pay the Redemption Price on the Bonds and, if such moneys have not been so received, this notice shall be of no force and effect and the Trustee shall not be required to redeem such Bonds. In such event, the City has the right to rescind this notice. Payment of the Redemption Price on the Bonds called for redemption will be paid upon presentation of the Bonds on and after the Redemption Date, at the following address of the Trustee. Delivery Instructions: U.S. Bank Global Corporate Trust 111 Fillmore Ave E St. Paul, MN 55107 Exhibit A The owners of the Bonds presenting their bonds in person for same day payment must surrender their bond(s) by 1:00 P.M. CST on the Redemption Date and a check will be available for pick up after 2:00 P.M. CST. Checks not picked up by 4:30 P.M. CST will be mailed out to the bondholder via first class mail. If payment of the Redemption Price is to be made to the registered owner of the Bond, the owner of the Bond is not required to endorse the Bond to collect the Redemption Price. For a list of redemption requirements please visit the Trustee’s website at www.usbank.com/corporatetrust and click on the “Bondholder Information” link for Redemption instructions. You may also contact the Trustee’s Bondholder Communications team at 1-800- 934-6802 Monday through Friday from 8 A.M. to 6 P.M. CST. IMPORTANT TAX NOTICE Under various provisions of tax related acts passed by Congress, the Trustee may be obligated to withhold a certain percentage of the interest from the payment to owners who have failed to furnish the Trustee with a valid taxpayer identification number. Owners of Bonds who wish to avoid this withholding should submit the taxpayer identification number (for individuals the Social Security Number) or an exemption certificate when presenting their Bonds for payment. **The City and the Trustee shall not be responsible for the selection or use of the CUSIP numbers selected, nor is any representation made as to their correctness indicated in the notice or as printed on any Bond. They are included solely for the convenience of the holders. Dated: _____, 2026 U.S. Bank Trust Company, National Association, as Trustee Exhibit B EXHIBIT B FORM OF NOTICE OF DEFEASANCE City of Palo Alto Water Revenue Bonds, 2009 Series A Date of Issuance: October 28, 2009 Maturity Date (September 1) Original Principal Amount Interest Rate *CUSIP No. for Redeemed Bonds 2027 $10,665,000 4.700% 697388 AK2 2030 5,170,000 5.650 697388 AL0 2035 10,815,000 5.950 697388 AM8 NOTICE IS HEREBY GIVEN, by the City of Palo Alto (the “City”) with respect to the above-captioned bonds (the “Bonds”), that the Bonds have been defeased and discharged under and within the meaning of that certain Indenture of Trust, dated as of October 1, 2009 (“Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as successor trustee (the “Trustee”). Funds for the payment of the Bonds have been deposited with the Trustee and are being held uninvested. As a consequence of the foregoing actions and in accordance with the Indenture, the Bonds are no longer secured by a pledge of net revenues under the Indenture, and the Bonds are now payable solely from the moneys set aside in escrow as described above and, if necessary, from other legally available funds of the City. The City has irrevocably elected to redeem all of the outstanding Bonds on October 23, 2026, at a redemption price equal to the principal amount thereof, plus accrued interest to the redemption date, without premium. *The City and the Trustee shall not be responsible for the selection or use of the CUSIP numbers selected, nor is any representation made as to their correctness indicated in the notice or as printed on any Bond. They are included solely for the convenience of the holders. Dated: _____, 2026 U.S. Bank Trust Company, National Association as Trustee COUNCIL MEETING 89/14/26 Received Before Meeting✔ REFINANCING OF 2009AWATER REVENUE BONDS City Council Presented by: Christine Paras, ASD Asst. Director www.paloalto.govSEPTEMBER 14, 2026 PRESENTATION OVERVIEW 1. Overview of Federal Securities Laws (Jones Hall, outside counsel) • Overview & Background • Debt Structure, Policy & Administration • Refunding Mechanics • Proposed Finance Committee Action 2 1. OVERVIEW OF FEDERAL SECURITIES LAW Chris Lynch, Jones Hall www.paloalto.govSEPTEMBER 14, 2026 Overview of Federal Securities Laws September 14, 2026 Chris Lynch Outline of Discussion Key Federal Securities Laws Disclosure Policies and Procedures * Key Laws Securities Act of 1933 (’33 Act) Securities Exchange Act of 1934 (’34 Act) SEC Rule 10b-5 SEC Rule 15c2-12 * Rule 15c2-12 Initial Disclosure * Rule 15c2-12 Continuing Disclo Annual reporting * Responsibilities of Officials – Orange County • County was relying on risky investment strategies to balance its budget, and failed to disclose the risky nature of its investments • County filed for bankruptcy protection in 1994; SEC brought enforcement action in 1996 (there were no bond defaults) • Board of Supervisors failed to take “steps appropriate under the to assure that the County's financial situation was being adequately disclosed to potential investors “Public officials may not authorize disclosure while recklessly disregarding • Takeaway: Public officials must exercise reasonable oversight * SEC Guidance “Lessons Learned from San Diego,” Linda Chatman Thomsen, Director, SEC Division of Enforcement (2007) “What should the municipal securities markets take away from these • adopt written disclosure policies and procedures • hire competent professionals * Conclusion and Questions * Questions Chris Lynch clynch@joneshall.com 415.391.5780 www.joneshall.com * 2. REFINANCING OF2009A WATER REVENUE BONDS Christine Paras, ASD www.paloalto.govSEPTEMBER 14, 2026 OVERVIEW Refinancing of the 2009A Water Revenue Bonds Removes the 2009 Bonds’ Available • Obligation of the Water, Gas, and Electric Funds Provides flexibility for the Electric Fund • Removes burdensome reserve funding requirement for the Electric Fund El Camino Park Reservoir construction Staff recommends restructuring the 2009 Bonds Eliminates City’s exposure to Federal •Est. Net Present Value savings is close to 3%* • CFO can waive 3% guideline if restructuring is *Final savings figures subject to market conditions at pricing. • The 2009 Bonds were Build America Bonds (BABs), 14 BACKGROUND • $35M in Water Revenue Bonds were issued in 2009 to finance major water system upgrades. • Structured as BABs under the American Recovery and Reinvestment Act • City receives a federal subsidy equal to 35% of interest payments • Bonds are payable from Net Revenues of Water System • Available Reserve requirement obligates that the Water, Park Tank Interior Coating 15 DEBT STRUCTURE, POLICY & ADMINISTRATION 2026 Water Revenue Refunding Bonds Estimated Refunding Results* Refunding Par Competitive Method of Sale • Interest rates will be determined the day of sale • Underwriter will be selected based on lowest true $14,565,000 (principal amt. of new bonds) Refunded Par (principal amt. of 2009A Water Bonds)• Rates will reflect prevailing market conditions $ Est. Net Present Value Savings $255,561 1.46% 3.28% June 1, 2027 June 1, 2035 Debt Policy: Estimated to be Above 3% threshold • May be waived by CFO if restructuring is in the *includes value of BABs federal tax credit Issuance Costs: Approx. $213K Annual Debt Service Savings: $309K through FY 2035 Bond Credit Rating: AAA with Stable Outlook (S&P) 16 REFUNDING MECHANICS To issue the Bonds, the Council will need to: 1. Adopt a resolution that authorizes the sale of up to $20M in bond principal 2. Approve required legal documents a. Official Notice of Sale b. Indenture of Trust •Subject to federal securities laws; require the Official Statement include all facts that d. Refunding Instructions 17 CITY COUNCIL ACTION Finance Committee recommend that the City 1. Authorize staff to refinance the outstanding Revenue Refunding Bonds in the not to 2. Approve the Official Notice of Sale, Indenture Mayfield Reservoir Passed by Finance Committee 18 LAUREN LAI Chief Financial Officer lauren.lai@paloalto.gov CHRISTINE PARAS ASD, Assistant Director christine.paras@paloalto.gov