Loading...
HomeMy WebLinkAbout2007-12 ADM � e MINUTES OF THE REGULAR MEETING OF THE ADMINISTRATION COMMITTEE Orange County Sanitation District Wednesday, December 12, 2007, at 5:00 P.M. A meeting of the Administration Committee of the Orange County Sanitation District was held on December 12, 2007, at 5:00 p.m., in the Sanitation District's Administrative Office. (2) Following the Pledge of Allegiance, a quorum was declared present, as follows: ADMINISTRATION COMMITTEE STAFF PRESENT: MEMBERS: Jim Ruth, General Manager DIRECTORS PRESENT: Bob Ghirelli, Assistant General Manager Mark Waldman, Chair Lorenzo Tyner, Director of Finance and Phil Luebben,Vice Chair Administrative Services Steven Choi Mike White, Controller Bill Dalton Rich Spencer, Employee Relations Supervisor Jon Dumitru Lilia Kovac, Committee Secretary Darryl Miller Bob Gaggle Joy Neugebauer Chris Norby OTHERS PRESENT: Ken Parker Brad Hogin, General Counsel Sal Tinajero Ed Soong, PRAG Jim Winder Larry Crandall, Operations Committee Chair Jim Ferryman, Board Chair DIRECTORS ABSENT: Rich Freschi Doug Davert, Board Vice Chair FILLEDL�IINNp��THVE pKFFFICgEpgOFF� ORANGE CbbM SANRATION DISfHICT (3) APPOINTMENT OF CHAIR PRO TEM DEC 19 2007 No appointment was necessary. (4) PUBLIC COMMENTS BY ` There were no public comments. (5) REPORT OF THE COMMITTEE CHAIR Chair Waldman did not give a report. (6) REPORT OF THE GENERAL MANAGER General Manager, Jim Ruth, did not give a report. r t' Minutes of the Administration Committee December 12, 2007 Page 2 (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES Lorenzo Tyner, Director of Finance and Administrative Services,did not give a report. (8) REPORT OF GENERAL COUNSEL Brad Hogin, General Counsel, did not give a report. (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same,as follows: a. MOVED, SECONDED AND DULY CARRIED: Approve minutes of the November 14, 2007 meeting of the Administration Committee. END OF CONSENT CALENDAR (10) ACTION ITEMS There were no action items. (11) INFORMATIONAL ITEMS a. ADM07-60 Leadership Academy Rich Spencer, Employee Relations Supervisor, briefly presented an overview of the training program designed to fill the Sanitation District's leadership training needs and management philosophy. The program will be presented to the Board of Directors for approval on December 19, 2007, Staff will explore the possibility of the participants acquiring college credits towards higher education. b. ADM07-61 Debt Financing Program Overview Director of Finance and Administration, Lorenzo Tyner, presented the Sanitation District's financing program broken into steps that identified the use, the reasons, and mechanics of issuance of Certificates of Participation for financing capital improvement projects. (12) CONVENE INCLOSED SESSION PURSUANT TO GOVERNMENT CODE SECTION 54957(b)(1). There was no closed session. Minutes of the Administration Committee December 12, 2007 Page 3 (13) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY There were none. (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT There were none. (15) FUTURE MEETING DATES The next regular Administration Committee meeting is scheduled for February 13, 2007, at 5 P.M. (16)ADJOURNMENT The Chair declared the meeting adjourned at 6:45 p.m. Submitted by: qA�,n _ & I �D' lia Kovac Committee Secretary Distributed at the Fine ce & Administration1124 Meeting Atlmltrial mCamm/ffee Workshop Overvlaw on Deb(Flnanclnp _ �« 4thatheassese,It has, Topks u/Olacusslon oIMAr.Wnn he Dears, Flnnnarq . hiF e.um o.al hish' oho Pmmo Pngtloo dyumom of,.h( l o Cs.t., Raq pmmol'CCPrI vma el cov[n.a why J.'i m+ rws[of coo...eonm vmyelm P 000a L.mrnl GOPy Oflne el Wrs o1 CCP nunnoo end hole.—Ftin— Flnnmal Ratios ootlr ho[eyuyhate InfrodocponW y yr .: • y .Vminitlgrbn Cammarw y4MP eee'r'Irven Ceq Wop[m Why fhe&ae tlssws Debt . Dvw.opomorlpr m.<.pinlmwo.emw.pmma lcwl Y.x DSYa.<Y.m mex.Y mroYmlo wo,lea. oeeump mx<a..mere nmorq wm.lwmon nmmr.a Dvme.®w.ra.l no..rrmlroo.rrla Whyfhe Dlsbkf/ssws Debt 0 oiMxep.r<.ur I.a wp da .—puunarym pryxmly m.l, p pmml E.Ib.IaEBeue G&aeFuMIv9 W _ 11 p 11 wo . -. . m. --- Iw Ice w 0 gg pp R W � Id R R R R W R R R R Why fhe D/sfdet lssees Nbf uwllmJ aua u..pom.moa.lrrn.oweeo,.pmwm.m„mMrap Immm. <mvrrl mw role to ponaMo eJlluod LMa b pry Ior CIP mep IW E.pmeYEMnua V..w 9...LIYp. ww - tlilnnNnE {Yp - wElNptllNnY F 1 1111 FW Im Iw W w ■■ Why the District Issues Debt ❑Debt service can more equitably distribute CIP costs across different generations of users in a"pay-as-you-use"arrangement $400 imml Distribution of CIP Coats $350 -- ■With Debt Flnaneing $300 - - ■Without Debt Financing ---- $250 _... ... 5200 _. . _....... .. 5150 _. $100 $50 SO O O O O O O O N O C O O O O O O S p N N N N N N N {V N N N N N N N N N N 6 Why the District Issues Debt ❑Debt issuance allows the District to maintain adequate cash reserves to weather changes In operations and market conditions • Fluctuations in connection fees • Variability In costs associated with treatment and disposal • Unanticipated costs(i.e., catastrophic losses, ERAF shifts,etc.) • Volatility in interest rates for Interest earnings and debt service _ _ Current Debt Profile—Outstanding Debt Original Par ODUtanding Final Intemst Bad. Original Par Mammy Rate Made Purpose of Issuance (Fowl Year) Epahadc Re6wnca 1986 COPs($10T 1992 E160,1'✓J0.000 $I],340.000 2014 Fixed mlluon)and SedesBCOPs (MA million) 1993 46000Opp 26900000 M17 Synthetic Refinanc SeriasBCOPs Fixed (E39.7 million) Variable Refinanw Series A Band C mo 218,M.= 198,6000pp T031 (3ally COPs($1]9]mllllon)and nasal) funded capital lnn,w menls 2003 28011000W 191,W.M 2033 Ftxed Fund capital imprmemams Vailabla 20p6 2p0,000I" 198,80pM mm (Daily Fund capital Mpra rds reset) 2007A 95,180,000 95,180,000 2030 Fixed ReOnanceapa9andSerles M03 COPs($88.5 million) 20 W 300.00OA00 ".M." i ii FbmO Fund wp9al inpmvpnems Total $1,M,M0,000 ly.m.m.m 'EspeGeE eNEment eMe M pxanps 20.20'Jl. 8 Current Debt Profile—Aggregate Level Debt Service 100 (Mum) 90 ........ _..__._. ............ _ 80 _. . _ _....._.... TO 60 iT — 50 4030 20 IIIIIr 10 l_ r+a�nmr mme� NNa �N NrN`INNN NNNNNpgNN1�V I�VgNr�9NNt�`2q NI�VgNNNNN NN �Sadu 1992 a8M®1993 0Was 2000 9adu 2003 N O&des 299E �9ada 2002R �Sada 20010•—Nat pa916v<. 'EaWadsulmantmedpac W20,2901. 9 Projected Issuance of Debt ❑To finance the District's CIP,the District staff estimates that approximately$811 million of long-tens debt would be issued over the next 8 years Fiscal Year Approximate slu 2008-09 $300,000,000 2009-10 155,000,000 2010-11 105,000.000 2011.12 125,000,000 2012.13 95.600,000 2013-14 31,000,000 Total $811,000,000 ID Certificates of Participation r i - IVf ,4 Administration Committee Workshop Overview on Debt Program a. What are Certificates of Participation? LICertificates of Participation("COPs")area debt financing vehicle ficir the District Provides omers with a damn to installment payments made by the District for facilities purchased from the Financing Corporation The District Bondholders installment P Payment. Payrr�.M S. COP survirs Proceeds Assigns Rights to Financing Installment Payments 12 Why Use COPs? Corporation 1a U Aternative financing vehicles for the District each has certain limitations 11 District VOreragr�LOn01red ;hwt•lOr@llLanclnp •General Obligali0n DOndz(pJ3 mai0dly) •Rlwnue BnildpaNan notes-Ip be repaid •District Revenue Bpntls(simple malOrily) In NlM1er the 98m0 pr nlq Nacal year •Special Assessment Bontls(Yl3 maiodly) •Grenll bond eolidpobon ndles-reouucs eelaecletion of teNeaul flnencln8 •f.Omm0RI01 p0pel NlgM1er raaq¢10.Infemspa(e9 -IyNcally malmes eucry 2]B days. •CapAll leases wnh private enmies requldn0 epher repayment or ro99ua0ta 61 edlh mdlully -sM1onAerm interest relac only,sublect 'I COOpgaQ_Ogpl agOflreni0lppllfy IO ba msel I •Jpim Powers AOln00ty(JPpl Revenue -Benarally hlBher bOrra+anB cost than [fonds-provitles no parcelved benllil _IonB-lerm NoaUrp rele COPS aver Dlsldd COPE e' Types of COPs Type Key Features Fixed Rafe 0 Long-term Rod Interest rates O Typically Includes attend to reseem at par In 10 years O May be refunded at a later date for econemle savings Variable Rah, ❑ShorHerm gating Interest tales set by remarketing agent(typically each day or Demand every?days) D Wy be redeemed by Me Olselct on any Interest payment date at par(typially,vie first business day of each month) 0 May be put back to the District by holders an any date,requiring liquidity facility to the provident bye financial Incubated Auction Rate 0 Shod-term gating Interest rates en through a Dutch auction process conducted by broker-dealer(typical ly every y.28 or 38 days) 0 May be,redeemed by the Dlstmt on anyaucllon date at par O Maybe put beck by holder but onlyto another Interested buyer Synthetic Flsed 0 Underlytn9 variable rate demand auction rate or other floating role COPS provide Rate funding D Interest rate swap provides a hedge based on either an Ines or actual Interest cost of the related COPS 0 Imroducss additlaal dais nI.tW to swaps,such as coumerpert,belle,fennlaeon to Process for Issuing COPS— Develop Plan of Finance V-_" 15 Process for Issuing COPS-Authorization � Authorizing Item for body Administrator, Financing Boards approval Committee Corporation Oirectara Selection of vendors and consultants(e.g.,Financial Advlsor,Bond/Disclosure Counsel,Undelwrkers) Financing Financing documents ✓ ✓ ✓ Is Process for Issuing COPs - Prepare Documents 1 fbsolutfw Fw Tmst Agrsmenf Preffmine, 011lclal Nodca Issuance •Terms.pledge& OHlclal Statement /nNting ands •Maximum amount Ilan of COPS •Disclosure of •ForcompeWlve •Maximum interest •Operating material events of hid only .to covenants Ind District •Terms of sale •Authomation Im •Limit on future •Marketing tool issuance deft Issuance Permitted Investments embalmment Of/k/el Satement Cetggoate Pumhaae •Disclosures of Pamhas Agreement material wants of Conmt •Tama,pledge 8 the District •For negotlated Ilan of COPS •Final pricing pricings only •Opened, Information •Terms d tulhi cwenents •❑mit on Mum deM Issuance ,imminand wontmenU 11 Process for Issuing COPS-Marketing Activities TIn:INne gum �.wau TK fGIC.cIFe e ��u ►�s� AaNsa �.�. ... 1. WraabnnaancemenH a, SdRlred.n/ "M°M" -'•^^• M9vell/kaaon lw sahro eMRanherwemanr poren(IelegdeH (cmmPelldval Vs,I It Fop. d _. pa. Raangap cy r l m c a me.dngircells a ..,_ ... So. Maniontingplaml I , e. llon W aYco l^a/.Hr eand lcnavlalaa fw Puh/kar o/ P.H.Wo.ry croon,rating ep.rta Mist arerement (ne9oflaredl to Process for Issuing COPs- Sale of COPS Typo of sale Compettive bid Negotiated pricing Degnglon A public auction among A contractual arrangement underwriters who submit bids between Issuer and one or more according to preset criteria and to underwriters under which the whom the COPs are awarded underwriters are given the based on the best bid(usually exclusive right to distribute the true Interest cost) cops Features • Generally results in the lowest * Allows underwriters to pre, yield for strong credits due to market the COPS competitive bidding process • More extensive outreach to — No direct Investor outreach retail Investors who are — Limited ability to structure generally least sensitive to COPs yields • Structuring fledblBy,to meet Investor demand a Required for floating rate COPS a Required for difficult creche (i.e.,"slay'bands) 19 Process for Issuing COPS - Sale of COPs Illy Competitive Bid Negotiefed Pddng Di strict involvement to Process for Issuing COPS - Credit Ratings fbo 'e lnveslon BeMu Standard&Pow% FItoUReU HWp Refine Au AM AM NO AM Me M O A AA A AM AM Inveclmenl At A. M Glee M q A q3 M ee Bed1 BBB• BBB Bee] BBB BBB 1 BBB- BBB- 8 e1 Ber BBB B BB BB BQ BB- BB Bi is, B+ S"CUMlNe IN B B G.ft 0B- B- Cut MC CCC+ CUR CCC CCC Cea3 CCC- CCc- Cd CC CC C C In OekuM C D Raldq V Flnmwla/C.nVdC U.n. ./COP/sa.an.. wJ.AG ~`�i We bMP.rwrlw an CohlROPam LOWO..M aMRsbkflone a..wplN wb m..Nnµ� enmr.N e...m..ru..wxmrn�b .r R.., i.rraXN®tllmwnbaw Prr�.Nryuamn weWnmmamiu. M.Wwtlfirrw .Vumlmm,ir ru Wwiu Mn uem.+mnimnrMr w.FW bN uN iwMM,MMn0.p wVb NIby M1}Ymn ImMnq Mmr.YhlmwurrpfM..s Ww1 tlaM1FFrWm pp YJs mm�MCMMY NW MNu.Xr..e WPpewsLPwW WbNMrv1W�uN Fln.nclal Refloa '� o mPmlee er b...wee+cm. ouwom emm.me wm+o�mry eulmoi.ma w. .cm.l eenezwe.m om.eM,l oumiaerv.alo.m,mw,y w.+onm minn o.buwm.i�nm,Izwm .ool,wMm m.wq. .FbLq m+e eryavo .omauPm.lyoon..e 1 Flwnclal Ratloa-DY6t Ssrvlca Conop '�' ac.eeul mean ollm.beXm mN Imnueieaseuou oN smu[eturbm. . �Inmme.oewwao. oYlsemee a IYbmel me vmMea o N semce mnrpe rmRr J"r<Na.mm e .ummaYyol lagrq Neaal..mm Blol wr rMo eM[Nge .Rmenuennu etllllvAryOlclP meb .Ambmnlorwonlil�mme Nerorymemol NM.mb[. semr remm.gorwN.eN oegYnm FlneMlel Ratw-Flwtlnp Rah Eapwun O OoisY m0wa 01 egveve b I Mehl rtle IIeM FbYy RYeEgaeve • pWagn Netlry RN qq-XYlxee *eu bN u cunm Ib qry me erp0.ue IYI.aehvn Br sel.xmR COPe1 .xxx Ner Yon+bmlmb.lmeeb oarycoNbbmu AwmnuamseexYN mueNbr lgmrlmm..l meu ....C Clarg us nls W[Nps .EgetlOenes.em bqbrm OMrgJmel OYxMnbeYpn.11m]NSEN Elleb'wrese 0l mryslap,ewglM[w W eIM{bm weye) .IMSN IYm.I rYe mE mr umla wue bN mwma RwOn IBebe101 p1WI0Ne eglemll.e.-Mlxe,brTIMYYImeb, ebwreboml Flnamial Ratlos-Days of LlauFlity w RalW ( I O AMYbb lame OnbMbpfy-n...Webin Me ep—0lmeluae unNm.ec.ne um0l. omol\'quary . AubnLEeu U.I. P .gas Bn WM tyyYry Ega'ss 01YeN EgMO -oquXYloe Dbm3l b,xnx .xBsam of MWMaav on nem P W.. pXmlu—MI erbbr[YmlmpX[Ilelu .RMutewletl lnml uxrbs ane[bq® Mry Mlxe ptlmllb4y Me mX BBuublugt®meb NOmlXpsl ml 2 Debt Poky Updebe . i; Debt Poky Updebs p Pqp tgeNgx vt d/FimpgYml W tu,MrY1bn01MptgQ, OW Polry 3 Distributed at the Finance & Administration o Meeting FINANCE DEPARTMENT POLICY AND PROCEDURE Subject: Debt Policy Index: Finance Administration Number: 201-3-1 Effective Date: August 43, Prepared by: FJnanse 2003December 11 AdmiRistratienFinancia 2007 1 Management Supersedes: August 13, Approved By: AdminislrationFAHR 20039eptembe r Committee 2001 1.0 PURPOSE: The foundation of any well-managed debt program is a comprehensive debt policy. A debt policy sets forth the parameters for issuing debt and managing outstanding debt, and provides guidance to decision makers regarding the timing and purposes for which debt may be issued, types and amounts of permissible debt, methods of sale that may be used and structural features that may be incorporated. The debt policy should recognize a binding commitment to full and timely repayment of all debt as an intrinsic requirement for entry into the capital markets. Adherence to a debt policy helps to ensure that a government maintains a sound debt position and that credit quality is protected. Advantages of a debt policy are as follows: 1.1 enhances the quality of decisions by imposing order and discipline, and promoting consistency and continuity in decision making; 1.2 rationalizes the decision-making process; 1.3 identifies objectives for staff to implement; 1.4 demonstrates a commitment to long-term financial planning objectives,and; 1.5 is viewed positively by the rating agencies in reviewing credit quality. 2.0 ORGANIZATIONS AFFECTED: Page 1 of 18 General Managers Department, Finance Department, General Counsel, bond rating agencies,financial advisors, bond underwriters, bond counsel, and external independent auditors. 3.0 REFERENCES: 3.1 2002 Interim Strategic Plan Update 3.2 1999 Strategic Plan Update. 3.3 1989 "2020 Vision" Master Plan. 3.4 Government Finance Officers Association publication"A Guide for Preparing a Debt Policy". 3.5 "Moody's on Municipals- An Introduction to Issuing Debt' by Moody's Investor Services. 3.6 Handbook for Muni-Bond Issuers by Joe Mysak, published by Bloomberg Professional Library. 4.0 POLICY: 4.1 Limitations on Indebtedness- 4.1.1 The District's debt capacity will not exceed legal limitations, such as coverage requirements or additional bonds tests imposed by existing bond covenant and will not rise to a level that w 11 iFAPAiF th , District's bond . In addition, consideration will be given to rating agency implications in establishing the appropriate debt capacity. 4.1.2 Before any new debt is issued, the impact of debt service payments on total annual fixed costs will be analyzed. In accordance with existing COP indenture agreements, Net Operating Revenues must be at least a 1.25 coverage ratio to the maximum annual debt service. 4.1.3 The District will restrict long-term borrowing tefor capital improvements that provide long-term benefits to the Districtcannet Is 4.1.4 Proceeds from long-term debt will not be used for current on-going operations. 4.2 Types of Debt- Page 2 of 18 4.2.1 The District may use short-term debt to cover temporary or emergency cash flow shortages. All short-term borrowing will be subject to Board approval by resolution. 4.2.2 The District may utilize Board approved intra-agency loans rather than outside debt Instruments to meet short-term cash needs. Intra- agency loans will be permitted only if an analysis of the affected Revenue Areas indicates funds are available and the use of these funds will not impact current operations. The principal, along with interest at the prevailing rate as established by the District's Treasurer, will be paid to the lending Revenue Area. 4.2.3 Commercial Paper- The District may issue short-term debt in the form of Commercial Paper. ethe ferw f debt-. 4.2.4 Revenue Bonds- The District may issue as special obligations various types of revenue securities including notes, warrants, interim debentures, bonds, and temporary bonds. Securities issued as special obligations do not constitute outstanding indebtedness of the District nor do they exhaust its legal debt-incurring power. Bonding should be limited to projects with available revenue sources, whether self-generated or dedicated from other sources such as user fees. Adequate financing feasibility studies should be performed for each revenue issue. Sufficiency of revenues should continue throughout the life of the bonds. 4.2.5 Certificates of Participation- Certificates of participation are essentially leases which are sold to the public. The lease payments are subject to annual appropriation. Investors purchase certificates representing their participation in the lease. Often, equipment or facilities being acquired serve as collateral. These securities are most useful when other means to finance are not available under state law. 4.2.6 Refundings-A refunding is generally the underwriting of anew bond issue whose proceeds are used to redeem an outstanding issue. 4.2.6.1 Prior to beginning a refunding bond issue, the District will review and estimate of the savings achievable from the refunding. The District may also review a pro forma schedule estimating the savings assuming that the refunding is done at various points in the future. Following Page 3 of 18 are the conditions under which the District will consider refunding outstanding bonds: 4.2.6.1.1 NetRpresent value savings are at least three(3) percent of the par amount of the refundediog bonds. Net present value savings of less than three (3) percent of refunded bonds are acceptable when compared to savings that could be achieved by waiting for more favorable interest rates and/or call premiums. 4.2.6.1.2 Net resent value savings exceed the costs of issuing the bonds. 4.2.6.1.3 The bonds to be refunded have restrictive or outdated covenants. 4.2,64.4CwFent savings are acceptable when Gampared t savings that eauld be aehleyed by waiting fn. .nn.n favorable interest rates andler call pFemiums� A °�'.64.2.6.1.4 Restructuring debt is deemed to be desirable. 4.3 Debt Structure- 4.3.1 Debt will be structured to achieve the lowest possible net overall cost to the District balanced against potential risks given market conditions, the urgency of the capital program, and the nature and type of security to be provided. A 9 2The Dinti nt w II design the • ent of its overall debt no as to rapidly FeeaptUFe its eFed't rapacity fna f. tUFe 433:14.3.2 The term of District debt issues should not extend beyond the useful life of the project and generally should not extend beyond 30 years unless there are compelling factors which make it necessary to extend the term further. 4.3.3 New money dDebt issued by the District should be structured to provide for either level principal or level debt service on an individual issuance or aggregate debt service basis. Deferring the repayment of principal should be avoided except in select instances where it will take a period of time before project revenues are sufficient to pay debt service. Ascending debt service should generally be avoided. Page 4 of 18 4.3.4 Variable Rate Obligations- When appropriate, the District may choose to issue variable rate obligations, or securities that pay a rate of interest that varies according to a predetermined formula or results from a periodic remarketing or auction of the securities. 4.3.4.1 The maximum level of net variable rate obligations incurred shall not exceed the level of available invested reserves. 4.3.4.2 Fate-slebt--mix-alIoiqed for the D strict by the Rating Agencies The District will consider Rating Agency implications in establishing an overall fixed versus variable rate debt mix. 4.4 Credit Objectives- 4.4.1 The District's goal is to maintain or improve its bond ratings. To that end, prudent financial management policies will be adhered to in all areas. 4.4.2 Rating Agencies- 4.4.2.1 Full disclosure of operations will be made to the bond rating agencies. District staff, with the assistance of the financial advisors and bond counsel, will prepare the necessary materials for and presentation to the rating agencies. 4.4.2.2 The District will maintain a line of communications with the rating agencies(Moody's, Standard R Poor's,and/or Fitch), informing them of major financial events at the District as they occur. The Comprehensive Annual Financial Report (CAFR) shall be distributed to the rating agencies after it has been accepted by the Board of Directors. 4.4.2.3 The rating agencies will be notified when the District begins preparation for a debt issuance. After the initial contact, a formal ratings application will be prepared and sent along with the draft of the Official Statement relating to the bond sale to the rating agencies. This application and related documentation should be sent several weeks prior to the bond sale to give the rating agencies sufficient time to perform their review. Page 5 of 18 4.4.2.4 A personal meeting with representatives of the rating agencies will be scheduled at least once every twofew years or whenever a major project is initiated. 4.4.3 Credit Enhancements- are mechanisms which guarantee principal and interest payments. They include bond insurance and a line or letter of credit. A credit enhancement, while costly, will sometimes bring a higher rating from the rating agencies and a lower interest rate on debt, thus lowering overall costs. Credit enhancements will only be used when net debt service is reduced by more than the cost of the enhancement. During the debt issuance planning, the Financial Advisor or Underwriter will advise the District which credit enhancements if any, should be purchased. 4.4.4 Dedicated Revenue Sources- In order to ensure the most favorable credit ratings, District revenues are dedicated to debt service in the following order: 4.4.4.1 Ad valorem property tax. 4.4.4.2 Sanitary sewer service charges. 4.4.4.3 Other revenues. 4.5 Method of Sale - 4.5.1 The District will select a method of sale that is the most appropriate in light of financial, market, transaction-specific and issuer-related conditions, and explain the rationale for its decision. 4.5.1.1 Competitive Sales- Debt obligations are generally issued through a competitive sale. The District and its financial advisor will set the terms of the sale to encourage as many bidders as possible. By maximizing bidding, the District seeks to obtain the lowest possible interest rates on its bonds. 4.5.1.2 Negotiated Sales-When certain conditions favorable fora competitive sale do not exist and when a negotiated sale will provide significant benefits to the District that would not be achieved through a competitive sale, the District may elect to sell its debt obligations through a private or negotiated sale. Such determination may be made on an issue-by-issue basis,for a series of issues, or for part orall of a specific financing program upon approval by the Page 6 of 18 finance,Administration,and-HUFRaR ReseuFses Committee (FAWR). 4.6 Methods of Selecting Consultants- 4.6.1 Financial Advisor- The District will retain an external independent financial advisor,to be selected fQF a teFFn Of Up to four years,through a competitive process and renewed at the discretion of the Administration Committee. The financial advisor contract will be administered by the District's FiRanoe DepaFtment Financial Management Division. The utilization of the financial advisor for a particular bond sale will be on a case by case basis upon recommendation by the Director of Finance and Administrative Services and approval by the Administration Commlttee.FAHR pursuant to a financial advisory service contract. For eachBiWiGt bond sale, the fiRRn,;,l RdViIIF Will -provide -the District with W nfemnation on pricing Rd undepwriting fees forGompaFable sales by etheF-issuerfr 4.6.2 Underwriters- For all competitive and negotiated sales, underwriters will be required to demonstrate sufficient capitalization and experience related to the debt issuance. The selection of underwriters may be for an individual or series of financings or a specified time period. 4.6.3 Bond Counsel- The District will retain external bond counsel for all debt issues. All debt issued by the District will include a written opinion by bond counsel affirming that the District is authorized to issue the debt, stating that the District has met all state constitutional and statutory requirements necessary for issuance, and determining the debt's federal income tax status. Bond counsel will be selected through a competitive process administered by the District's Financial Management Divisionfinance Department. The selection process will require comprehensive municipal debt experience. 4.6.4 Disclosure Counsel- The District will retain, when appropriate. Disclosure Counsel for debt issues. Disclosure Counsel will be responsible for ensuring that the official statement complies with all applicable rules regulations and guidelines. Disclosure Counsel fora particular transaction may also serve the District as bond counsel on the same issue. Disclosure counsel will be selected through a competitive process administered by the District's Financial Management Division—DeeaRmepA. The selection process will require comprehensive municipal debt experience.Paying Agent• Page 7 of 18 qualified GOrnmerGial and tru tee banks. The cost reviding sueh sery Gas shall be Lised, ve measurementsan developing a Paying gent FeGernmendation to the FAHR, along with the term nf Rush agFeement- 4.7 Disclosure and Arbitrage Compliance- 4.7.1 The District will follow all State and federal regulations and requirements regarding bond provisions, Issuance, taxation, and disclosure. 4.7.2 The Districtwill monitor compliance with bond covenants and adhere to federal arbitrage regulations. Any instances of noncompliance will be reported to the FAHR. 4.7.3 The District will maintain good communications with bond rating agencies about its financial condition and will follow a policy of full disclosure in every financial report and bond prospectus (Official Statement). 4.7.4 Official Statements accompanying debt issues, CAFRs, and continuous disclosure statements will meet, at a minimum, the standards articulated by the Municipal Standards Rulemaking Board (MSRB), the Government Accounting Standards Board (GASB), the National Federation of Municipal Analysts, the Securities and Exchange Commission (SEC), and Generally Accepted Accounting Principles (GAAP). The Finance Department will be responsible for ongoing disclosure to all Nationally Recognized Municipal Information Depositories(NRMSIRs)designated by the SEC and for maintaining compliance with disclosure standards promulgated by state and national regulatory bodies. 4.7.4.1 Quarterly compliance reports to NRMSIRs. 4.7.4.2 Copies of CAFR and updated tables from the Official Statement to NRMSIRs within six month of year end. 5.0 DEFINITIONS: 5.1 ACCRUED INTERST- In the sale of a new issue of municipal bonds, the dollar amount, based on the stated rate or rates of interest, which has accrued on the bonds from the dated date, or other stated date, up to but not including the date of delivery. When a bond is purchased in the secondary market, the dollar amount, based upon the stated rate of interest,which has accrued on the bond from the most recent interest payment date, up to but Page 8 of 18 not including the date of settlement. Accrued interest is paid to the seller by the purchaser and is usually calculated on a 360-day year basis (assumes each month has 30 days). 5.2 ADDITIONAL BONDS TEST- Refers to legal test found in resolution or ordinance securing bonds; governs ability to issue additional bonds having the same lien on pledged revenues. Usually expressed as a ratio in which historic earnings meet certain levels of future debt service coverage. 5.3 ADDITIONAL OBLIGATIONS TEST- Refers to legal test found in the resolution which governs an agencies ability to issue additional obligations having the same lien on pledged revenues. The District's additional obligations test is expressed as a ratio in which historic earnings must meet or exceed certain levels of future obligation service coverage. 5.4 AD VALOREM TAX- A direct tax based "according to value" of property. Counties and school districts and municipalities usually are, and special tax districts may be, authorized by law to levy ad valorem taxes on property other than intangible personal property. Local government bodies with taxing powers may issue bonds or short-term certificates payable from ad valorem taxation. 5.5 ADVANCE REFUNDING- A transaction in which new debt is issued to provide monies to pay interest on old, outstanding debt as it becomes due, and to pay the principal on the old debt either as it matures or at an earlier call date. An advance refunding occurs before the maturity or call date (more than 90 days before the maturity or call date)of the old debt, and the proceeds of the new debt are invested until the maturity or call date of the old debt. Most advance refundings result in defeasance of debt. 5.6 AMORTIZATION-The process of paying the principal amount of an issue of bonds by periodic payments either directly to certificate holders or to a sinking fund for the benefit of certificate holders. Payments are usually calculated to include interest in addition to a partial payment of the original principal amount. 5.7 ARBITRAGE-Classically,the simultaneous purchase and sale of the same or an equivalent security in order to profit from price discrepancies. The most common occurrence in the public sector involves the investment of the proceeds from the sale of tax-exempt securities in a taxable money market instrument that yields a higher rate, resulting in interest revenue in excess of interest costs. 5.8 ARBITRAGE REBATE REQUIREMENTS-Arbitrage profits(interest revenue in excess of interest costs)from investment bond proceeds that are invested in taxable instruments must be rebated to the U.S. Treasury Department. Page 9 of 18 5.9 AVERAGE COUPON-Weighted average interest cost of an issue. 5.10 BANK INVESTMENT CONTRACT- A separate account at a financial institution that functions like a guaranteed investment contract,whereby the contract is designed to provide guarantees of principal and interest on funds deposited for a specified period. 5.11 BASIS POINT- Yields on municipal securities are usually quoted in basis points where one basis point is equal to 1/100 of one percent. 5.12 BOND- Written evidence of the issuer's obligation to repay a specified principal amount on a date certain(maturity date),together with interest at a stated rate, or according to a formula for determining that rate. Bonds are distinguishable from notes, which mature in a much shorter period of time. 5.13 BOND COUNSEL-An attorney(or firm of attorneys)retained bythe issuer to give a legal opinion on the legality and security of the issue and its tax exemption or taxability. Typically, bond counsel may prepare, or review and advise the issuer regarding, authorizing resolutions or ordinances, trust indentures, official statements, validation proceedings, and litigation. 5.14 BONDED DEBT- The portion of an issuer's total indebtedness as represented by outstanding bands. 5.15 BOND INSURANCE- An insurance policy purchased by an issuer or an underwriter for either an entire issue or specific maturities,which guarantees the payment of principal and interest. This security provides a higher credit rating and thus a lower borrowing cost for an issuer. Bond insurance can be purchased directly by the District prior to the bond sale(direct purchase)or at the underwriter's option and expense (bidder's option). T�he—�a^"''-ictwill attempt POOF'S Corporation when inswFanGe IS appropriate. 5.16 BOND RESOLUTION OR ORDINANCE- The document or documents representing action of the issuer authorizing the issuance and sale of municipal bonds. Issuance of the bonds is usually approved in the authorizing resolution or ordinance, and the sale is usually authorized in a separate document known as the "sale" or "award" resolution. All of such resolutions, read together, constitute the bond resolution, which describes the nature of the obligation and the issuers duties to the bondholders. 5.17 BROKER-A person or firm, other than a bank, which acts as an intermediary by purchasing and selling securities for others rather than for its own account. Page 10 of 18 5.18 CALLABLE BOND-A bond which permits or requires the issuer to redeem the obligation before the stated maturity date at a specified price, usually at or above par by giving notice of redemption in a manner specified in the bond contract. 5.19 CAPITALIZED INTEREST-Interest paid on long-term obligations during the period of time required to complete and prepare an asset for its intended use is capitalized as part of the acquisition cost of an asset. 5.20 CERTIFICATES OF PARTICIPATION- Obligations of a public entity based on a lease or installment sale agreement. These are not considered debt under Article 13 of the California Constitution. 5.21 CERTIFICATE HOLDER- The owner of a municipal certificate of participation to whom payments of principal and interest are made. Generally certificates are registered, and the owner is the person whose name is noted on the certificate register. 5.22 CERTIFICATE REGISTER- The listing of names and addresses of the current registered owners of the certificates, as maintained by the trustee or certificate registrar. 5.23 COMPETITIVE SALE-The sale of bonds through sealed bids. 5.24 COST OF ISSUANCE- The expenses associated with the sale of a new issue of municipal securities, including such items as underwriters spread, printing, legal fees, and rating costs. 5.25 COVENANTS- The issuers enforceable promise to perform or refrain from performing certain actions. With respect to municipal bonds, covenants are generally stated in the bond contract, resolution, or indenture. 5.26 COVERAGE-The ratio of pledged revenues available annually to pay debt service obligations, as compared to the annual debt service obligation requirement. This ratio is one indication of the margin of safety for debt service obligations. 5.27 CREDIT ENHANCEMENT- The availability of additional outside support designed to improve an issuers own credit standing. Examples include bank lines of credit or collateralized funds. 5.28 CURRENT REFUNDING-A refunding transaction in which the proceeds of the refunding debt are applied immediately (no more than 90 days from issuance)to redeem the debt to be refunded. This situation differs from an Page 11 of 18 advance refunding,where the proceeds of the refunding bonds are placed in escrow pending the call date or maturity of the debt to be refunded. 5.29 CURRENT YIELD- The ratio of the annual dollar amount of interest to the purchase price of a bond, stated as a percentage. 5.30 CUSIP NUMBERS (COMMITTEE ON UNIFORM SECURITY IDENTIFICATION PROCEDURES)- Identification numbers assigned each maturity of a bond issue, and usually printed on the face of each individual bond in the issue. The CUSIP numbers are intended to facilitate identification and clearance of municipal securities. 5.31 DEBT LIMIT- The maximum amount of debt which an issuer of municipal securities is permitted to incur under constitutional, statutory, or charter provisions. 5.32 DEBT PER CAPITA- Bonded debt divided by population. 5.33 DEBT SERVICE OBLIGATION- The amount of funds necessary to pay principal and interest, and the required contributions to an amortization sinking fund for term certificates on an outstanding obligation. Debt service obligation on certificates may be calculated on a calendar-year or on a fiscal-year basis. 5.34 DEBT SERVICE RESERVE FUND- A fund usually amounting to principal and interest payments for one year and used only if pledged revenues do not generate sufficient funds to satisfy the debt service requirement. The reserve fund is typically funded in whole or in part from the proceeds of the debt issuance. The size and investment of the reserve fund are usually subject to arbitrage regulations. 5.35 DEBT SERVICE SCHEDULE-Atablelistingtheannualpaymentsnecessary to meet debt service requirements over the period of time the bonds are to be outstanding. 5.36 DEFAULT- Failure to make timely payment of principal and interest or to comply with other features of the indenture. 5.37 DEFEASANCE- Eliminating bonded indebtedness off an issuer's books through creation of a portfolio of allowableTreasury securities sufficient to make all debt service payments on pre-refunded, outstanding bonds. 5.38 DIRECT DEBT- The debt that a governmental agency incurs in its own name. Page 12 of 18 5.39 DISCOUNT- The amount by which par value exceeds the price paid for a security which generally represents the difference between the nominal interest rate and the actual or effective return to the investor. 5.40 DOUBLE-BARRELED BOND- Traditionally, a bond secured by a defined source of revenue plus the full faith and credit of the issuer. The term is occasionally, although erroneously, used to refer to bonds secured by any two sources of pledged revenue. 5.41 DOWNGRADE- The lowering of a bond rating by a rating service. A downgrade would be considered If the issuer encountered major financial difficulties or an economic decline, which may be viewed by the rating service as reducing the credit quality of the bond issue. 5.42 EFFECTIVE INTEREST RATE- The actual rate of interest earned by the investor on bonds purchased, after allowing for premiums, discounts, or accrued interest over the period of the investment. 5.43 FEASIBILITY STUDY-A report by an independent expert on the economic need and practicality of a proposed debt program. 5.44 FINANCIAL ADVISOR- Performs analysis as to the appropriateness of a bond sale and, if the governing body of the agency determines that a bond sale is necessary, they then assist in its planning and preparation. 5.45 FLOATER- A security sold with a variable rate that changes at intervals ranging from daily to annually. 5.46 FULL FAITH AND CREDIT- The pledge of a government's general taxing power to pay off its debt obligations. 5.47 GENERAL OBLIGATION BONDS-Bonds which are secured bythe full faith and credit of the issuer. General obligation bonds are secured by a pledge of a portion of the ad valorem taxing power. Such bonds constitute debts of the issuer and require approval by election prior to issuance. 5.48 GUARANTEED INVESTMENT CONTRACT(GIC)-Agroup annuity contract designed to provide guarantees of principal and interest on funds deposited with an insurance company for a specified period. 5.49 HIGH GRADE BONDS- Top-rated bonds, usually triple-A. 5.50 INDENTURE-Legal document describing the terms and conditions of a bond offering, the rights of the bondholder, and the obligations of the issuer to the bondholder. The document is alternatively referred to as a bond resolution or deed of trust. Page 13 of 18 5.51 INTEREST RATE SWAP- An agreement between two parties to exchange future flows of interest payments. One party agrees Fate; the eth r pays the fiFSt PaFty aR mijustable rate usually toed to a shert- term index.Swao payments may be based on actual bond payments and/or based on various market indices. 5.52 INVERTED YIELD CURVE-When short-term rates are higher than long-term rates. 5.53 INVESTMENT GRADE- The broad credit designation given bonds which have a high probability of being paid. Such bonds, have few, if any, speculative features and are rated by the rating agencies in one of their top four categories, ranging from triple-A to BBB and Baa. 5.54 ISSUER- A state, political subdivision, agency, or authority that borrows money through the sale of bonds or notes. 5.55 JUNIOR LIEN BONDS- Bond with a subordinate claim against pledged revenues. 5.56 LETTER OF CREDIT- An agreement, usually with a commercial bank, to guarantee demands for payment upon compliance with conditions established in the agreement. Bank letters of credit are typically used as additional sources of security and liquidity with variable rate obligations. 5.57 LIQUIDITY- The ability to convert assets, such as investments, readily into cash. 5.58 MATURITY-The date on which the principal amount of a security is due and payable to the certificate holder. 5.59 NEGOTIATED SALE-The sale of a new issue of municipal securities by an issuer through an exclusive agreement with a previously selected underwriter or underwriting syndicate. A negotiated sale should be distinguished from a competitive sale, which requires public bidding by the underwriters. Primary points of negotiation for the issuer are the interest rate and purchase price, which reflect the issuer's cost of offering Its securities in the market. 5.60 NET INTEREST COST(NIC)-Traditional method of calculating an issuer's borrowing cost. NIC is derived by adding the total volume of interest payments for the entire offering and dividing by the amount of certificates outstanding times the years they are outstanding. Page 14 of 18 5.61 NOTES- A written, short-term promise of the issuer to repay a specified principal amount on a certain date,together with interest at a stated rate, or according to a formula for determining that rate, payable from a defined source of anticipated revenue. Notes usually mature in less than five years. Notes are used to cover seasonal cash flow needs or interim financings. 5.62 OFFICIAL STATEMENT (OS) - A document published by the issuer who generally discloses material information on a bond issue, including the purpose of the bond issue, how the bonds will be repaid, and the financial, economic, and demographic characteristics of the issuer. Investors may use this information to evaluate the credit quality of the bonds. 5.63 ORIGINAL ISSUEDISCOUNT(OID)-Thediscountfromparatwhichanew issue comes to market. The capital gain represented by the OID is deemed tax-exempt by the IRS. 5.64 OVERLAPPING DEBT- The issuer's share of the debt of other local units. 5.65 PAR VALUE- The principal amount of a security, which must be paid at maturity. Par value is also referred to as the face amount of a security. 5.66 PARITY BONDS- Separate bond issues that have the same lien against pledged revenues. 5.67 PAY-AS-YOU GO BASIS-The financial policy of a municipality that finances all capital outlays from current revenues rather than from borrowing. 5.68 PAYING AGENT- The entity responsible for the payment of principal and interest on municipal obligations on behalf of the issuer. The paying agent is usually a bank or trust company. 5.69 PLEDGED REVENUES- Funds obligated for the payment of debt service and other deposits as required by the bond contract. 5.70 PRELIMINARY OFFICIAL STATEMENT (POS)-A preliminary version of the official statement which is used by the issuer or underwriter to describe the proposed issue of municipal bonds prior to the determination of an interest rate and offering price. The preliminary official statement is a marketing tool used to gauge buyers interest in the issue and is relied upon by potential purchasers in making their investment decisions. 5.71 PREMIUM- The amount by which the price paid for a security exceeds par value, generally representing the difference between the nominal interest rate and the actual or effective return to the investor. Page 15 of 18 5.72 PRESENT VALUE SAVINGS. Present value of gross savings discounted at the refunding bond yield to the closing date plus accrued interest less any contribution from a reserve or debt service fund. 5.73 PRINCIPAL- The par value or face amount of a bond payable or issue of bonds payable on stated dates of maturity. 5.74 PRIMARY MARKET- The market for new issues of municipal securities. 5.75 PRIVATE PLACEMENT- An original issue of municipal securities sold directly to an institutional or private investor by way of a negotiated sale rather than through a public offering. 5.76 RATE CONVENANT- A bond indenture provision requiring rate changes necessary to meet annual debt service payments. 6.77RATIN11-5: Evaluations of the oFedit quality of notes and nds usually made the timely repayment . 5-785.77 RATING AGENCIES- Credit quality evaluation of an issuer's securities made by independent rating services. The three primary rating agencies with regard to municipal debt are Moody's Investors Services, Standard & Poor's Corporation, and Fitch. 5-795.78 RATINGS. Evaluations of the credit quality of obligations usually made by independent rating services. Ratings generally measure the probability of the timely repayment of principal and interest on municipal obligations. The higher the credit rating,the more favorable the effect on the marketability of the security. 5.895.79 REDEMPTION-A transaction in which the issuer pays an outstanding obligation at a specified price, usually at or above par prior to the specified maturity date. Also known as a call. 5845.80 REFUNDING-Selling a new bond issue for redemption ordefeasance of an outstanding bond issue. There are generally two reasons for refunding: to reduce the issuers interest costs or to remove a burdensome or restrictive covenant imposed by the terms of the bonds being refinanced. 5 825.81 REGISTRAR: The person or entity responsible for maintaining records on behalf of the issuer for the purpose of noting the owners of registered obligations. The paying agent frequently performs this function. 5 835.82 REVENUE BONDS. Bonds payable from a specific source of revenue and which do not pledge the full faith and credit of the issuer. Page 16 of 18 i 5-045.83 SECONDARY MARKET- Market for bonds previously offered and sold. 6855.84 SENIOR LIEN OBLIGATIONS: Obligations having a prior claim on pledge revenues. 6 665.85 SERIAL BONDS- Bonds of an issue in which some bonds mature in each year over a period of years. 5-.975.86 SETTLEMENT- Delivery of and payment for a new issue of municipal bonds. Settlement usually occurs within 30 days after the bonds are awarded to the underwriters, which allows for the printing of the bonds and the completion of certain legal matters. 5-.965.87 SETTLEMENT DATE- The date used in price and interest computations, usually the date of delivery. 5,695.88 SINKING FUND-Afund established in a bond indenture that contains money available to call fonds prior to maturity. 5�05.89 STANDBY BOND PURCHASE AGREEMENT- A legal agreement with a commercial bank or trust company whereby the bank agrees to purchase demand bonds which the remarketing agent was unable to remarket to other parties and chose not to purchase for itself. 5445.90 SUBORDINATE(JUNIOR) LIEN OBLIGATIONS-Obligations having a subordinate claim against pledged revenues. 5A25.91 TAX-EXEMPT OBLIGATIONS-Obligations whose interest is exempt from federal income taxation pursuant to Section 103 of the Internal Revenue Code, and may or may not be exempt from state income or personal property taxation in the jurisdiction where issued. 5 935.92 TERM BONDS- Bonds coming due in a single maturity. The issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of term bonds before maturity or for payment at maturity. 5-.945.93 TRUE INTEREST COST(TIC)-The present value borrowing cost of the issuer is reflected by taking into account the costs of issuance and underwriting. TIC is similar to NIC, but also accounts for the time value of money. 67955.94 TRUSTEE- A financial institution with trust powers which acts in a fiduciary capacity for the benefit of bond holders in enforcing the terms of the bond indenture agreement. I Page 17 of 18 &965.95 TRUST INDENTURE- A contract between the issuer of municipal securities and a trustee, serving for the benefit of the security holders. 6.975.96 UNDERWRITER-A dealer at a bank or brokerage house who buys an agency's bonds in order for the firm's sales force to resell them to both institutional and retail investors. The underwriter may acquire the bonds either by negotiation with the issuer,or by award on the basis of competitive bidding. 6:985.97 UNDERWRITERS COUNSEL-A lawyer involved in the transaction, who represents the securities firm buying an issuerageroy's bonds. §995.98 VARIABLE RATE OBLIGATIONS- A tax-exempt security whose interest rate is reset periodically by the remarketing agent according to a preset formula defined in the indenture agreement. The variable interest rate, also known as a "floater", is determined by the remarketing agent as the level at which all bonds trade at par. 6-1995.99 YIELD CURVE- Graph displaying the term structure of interest rates by plotting the yields of all bonds of the same quality with maturities ranging from shortest to the longest available. 6.1015.100 YIELD TO MATURITY-The rate of return to the investor earned from payments of principal and interest,which is compounded semiannually and assumes that interest paid is reinvested at the same rate. Yield to maturity takes into consideration the time value of the investment. 6a925.101 ZERO-COUPON BONDS- Bonds sold at a deep discount from par, which pay no interest and appreciate to full value at maturity. Also known as capital appreciation bonds. Page 18 of 18 STATE OF CALIFORNIA) ) SS. COUNTY OF ORANGE ) Pursuant to California Government Code Section 54954.2, 1 hereby certify that the Notice and Agenda for the Administration Committee Meeting of Orange County Sanitation District to be held on December 12, 2007, was duly posted for public inspection in the main lobby of the Districts' offices on December 5, 2007. IN WITNESS WHEREOF, I have hereunto set my hand this 5th day of December 2007. Lilia I ovac, Committee Secretary Orange County Sanitation District H:WEMAGENDMADMIN COMMITTEMAGENDA CERTIFICATION.DOC ORANGE COUNTY SANITATION DISTRICT 014i 962 2411 ° December 5, 2007 faa: www.adoJ r.. R..nflw ad.; Poanvm Wlvy IA o729 e1c1 NOTICE OF MEETING .treat aaaroa: 111844 Bl'P Ava,ele a+vanes CA ADMINISTRATION COMMITTEE esme m1e Finance, Human Resources and Information Technology m.aln.r cite a ORANGE COUNTY SANITATION DISTRICT ti,+a.+enn Sir euxna Vale p,a.nre,n v nay WEDNESDAY, DECEMBER 12, 2007 - 5:00 P.M. FuOara,n fd,rMn 6rnw bonm+uto+I eex.�+ DISTRICT'S ADMINISTRATIVE OFFICES woe fa riatna 10844 ELLIS AVENUE 1a van"'' FOUNTAIN VALLEY, CALIFORNIA 92708 Lri Naminu Neuyma. ena,al W W W.00SD.COM UrentyE f'fe.illl Serra All" .`Awl I13m:n 71,.Vl A regular meeting of the Administration Committee of the Orange County Sanitation District will be held at the above location, date 15u1,a frnns and time. County of arena. I.Mt.r. Giatric.a M+dn'a1 ray Woo., G(n..I.. Irwnx Aenap To memm.world-class feadersnip in westeweter sod we ter resource management X}x ♦N,ry i � oy ss F'7 * ixF EXP ADMINISTRATION COMMITTEE MEETING DATES Meeting Date Board Meeting Dates December 12, 2007 *December 19, 2007 January 2008 — Dark January 23, 2008 February 13, 2008 February 27, 2008 March 12, 2008 March 26, 2008 April 9, 2008 April 23, 2008 May 14, 2008 May 28, 2008 June l 1, 2008 June 25, 2008 July 9, 2008 July 23, 2008 AUGUST DARK August 27, 2008 September 10, 2008 *September 17, 2008 October 8, 2008 October 22, 2008 November 12, 2008 *November 19, 2008 *Meetings being held the third Wednesday of the month. ROLL CALL ADMINISTRATION COMMITTEE Finance, Human Resources and Information Technology Meeting Date: December 12, 2007 Time: 5:00 p.m. Adjourn: COMMITTEE MEMBERS (14) Mark Waldman Chair Phil Luebben Ice Chair Steven Choi Bill Dalton Jon Dumdru Rich Freschi Darryl Miller Joy Neu ebauer Chris Norb Ken Parker Sal Tina ero Jim Winder James M. Ferryman Board Chair Doug Davert Board Vice Chair OTHERS Brad in, General Counsel STAFF Jim Ruth, General Manager Bob Ghirelli, Assistant General Manager Nick Arhontes, Director of Operations & Maint. Jim Herber , Director of Engineering Ed Tones, Director of Technical Services Lorenzo Tyner, Director of Finance and Administrative Services Lille Kovac, Committee Secretary Jeff Reed, Human Resources and Employee Relations Mana er Mike White, Contrdler H Wep0agendaWdmin Commiaeel12071ll2.Roll Call.d. AGENDA REGULAR MEETING OF THE ADMINISTRATION COMMITTEE ORANGE COUNTY SANITATION DISTRICT WEDNESDAY, DECEMBER 12, 2007, AT 5:00 P.M. ADMINISTRATIVE OFFICE 10844 Ellis Avenue Fountain Valley, California 92708 www.oGsd.com (1) PLEDGE OF ALLEGIANCE (2) DECLARATION OF QUORUM (3) APPOINTMENT OF CHAIR PRO TEM, IF NECESSARY (4) PUBLIC COMMENTS (5) REPORT OF COMMITTEE CHAIR (6) REPORT OF GENERAL MANAGER (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES (8) REPORT OF GENERAL COUNSEL (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. Approve minutes of the November 14, 2007 meeting of the Administration Committee. Book Page I December 12, 2007 Page 2 END OE QONSENT CALENDAR C. Consideration of items deleted from Consent Calendar, if any. (10) ACTION ITEMS (11) INFORMATIONAL ITEMS a. ADM07-60 Leadership Academy (Book Page 9) b. ADM07-61 Debt Financing Program Overview (Book Page 12) (12) CLOSED SESSION ......._._._........---..__......._..... ._..._..._.._..................................................................._.._............................._............_.__._...... '---__._._._.__........ _._..., During the course of conducting the business set forth on this agenda as a regular meeting of the Committee, i 1 the Chair may convene the Committee in dosed session to consider matters of pending real estate regotations, ipending or potential litigation, or personnel matters, pursuant to Government Code Sections 54956.8,54956.9, i 54957 or 54957.6,as noted. Reports relating to (a) purchase and sale of real property; (b) matters of pending or potential litigation; (c) � I employee actions or negotiations with employee representatives; or Which are exempt from public disclosure I under the California Public Records Act, may be reviewed by the Committee during a permitted closed session 1 and are not available for public inspection. At such time as final actions are taken by the Committee on any of i 1 these sub(ects,ftnumutes will.rellect all M uired.disclosures of information. ....................... .........._......_.....—___...________._.__._.___.._._.__................._.i a. Convene in closed session. b. Reconvene in regular session. c. Consideration of action, if any, on matters considered in closed session. (13) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT (15) FUTURE MEETING DATES The next regular Administration Committee meeting is scheduled for February 13, 2006, at 5 P.M. (16) ADJOURNMENT Book Page 2 December 12, 2007 Page 3 Aaenda Posting: In accordance with the requirements of California Government Code Section 54954.2, this agenda has been posted in the main lobby of the District's Administrative offices not less than 72 hours prior to the meeting date and time above. All written materials relating to each agenda item are available for public inspection in the office of the Clerk of the Board. Items Not Posted: In the event any matter not listed on this agenda is proposed to be submitted to the Committee for discussion and/or action, it will be done in compliance with Section 54954.2(b) as an emergency item or because there is a need to take immediate action, which need came to the attention of the Committee subsequent to the posting of agenda, or as set forth on a supplemental agenda posted in the manner as above, not less than 72 hours prior to the meeting date. Public Comments: Any member of the public may address the Administration Committee on specific agenda items or matters of general interest. As determined by the Chair, speakers may be deferred until the specific item is taken for discussion and remarks may be limited to three minutes. Matters of interest addressed by a member of the public and not listed on this agenda cannot have action taken by the Committee except as authorized by Section 54954.2(b). Consent Calendar: All matters placed on the consent calendar are considered as not requiring discussion or further explanation, and unless a particular item is requested to be removed from the consent calendar by a Director of staff member,there will be no separate discussion of these items. All items on the consent calendar will be enacted by one action approving all motions, and casting a unanimous ballot for resolutions included on the consent calendar. All items removed from the consent calendar shall be considered in the regular order of business. The Committee Chair will determine if any items are to be deleted from the consent calendar. Items Continued: Items may be continued from this meeting without further notice to a Committee meeting held within five(5)days of this meeting per Government Code Section 54954.2(b)(3). Meeting Adioumment: This meeting may be adjourned to a later time and items of business from this agenda may be considered at the later meeting by Order of Adjournment and Notice in accordance with Government Code Section. 54955(posted within 24 hours). Accommodations for the Disabled: The Board of Directors Meeting Room is wheelchair accessible. If you require any special disability related accommodations, please contact the Orange County Sanitation District Clerk of the Board's office at (714)593-7130 at least 72 hours prior to the scheduled meeting. Requests must specify the nature of the disability and the type of accommodation requested. Notice to Committee Members: For any questions on the agenda or to place any Items on the agenda, Committee members should contact the Committee Chair or Clerk of the Board ten days in advance of the Committee meeting. Committee Chair. Mark Waldman (714)927-1959 Committee Secretary: Lila Kovac (714)593-7124 IkovacMocsd.com General Manager: Jim Ruth (714)5934110 inAh@ocad.com Assistant General Manager Bob Ghirelli (714)593.7400 rohirelli0ocsd.mm Director of Finance and Lorenzo Tyner (714)593-75M Iwnerl@ocsd.com Administrative Services Human Resources and Employee Jeff Read (714)593-7144 ireed&Zocsd.com Relations Manager H:WeptlagendaWdmin Commikee\1207103.121007 Administration Agenda.doc Book Page 3 December12, 2007 ADMINISTRATION COMMITTEE AGENDA CALENDAR Item Action February Quarterly Investment Report Information February 2008/09—2009/10 Budget Assumptions Action February 2008/09—2013/14 Sewer Service Charges Action February ARBA Agreement Information Book Page 4 MINUTES OF THE REGULAR MEETING OF THE ADMINISTRATION COMMITTEE Orange County Sanitation District Wednesday, November 14, 2007, at 5:00 P.M. A meeting of the Administration Committee of the Orange County Sanitation District was held on November 14,2007, at 5:00 p.m., in the Sanitation District's Administrative Office. (2) Following the Pledge of Allegiance, a quorum was declared present, as follows: ADMINISTRATION COMMITTEE STAFF PRESENT: MEMBERS: Jim Ruth, General Manager DIRECTORS PRESENT: Bob Ghirelli,Assistant General Manager Mark Waldman, Chair Lorenzo Tyner, Director of Finance and Phil Luebben, Vice Chair Administrative Services Steven Choi Mike White, Controller Catherine Driscoll (Alt) Jeff Reed, Human Resources 8 Employee Relations Jon Dumitru Manager Rich Freschi Life Kovac, Committee Secretary Darryl Miller Bob Bell Joy Neugebauer Rich Castillon Chris Norby Norbert Gets Sal Tinajero Bob Gaggle Jim Winder Paul Loehr Jim Ferryman, Board Chair Juanita Skillman Doug Davert, Board Vice Chair Simon Watson DIRECTORS ABSENT: OTHERS PRESENT: Bill Dalton Brad Hogin, General Counsel Ed Soong Public Resources Advisory Group Jennifer Christian Mayer Hoffman McCann and Stephen Parker, Mayer Hoffman McCann Toby Weissert, Carollo Engineers (3) APPOINTMENT OF CHAIR PRO TEM No appointment was necessary. (4) PUBLIC COMMENTS There were no public comments. (5) REPORT OF THE COMMITTEE CHAIR Chair Waldman did not give a report. (6) REPORT OF THE GENERAL MANAGER General Manager,Jim Ruth, did not give a report. Book Page 5 Minutes of the Administration Committee November 14, 2007 Page 2 (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES Lorenzo Tyner, Director of Finance and Administrative Services, did not give a report. (8) REPORT OF GENERAL COUNSEL Brad Hogin, General Counsel, briefly reported the agreement with the Orange County Water District regarding the GWRS will be reviewed in detail and revised, if necessary, prior to operating at full capacity. Mr. Hogin also informed the Committee members that agreements with SAWPA re SARI Line will also be reviewed and updated, if necessary. (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. MOVED, SECONDED AND DULY CARRIED: Approve minutes of the October 10, 2007 meeting of the Administration Committee. Director Driscoll abstained. b. ADM07-52 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to 1)Approve Change Order No. 2 to Purchase Order No. 55952-OS, a sole-source agreement, issued to Louis Allen Worldwide for management and leadership training services, adding four one-year renewal periods effective January 1, 2008 through December 31, 2008, authorizing $28,800 for this period, and $24,000 for all subsequent renewal periods,for a total amount not to exceed $253,815; and, 2)Approve a 5% per year cost escalation. END OF CONSENT CALENDAR (10) ACTION ITEMS a. ADM07-53 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to receive and file: 1)Comprehensive Annual Financial Report for the year ended June 30, 2007, prepared by staff and audited by Mayer Hoffman McCann, Certified Public Accountants; 2) Report on Compliance and Internal Control for the year ended June 30, 2007;and 3) Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. Book Page 6 Minutes of the Administration Committee November 14, 2007 Page 3 b. ADM07-54 Director Miller indicated his concern of seeing only one option to issue the certificates of participation proposed with a fixed rate, but no information for issuance with a variable rate and its applicable inferences. A workshop was proposed to be held to review debt policies. A substitute motion was made to bring this item back to the Administration Committee with further information; however, due to critical timing of the budgeting process,this would cause a delay of three months for COP issuance. It was then proposed that the following item be sent to the Board of Directors for consideration along with the requested additional information,with no recommendation from the committee: 1)Adopt Resolution No. OCSD-_, a Resolution of the Board of Directors of the Orange County Sanitation District Authorizing the Execution and Delivery by the District of an Installment Purchase Agreement, a Trust Agreement,and a Continuing Disclosure Agreement in connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, Series 2007B,Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed $300,000,000,Authorizing the Distribution of an Official Notice Inviting Bids and an Official Statement in Connection with the Offering and Sale of such Certificates and Authorizing the Execution of Necessary Documents and Related Actions; and, 2)The Orange County Sanitation District Financing Corporation approves the documents supporting and authorizing the Certificates of Participation, Series 2007E in an amount not to exceed $300 million. C. ADM07-55 MOVED,SECONDED AND DULY CARRIED: Recommend to the Board of Directors to: 1)Approve a sole source purchase order to IBM Corporation for the purchase of IBM Maximo Enterprise Asset Management software for replacement of the Computerized Maintenance Management System,for a total amount of$592,932; and, 2)Approve a 5% contingency($29,647). d. ADM07-M MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to: 1)Authorize a renewal to the Master Contract with Xerox, Inc.,for an additional five-year period, December 1, 2007 through November 30,2012,for a total amount not to exceed $233,000 per year, and color copies at$.09 per impression; and, 2)Authorize a maximum 10%contingency($23,300) per year. e. ADM07-57 MOVED,SECONDED AND DULY CARRIED:Approve a sole source Consultant Services Agreement with Carollo Engineers to complete a sewer rate study in an amount not to exceed $156,508. Book Page 7 Minutes of the Administration Committee November 14, 2007 Page 4 f. ADM07-58 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to approve an extension of the Additional Retiree Benefit Account agreement with Orange County Employees Retirement System, extending the contract for a period of up to 90 days. (11) INFORMATIONAL ITEMS a. ADM07-59 Labor Relations Program Update Jeff Reed, Manager of Human Resources and Employee Relations, and Paul Loehr, Employee Relations Supervisor,briefly updated the committee members on the progress in implementing the Memorandum of Understanding provisions as ratified by the Board of Directors. (12) CONVENE INCLOSED SESSION PURSUANT TO GOVERNMENT CODE SECTION 54957(b)(1). There was no closed session. (13) OTHER BUSINESS,COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY There were none. (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT There were none. (15) FUTURE MEETING DATES The next regular Administration Committee meeting is scheduled for December 12,2007,at 5 P.M. (16)ADJOURNMENT The Chair declared the meeting adjourned at 6:30 p.m. Submitted by: 'LiU v w✓ lid Kovac Committee Secretary Book Page 8 ADMINISTRATION COMMITTEE Meeum Date To ad.or(W. 11/VJ07 W19107 AGENDA REPORT Ran NU WW 1OMNwnb ADM07-60 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance & Administrative Services SUBJECT: LEADERSHIP ACADEMY GENERAL MANAGER'S RECOMMENDATION Information only. SUMMARY The General Manager will request that the Board of Directors approve a contract with Pepperdine University to develop and deliver a six-module Leadership Academy for OCSD. This program will be presented to the Board on December 19, 2007, for an amount of$188,646, plus a 5% per year cost escalation. Such an academy will build a consistent leadership approach across OCSD management. The program will contribute to a stronger leadership culture by building leadership skills, which supports the focus of OCSD's Succession Management Program and compliments the management-skills focus of Profession of Management training. A Leadership Academy will be provided annually through FY 11-12, for a total of six groups, to ensure consistency and continuity at all levels of management. PRIOR COMMITTEEIBOARD ACTIONS None. ADDITIONAL INFORMATION The General Manager requested that Human Resources staff contact local academic institutions regarding the development and delivery of a Leadership Academy for OCSD. Staff contacted 22 local universities to determine the structure of their leadership training programs, as well as their ability to customize an existing leadership program or create a new program to meet OCSD's specific needs. Several proposals were provided, and most focused on management skills. Pepperdine University and Chapman University provided information and had significant experience with programs focused on leadership. After meeting with both institutions, the General Manager determined that Pepperdine's approach and content best fit OCSD's needs and expectations. The proposal from Pepperdine best aligned with OCSD's leadership competencies, the goals of the Succession Management Program, and the General Manager's leadership philosophy. FOM No,DW10t FruoG.=1W Page 1 Book Page 9 The program will consist of six modules, for a total of 24 training hours per participant. The recommended training modules, which will be customized according to OCSD's input, cover the following topics: • Individual Leadership Style • Communication • Interpersonal Skills • Team Leadership • Decision Making • Problem Solving All levels of management will have the opportunity to attend the Leadership Academy in one of the six groups of 20 participants each. The program will be conducted according to the following schedule: Group Participants Schedule 1 6 EMT + 14 Managers Jan. 2008-Jun. 2008 2 8 Managers + 12 Supervisors Jul. 2008-Dec. 2008 3 20 Supervisors Jan. 2009-Jun. 2009 4 20 Supervisors Jul. 2009-Dec. 2009 5 20Supervisors Jul. 2010- Dec. 2010 6 Supervisors 4 + new + Leads Jul. 2011 -Dec. 2011 The program costs will be incurred over five fiscal years, as detailed below: Fiscal Year Schedule FY Total FY07-08 Jan. 2008-Jun. 2008 $31,441 FY 08-09 Jul. 2008-Dec. 2008 $62,882 Jan. 2009-Jun. 2009 FY 09-10 Jul. 2009-Dec. 2009 $31,441 FY 1D-11 Jul. 2010 - Dec. 2010 $31,441 FY 11-12 Jul. 2011 - Dec. 2011 $31,441 Total Program Costs $188,60 Fiscal Years 5 Average Annual Cost $37,729 Fo,m No.D iu3 IWW:OLo1Nr Page 2 Book Page 10 Previously an OCSD Leadership Education and Development(LEAD)training program was conducted on-site by Chapman University in 2001. Managers and supervisors participated, for a total of 48 participants divided into three groups. The curriculum included six class meetings, including kick-off and closing sessions, for a total of 38 training hours per participant. The four sessions in OCSD's LEAD program in 2001were titled as follows: • Leading from Within • Leading with Integrity • Building Team Spirit • Authentic Communication However, the LEAD program is dated and does not align with the leadership philosophy of OCSD's current management team. Also, only 52 percent of OCSD's present management staff attended the LEAD program. The LEAD program was not designed to support OCSD's Succession Management Program or the General Manager's leadership philosophy, or compliment the Profession of Management training. A Leadership Academy developed with Pepperdine University would do so. Pepperdine University is an appropriate vendor for OCSD's upcoming Leadership Academy. Its status as a highly-respected academic community and the reputation of its Graziadio School of Business and Management reflect the quality of its education services. The acclaim it has earned since the university was established in 1937 supports OCSD's desire to pursue this vendor for the Leadership Academy. Procuring Pepperdine University's services will ensure that OCSD implements a high- quality customized leadership training program that meets the needs of the organization. This item will be funded from OCSD's existing centralized training funds. ATTACHMENTS None. JDR:LT:JR:RS Fo,m No.0 10 3 Periva:0.VJtro] Page 3 Book Page I I ADMINISTRATION COMMITTEE Ming oo'e To Bd.of M. 2112107 AGENDA REPORT Item Number Item Number goMm-sl Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: DEBT FINANCING PROGRAM OVERVIEW GENERAL MANAGER'S RECOMMENDATION For information only SUMMARY As a result of recent discussions related to capital financing, it has been determined that a broader discussion of the OCSD Debt Financing Program is warranted. Therefore the December Administration Committee meeting will be dedicated to this topic. Staff, assisted by its financial consultant, will provide a financing overview. This overview will include a discussion of the types of debt, the process for issuance, and related OCSD policies. In addition to the attachments included with this report, additional materials will be provided at the Administration Committee meeting. PRIOR COMMITTEE/BOARD ACTIONS • November 28, 2007: The OCSD's Board of Directors approved the issuance of $300 million in fixed-rate debt. • September 12, 2007: The Administration Committee authorized issuance of up to $300 million in new fixed-rate Certificates of Participation debt. • June 27, 2007: The OCSD Board of Directors approved 2007-08 Budget Update, which included a 2007 debt issuance. ADDITIONAL INFORMATION Additional materials will be provided at the Administration Committee meeting. ATTACHMENTS 1. Memorandum to the OCSD Board of Directors dated November 26, 2007 2. OCSD Debt Policy JDR:LT:MW:Ic Form No.D 102.3 PWIwE:O&otwl Page 1 Book Page 12 November 26, 2007 MEMORANDUM TO: Board of Directors James D. Ruth, General Manager �- FROM: Lorenzo Tyner-t;-I. Director of Finance and Administrative Services SUBJECT: Certificates of Participation At the November Administration Committee, staff presented an item requesting approval to issue $300 million in Certificates of Participation (COPs) as called for in the District's current cash flow projection. This item Is listed as Board Agenda Item Number 15 -Certificates of Participation(COPS), Series 2007E -and is contained in your Board Agenda materials. This debt issuance was included in the 2006-07 budget approved in June 2006 and the 2007-08 Budget Update approved in June 2007. Staff first obtained approval to issue $300 million of fixed rate debt at the September Administration Committee. At that time, Staff recommended that this $300 million COP debt be Issued as traditional fixed rate debt in keeping with components of the District's Debt Policy regarding variable debt: • The maximum level of variable rate obligations incurred shall not exceed the level of available invested reserves: and • The District will maintain an overall fixed versus variable rate debt mix allowed for the District by the Rating Agencies. Additionally, as the District is projected to issue over$1 billion more in debt in support of the Capital Improvement Program(CIP), there would be amply opportunity to adjust the future mix fixed and variable debt. Book Page 13 After some discussion, the Administration Committee referred this item to the full Board without a recommendation. During the staff presentation to the Administration Committee, some Committee members had questions regarding this debt issuance, including the appropriate mix of fixed rate and variable debt and overall debt capacity. The direction from the Committee was to send the item forward to the full Board without recommendation and for staff to provide additional information at the Board meeting. This correspondence includes additional information regarding the District's debt financing program and the rationale for issuing debt at this time and the selection of fixed rate debt, and includes an update of the District's Capital Improvement Program Financing Plan prepared by the District's financial advisor, Public Resources Advisory Group (PRAG). If you have any questions or concerns, please feel free to contact me. Book Page 14 Debt Financing Program Certificates of Participation (COPs)are the District's primary mechanism for financing capital projects. COPS are repayment obligations based on a lease or installment sale agreement. The 2006-07 Budget adopted in June 2006 included the proposed $300 million debt issuance. The 2007-08 Budget Update adopted in June 2007 also included this debt issuance to assist with financing of the $334 million in capital outlays scheduled for this fiscal year. Due to the magnitude of identified future annual capital and operations and maintenance expenditures, and the discontinuation of federal and state grant programs, the Master Plan concluded that it was necessary to utilize debt financing to meet our obligations. Debt financing, recommended by the Master Plan, would enable the District to meet projected construction schedules while achieving the lowest possible user fees, as well as long-term stability for the user fees. A Ten-Year Financial Plan is maintained to establish financing parameters regarding the issuance of debt, the levying of user charges and the funding level for the four-part reserve structure. The Financial Plan is revised annually to reflect the most current cost and revenue figures resulting from capital program revisions and operating changes. The District embarked upon its Debt Financing and Management Program, and specifically its Variable and Fixed Rate Debt Program (the "Program"), in 1990 with the issuance of$100 million in Certificates of Participation ("COP"), Capital Improvement Program, 1990 Series"A." The Program was established to accomplish the following: • To finance assets with long useful lives with long-term debt; • To achieve the lowest possible interest costs and highest investment returns, commensurate with the appropriate risk; • To recoup reserve moneys that had previously been spent. CON are repayment obligations based on a lease or installment sale agreement. The COP structure was selected over other structures because COPS are not viewed as debt by the State of California, as the purchaser does not actually receive a "bond," but rather a share in an installment sale arrangement where the District serves as the purchaser. Accordingly, the District is not subject to the usual State restrictions surrounding the issuance of debt. CON can be issued with fixed or variable interest rates. Book Page 15 Fixed-rate debt can be either traditional or synthetic in form: • Fixed-Rate Debt traditionally has a final maturity between 20 and 30 years from the date of issuance. Generally, principal is amortized annually. Principal maturing in early years typically has a lower interest rate("coupon")than later maturities. This structure typically produces a level debt service. The District's 2003 series is a traditional fixed- rate debt issuance. Synthetic Fixed-Rate Debt: Long-term, variable-rate debt can be issued and then the interest component can be swapped to a fixed rate. This form of fixed-rate debt achieves a balance between short and long-term interest costs and is frequently a less expensive form of debt. In some markets, this form of fixed-rate debt is less expensive to issue than the more traditional form of fixed-rate debt described above. The District's 1992 and 1993 Refunding Series are both synthetic fixed rate COPs. Variable-rate debt ran also be traditional or synthetic: " Variable-Rate Debt: traditionally has either a long or short nominal maturity, but the interest rate resets periodically. Typically, the intervals for interest rate resets are daily, weekly or monthly, but any period is possible. Both the District's Series 2000 COPS and Series 2006 are variable-rate debt maturing in 30 years, but with sinking funds to retire a portion of the principal annually, and a daily interest rate reset. • Synthetic Variable-Rate Debt: As described above for fixed-rate debt, variable-rate debt can be created from a fixed-rate issue by means of a floating-rate swap. An important factor to keep in mind, however,when reviewing the historical difference between variable rate and fixed rate debt is that there are two fees that occur with variable rate debt that are in addition to the interest rate. These fees are liquidity fees and remarketing fees. Even when these extra fees are included, variable rates have been lower than fixed rates over the past several years. The maximum level of variable rate obligations incurred by the District should not exceed the level of invested reserves available. This policy hedge is to be maintained between variable rate obligations and short-term investments. The periodic change in interest earnings on the District's unrestricted reserve funds(invested in short-term securities like Treasury Bills)will move in a fashion similar to the movement of the yield on the District's variable rate obligations. This "floating hedge"will result in a generally consistent and predictable spread between the District's financing cost and the yield on the invested funds. Moreover, since the District's obligations are tax-exempt, while its reserves earn taxable yields, there is a potential legal arbitrage benefit which may actually lower the District's cost of funds. There are complex federal regulations that limit the interest(arbitrage) earnings on tax exempt financings and the District complies with them. Book Page 16 The District has entered into two types of swaps since 1990: fixed-to-floating and floating-to-fixed. Fixed-to-floating interest rate swaps allow an issuer to convert all or a portion of its fixed rate debt to a floating rate. The way this is accomplished is the issuer receives a fixed payment from a counterparty and makes floating rate based payments to that counterparty. A floating-to-fixed interest rate swap allows the issuer to convert floating rate debt to fixed rate. The counterparty makes floating rate based payments to the issuer and, in return, the issuer makes fixed payments to the counterparty, The certificate holder, in both cases, receives the payment that the counterparty pays to the issuer. The certificate holder, or investor, always receives the original stream of payments. Through discussions with the Rating Agencies, the District has been permitted to maintain an overall fixed versus variable rate debt mix of approximately 50:50. "Synthetic"fixed transactions are considered as fixed rate transaction by the Rating Agencies since the swap duration matches the maturity of the COP. These ratios are higher than those traditionally allowed for most issuers, in part because of the District's reserve policy. The District currently has outstanding synthetic fixed-rate and fixed-rate COPS of$410.4 million and variable-rate COPs of$398.2 million, for a ratio of 51:49. The Series 2000 Refunding reduced the three tiers of outstanding debt, Closed Senior Obligations, Senior Subordinate Obligations, and Junior Obligations, to only two tiers, Open Senior and Subordinate. Series 2003 and Series 2006 were issued to fund current and future capital improvement expenditures. Figure 1 shows the status of all outstanding COPS at June 30, 2006. Figure I snmm.re nreedlne.m ar Pamdamen Serb 1992 Senn 1993Series 2006 Series M3 Series 2006 Series Irene Nnme Refunding CON Reftoding COP, Reruadiag COW COP, COW bme Den 12.0Y1992 09-21-1993 W-31-280D 0936d003 0341.2006 Original Per 9160,6D0d100 $46.00,000 $218160R000 $280,000,000 8201)g00,000 Onurendlog Par W3,120,W W.250JO S19R2I01OW 52aiuddi3OW $200,00,000 Payment Date Augmt 1 Axpu 1 Auguu I Nbru,ry I February 1 Geeof Prouedr Adv9nae Refunding Advanxe Refunding W.x&Reimb. RSImbJFnture CIP C..VFOture CIF Lien or Tier Open Senor Open Senior open Senior Open Senior Open Senior Interest Rate Mode, Synthui¢Fixed Synthetic Fired VaAable Fixed Vnriuble Fian1 MntOnty Date 8-1-2013 9-1-2016 8-13030 2-1-2033 2.1-2036 Due to the current low interest rate environment, the District refunded $88.5 million of the COP Series $280 million debt with the issuance of the$95 million Refunding COP Series 2007A in May 2007. The net present value savings generated from this refunding totaled $4.4 million. Book Page 17 Dedicated Funding Source In 1992 and 2004 the Board of Directors formalized the dedication of certain funding sources. To assure the continuation of favorable credit ratings, revenues were dedicated to debt service in the following order: 1. Ad valorem property taxes 2. Sanitary sewer service charges i 3. Other revenues This apportionment of the ad valorem tax was consistent with and pursuant to the Revenue Program adopted in April 1979 to comply with regulations of the Environmental Protection Agency and the State Water Resources Control Board and in accordance with COP documents and Board policy. Up until FY 2003-04, property tax revenues alone had been sufficient to meet current debt service payments. However, since the $280 million COP Series 2003 debt issuance, this revenue source now has to be augmented by sewer service charges or user fees. Annual increases in these user fees to offset property tax revenue shortfalls, as well as to assist in the funding of the CIP expansion, are projected for the next several years. Establishment of Debt Policy In 2001,the District developed a written debt policy for the following underlying reasons: • promoting consistency and continuity; • rationalizing the decision making process; • committing to long-term financial planning; • enhancing the quality of decisions; and • promoting credit quality to rating agencies. This Board adopted policy serves as the agency's guide in the management of existing debt and in the issuance of future debt. Included within this debt policy are the following restrictions on the issuance of variable rate debt: • The maximum level of variable rate obligations Incurred shall not exceed the level of available invested reserves; and • The District will maintain an overall fixed versus variable rate debt mix allowed for the District by the Rating Agencies. Coverage Ratios OCSD has no legal debt limits as imposed by state legislation. The District does have contractual covenants within the existing COP indenture agreements which require minimum coverage ratios (the ratio of net annual revenues available for debt service requirements to total annual debt service requirements for all senior lien COP debt)of 1.25. However, traditionally rating agencies have looked favorably at ratios in excess of this amount. Book Page 18 Future Debt Financings In March 2006; the District issued $200 million of COP fixed rate debt for current and future capital improvements to be constructed over FY 2005-06 and FY 2006-07. As the result of having a well-funded reserve policy, experienced management, and prudent planning, the District was able to secure "As" category ratings from all three rating agencies. The District's long-range financing plan is designed to maintain these high ratings. Over the next 15 years, the District is projecting an additional $2.5 billion in future treatment plant and collection system capital improvements. In accordance with the District's long-term debt fiscal policy, the District will confine long-term borrowing to capital improvements that cannot be financed from current revenue. Before any new debt is issued,the impact of debt service payments on total annual fixed costs will be analyzed. Although no new debt issuance is being proposed for FY 2006-07, the District's cash Flow forecast calls for the issuance of$300 million of COP in FY 2007-08 to help offset the CIP cash outlays scheduled to occur the same year. A total of$1.2 billion in COP debt Issuance is being proposed over the next seven years. These financings are needed early in the 15-year capital program because the bulk of the construction is scheduled during the next six years. Included on page 12 of the CIP Program Financing Plan Update prepared by PRAG is an updated forecast on the financing plan out to 2019-20 by COP debt structure including traditional fixed, synthetic fixed, traditional variable (hedged), and traditional variable (unhedged). Book Page 19 Capital Improvement Program Financing Plan Update .a SANI T<r t � 4 / \PO r iHc � for the Orange County Sanitation District Certificates of Participation, Series 2007B = PRAG Public Resources Advisory Group November 26, 2007 Book Page 20 Orange County Sanitation District Page 1 CIP Financing Plan Update-COPs, Series 2007E November 26, 2007 Background The Orange County Sanitation District (the "District") adopted a long-term capital improvement program ("CIP") as part of its strategic planning initiatives. The CIP includes a number of different projects which will provide new treatment and disposal capacity and expand the collection system for the District. In addition, the District expects to fund other replacement, rehabilitation, and refurbishment projects to properly maintain the operation of existing facilities. It is anticipated the District will use a combination of ongoing revenues and new debt issuances to finance the CIP through fiscal year 2019-20. The following chart shows the projected funding of capital costs between revenues and debt proceeds. ($mm) Estimated Sources of CIP Funding 400 ---- - - -- - 350 - -- -- ■Ongoing Revenues 300 ® , - -- ■Debt Financed 250 200 - 150 - 100 50 0 6) W O N VI O O N O O O O O O O O O O O O O N N N N N N N N N N N N N The long period over which expenditures are expected to be made, the magnitude of those expenditures, the long useful life of the assets funded, and the goal of minimizing the already substantial (on a percentage basis) rate increases, all support the decision to finance a substantial portion of the CIP through a series of bond financings through fiscal year 2013-14. Assuming a series of debt issuances requires that long-term strategic considerations must be examined on an aggregate basis with each future issuance providing the District with the opportunity to be flexible and make adjustments. In addition, a series of debt issuances should reduce the risk associated with liming the market for the lowest interest cost. The timing and sizes of subsequent issuances is estimated in the following table. Fiscal Year Approximate Size 2007-08 $300.000,000 2008-09 236,000,000 2009-10 177,0D0,000 2010-11 131,000,000 2011-12 100.000.000 2012-13 130.0MD00 2013-14 60.000.000 Total $1,134,000,000 The District has requested that Public Resources Advisory Group ("PRAG") provide recommendations pertaining to the management of existing debt and the issuance of additional debt in connection with the CIP. In 2005, PRAG provided a report (the '2005 Report") = PRAG Book Page 21 Orange County Sanitation District Page 2 CIP Financing Plan Update—COPS, Series 2007E November 26, 2007 summarizing our debt management recommendations based on information which was available at the time, including the District's financial projections, data on market conditions, historical interest rates, best practices among municipal issuers, credit issues, and the District's outstanding debt. The recommendations were formulated as guidelines for a long-term financing plan that balances lowering interest cost and Interest rate risk. This report applies the principles outlined in the 2005 Report to the upcoming issuance of the District's certificates of participation ("COPS")and updates certain recommendations based on the District's current financial position (and projections) and changes in market conditions. The District's Current Outstandina Debt Currently, the District has approximately $784 million of outstanding long-term debt, comprised of six different series of COPS. The six series of COPS include traditional fixed rate COPS, synthetic fixed rate COPS (i.e., variable rate COPS linked to a floating-to-fixed interest rate swap, which together create an expected net fixed rate obligation) and variable rate COPS, which were issued to fund new capital improvements and to refund then outstanding debt. Additional detailed information pertaining to the COPS is shown in the following table. Original Par Outstanding Final Maturity Interest Series Issued Par (Fiscal Year) Rate Mode Purpose of Issuance Refunded 1986 COPS($107 1992 $160,800,000 $77,340,000 2014 Synthetic Fixed million)and Series B COPS ($38.4 million 1993 46,000.000 26,900.000 2017 Synthetic Refunded Series B COPS Fixed ($39.7 million) Variable Refunded Series A. B and C 2000 218,600,000 198,600,000 2031 (Daily reset) �COPS cal79.7Imipron)and s 2003 280,000,000 191,500.000 2033 Fixed Funded capital improvements 2006 200,000,000 196,600,000 2036 Variable Funded capital improvements (Daily reset) 2007A 95,180,000 95,180,000 2030 Fixed Refunded a portion of Series 2003 COPS($88.5 million Total $1,300,380,000 $784,120,000 On an aggregate basis, as shown in the graphic on the following page, over 50% of the District's outstanding debt portfolio (i.e., $393.2 million) is net variable rate (not fixed rate or synthetic fixed rate). This exposure to fluctuations in short-term interest rates is offset to some degree by the District's short-term investment assets. According to the District's most recent Quarterly Treasurer's Report for the Three Months Ended September 30, 2007 (the "Treasurer's Report"), the District's investment account balances totaled $336.4 million, including debt service reserve deposits with the trustee. Of this amount, approximately $65.7 million must be deposited in debt service reserve funds, the earnings on which are subject to yield restriction in accordance with arbitrage regulations and, as a result, do not serve as effective hedges against changes in short- term interest rates. Therefore, a balance of $270.7 million in investment assets is available to hedge against short-term interest rate movements. PRAG estimates that this balance of short-term taxable investments effectively hedges an equal amount of, or in other words on a one-to-one ("l-to-1 Basis") with, tax-exempt variable rate COPS. (Note that this differs from the implied three- to-two basis originating from the top-bracket marginal federal income tax rate of 35%.) The 1-to-1 Basis reflects that the traditional composition of the District's investment portfolio, the vast majority of which is held in long-term bond funds and that investment eamings from long-term bond funds PRAG Book Page 22 Orange County Sanitation District Page 3 CIP Financing Plan Update—COPs, Series 2007E November 26, 2007 are less responsive (than their short-term bond fund counterparts) to short-term interest rate movements. All in all, the District's current unhedged, net variable rate exposure which is hedged by neither interest rate swaps nor investment assets is approximately 15.6%. Breakdown of Outstanding COPS Fixed, 5286.]mm, 36.6% Variable, i393.2mm, 50.1% IV f Synthetic Fixed. 9104.2mm, 13.3% The aggregate debt service profile of the COPS is nearly level, after taking into account the releases of debt service reserves to pay debt service for each given series. From fiscal year 2007-08 through fiscal year 2031-32, net annual debt service associated with the outstanding COPS is approximately $48 million; there is an increase for fiscal year 2032-33 to approximately $57 million. Thereafter, net annual debt service declines to approximately $18 million through fiscal year 2034-35. The following chart illustrates the aggregate debt service profile of the District's outstanding COPS. 901smml Aggregate Debt Service �sr er 1992=s.rb 1993 _ }II _Serse2000 =series 2000 ..._.. 701..I=sense 2009 MMSems 2007A -'.. Wt Debt Svc. _ _...... I i 60 s0 40 — 30 20 1(01 lIL�1 O r) N O O O O C O O O O O O O O O N N N N N N N N N N N N N N N Variable to Fixed Ratio A fundamental strategic consideration of a long-term financing plan for a multi-year capital improvement program is the ratio that represents the variable versus fixed rate debt relationship of an outstanding debt portfolio (the -Variable/Fixed Ratio'). The Variable/Fixed Ratio is calculated as the ratio of variable rate debt divided by total debt. The overall target Variable/Fixed Ratio set by the District should be based on (1)the amount of and the type of interest rate risk the PRAG Book Page 23 Orange County Sanitation District Page 4 CIP Financing Plan Update—COPs, Series 2007B November 26, 2007 District is willing to accept and (2)the expected cost benefit of variable rate debt over fixed rate debt. Prior to each future debt issuance, the District has a choice of issuing fixed rate, variable rate, or a combination of fixed and variable to reach the overall target Variable/Fixed Ratio. The District should evaluate each component (fixed or variable) on a net hedged basis by considering the amount of outstanding hedges that mitigate or offset variable rate risk. Interest Cost Savinos Historically, short-term variable rates have been lower than long-term fixed rates. The following chart compares long-term BondBuyer 20 General Obligation index (BBG020) to the Securities Industry and Financial Market Association (SIFMA), formerly known as Bond Market Association (BMA), swap index (a composite index for over 150 highly-rated, tax-exempt variable rate demand obligations). The BMAISIFMA swap index has been an accurate indicator for the variable interest cost of the District's debt. BBG020(long-term tax-exempt)versus BMAISIFMA(short-term tax-exempt) B820G0 Rate � BMAISIFMA Rate 4% T(+�t "( My '}I ji$tr . i7.1 _. n^I�4A5% (current) 3% '���,',d111 hIY h !tf' Y avxrktm�:::,iF ✓ ,.,I 310% .13.41%(current) 1% .__. _._...... _ yw......_. ....,.....III m m m m w w m m w m o 0 0 0 0 o e e o If short-tern tax-exempt variable rates continue to be low, there is an expected cost benefit which is one of the primary reasons to issue variable rate rather than fixed rate debt. However, in the current market, the difference between short- and long-term interest rates as shown above is less than the historic averages. The risk of variable rate debt is that periodic short-term interest rate spikes, which exceed long- term foxed rates, can and have occurred in the past. Also, variable rate debt requires additional costs for credit enhancement and remarketing which effectively increase the cost of borrowing. Short-term interest rate changes by the Federal Reserve since 2005 have directly impacted short- term tax-exempt interest rates. Any additional Federal Reserve rate changes are likely to correspondingly affect municipal variable rates. Since 1990, the historical correlation between the BMA/SIFMA swap index and Federal Funds Rate is strong at 92.7% as shown in the following chart. PRAG Book Page 24 Orange County Sanitation District Page 5 CIP Financing Plan Update—COPs, Series 2007B November 26, 2007 BMAISIFMA versus Fed Funds Rate 9% ........ ...........j SMAfSIFMAAA ate .._.. .....-... •. _. _.._.. . .... .........�_.Fed Funds Rate _.. ... . ..._....._..... .........,...' _...— - 7% I... .......... ..... _.__.-_-.. . .......... 6% "� .�e ....... . r.. } 4% _ . . .. ._....._; . O N PJ V b O A m N S OS pp pNp VSS! O b Ip 1` Hedges The Variable/Fixed Ratio of the District is limited by (1)the amount of outstanding hedges (i.e., interest rate swaps and investments), (2) the expected ability to withstand interest rate spikes and (3) rating agency guidelines. To calculate the unhedged (or net) VadablelFixed Ratio, the amount of variable rate assets (and fixed payer swaps) is subtracted from the outstanding variable rate debt and the result is divided by total outstanding debt("Net Variable/Fixed Ratio"). The following table provide simplified examples on how asset-to-liability hedging works by assuming a 1-to-1 Basis for the relationship of taxable interest eamings to tax-exempt interest earnings. Annual Taxable Annual Tax-Exempt Incremental Investment Incremental Interest Earnings Variable Rate Earnings Rate Investment Net Annual Rate Change Debt Cost Change I Income Income I(Cost) Example One-$100 million Variable Rate Debt and$200 million Assets +100 bps ($1,000.000) +100 bps $2.000.000 $1.006.000 -100 bps 1 $1,000,000 -100 bps $2,000,000) ($1,000,000) Exam 1e Two-$200 million Variable Rate Debt and$200 million Assets +100 bps ($2,000,000) +100 bps $2,000.000 $0 •100 bps $2.000.000 -10o bps ($2,000.000) $0 Example Three-$300 million Variable Rate Debt and$200 million Assets +100 b $3,000,000 +700 bps $2,000,000 ($1,000,000) -100 bps $310001000 -100 bps ($2,000.000) $1,000,000 As shown by Example Two in the table above, which assumes a 1-to-1 Basis, perfect hedging occurs when variable rate debt is equal to the amount of assets which neutralizes the impact of any interest earnings rate movements on net incometcost. If the amount of debt is less than the amount of assets ('overhedged", as in Example One), net income would change in the same direction as interest earnings rates (as interest earnings rates increase, net income increases and vice versa). If the amount of debt is more than the amount of assets (Example Three), net income would change in inverse proportion to the direction of interest earnings rates. In other words, not PRAG Book Page 25 Orange County Sanitation District Page 6 C/P Financing Plan Update-COPs, Series 2007E November 26, 2007 only can the issuance of a large amount of variable rate debt introduce interest rate risk, but also the seemingly conservative choice of targeting a low Variable/Fixed Ratio (i.e., having mostly or all fixed rate debt) can introduce interest earnings rate risk. In addition, for the District's multi-year CUP, the future fixed rate borrowing cost of the District will vary, creating long-term interest rate risk to the District. As described above, the District currently has $270.7 million of investment assets which could effectively hedge an equal amount of variable rate debt, assuming a 1-to-1 Basis between changes in investment earnings and short-term variable rate bond interest payments. The 1-to-1 Basis is consistent with the District's policy to limit the aggregate amount of variable rate debt to no more than its reserves, including any debt service reserves. This policy, recognized by rating agencies (see Credit Rating Impact discussion below), is an effective management tool to mitigate variable rate risk to the District. In comparison, the District has $393.2 million of variable rate COPS outstanding, a situation which could be considered underhedged; for example, if interest rates were to increase, interest costs could increase greater than investment income. This is somewhat offset by the fact that the amount of reserves is forecasted to grow by $106.9 million to $377.6 million(net of$169.4 million debt service reserves) over the next five years. Credit Ratino Impact Credit ratings from rating agencies can impact the borrowing costs for fixed rate debt and also credit enhancement costs for variable rate debt. Among many factors, financial and non-financial, the Variable/Fixed Ratio is one of the factors that credit rating analysts review when assigning credit ratings. For a given rating, the Variable/Fixed Ratio acceptable to rating agencies varies depending on the available liquidity to the issuer, volatility of revenues, flexibility of an issuer to adjust revenues, variability of other (i.e., not interest-related) expenses, and an issuer's ability to understand and manage interest rate risk. Moody's Investors Service ('Moody's*) has "assign[ed] high-grade long- and short-term ratings to some issuers, typically well endowed colleges or cash flush states, public authorities and hospitals, with as much as 30% to 50% of their debt in variable rate mode." Standard & Poor's ("S&P") states that "[i]ssuers with competitive rates, tax advantages, or significant short-term assets can handle variable and short-term debt well in excess of 80% of total debt, some even with 100%, when backed by accompanying risk management programs.- More specifically, the District's Variable/Fixed Ratio is an important element in the assessment by the rating agencies of its financial strength. In their published reports, the rating agencies discuss the District's Variable/Fixed Ratio as one factor in assessing the credit profile of the District. Excerpts from rating reports pertaining to the District's fixed versus variable rate capital structure and how the District manages this risk are below: Moody's: "The District has issued a significant amount of variable rate debt. The District's ample reserves provide a natural hedge against the risk posed by the District's variable rate debt, and the District routinely monitors the relationship between its invested assets and its variable rate debt exposure. Variable rate debt is limited by policy to not more than tx District reserves." Filch Ratings ("Fitch"): "Unhedged variable-rate exposure is above average, constituting approximately 50% of outstanding debt..." S&P: "The 2000 and 2006 COPs are variable rate, totaling $398 million, and are hedged through the district's cash position, which is by board policy maintained at a PRAG Book Page 26 Orange County Sanitation District Page 7 CIP Financing Plan Update-COPs, Series 2007B November 28, 2007 high level, with cash reserves targeted at least equal to variable rate debt outstanding.-The district's policy is never to have more variable-rate debt than reserves, so that interest earnings may offset variable interest costs." Based on the current financial condition of the District, PRAG believes that the District's future Variable/Fixed Ratio could be gradually increased with minimal, if any, negative credit rating consequences. The actual level will depend on the District's debt management policies (primarily relating to Section 4.3.4.1 of the District's Debt Policy requiring "The maximum level of variable rate obligations incurred shall not exceed the level of available invested reserves."), evolving financial profile of the District (including the amount of its cash reserves), the funding progress of the CIP, and the ability to secure timely rate increases. Structure of Debt Issuance For each pending debt issuance, the decision on whether to issue fixed or variable rate debt, provided there is sufficient flexibility to achieve the target Variable/Fixed Ratio, should be based on two factors--(1)the level of fixed rate interest rates and (2) the perceived interest cost savings of variable rate debt over fixed rate debt. If long-term interest rates are perceived to be low relative to (1)expected future long-term interest rates and/or (2) historical long-term fixed rates, then fixed rate debt would be the attractive choice. The former method of comparison is dependent on interest rate outlooks by an issuer, which span the range from lower to higher interest rates. Some economists have predicted that interest rates will rise, while others have forecasted continuing low interest rates. In general, it seems very difficult to accurately predict the direction of long-term interest rates, if not impossible. The historical data necessary for the latter method of comparison is readily available. As shown in the following chart,current long-term tax-exempt interest rates (represented by the BB20GO Index) are lower than both the 15-year and the 50-year historic averages. However, some economists in recent years have proposed that curets interest rates reflect a return to "normal" interest rate levels and that the high interest rates of the late 1970's and early 1980's were aberrations which have artificially distorted historic averages. In addition, as with investing, past history is not, and should not be, a predictor of future events. Nevertheless, based on near-term historic data, current long-term interest rates, although somewhat higher than recent lows in March of this year, remain relatively low. Bond Buyer General Obligation (G.O.)20 Index 14% 12% -.. BBG020 RNa 15-Year Awxage : r 10% ;. _....._.. . . 8% . .... 6 70h. . iw. 2%-�- - -Recent low 13/a107)a4.08%- Current*4.46% 0% PRAG Book Page 27 Orange County Sanitation District Page a CIP Financing Plan Update—COPS, Series 20078 November 28, 2007 Alternatively, if long-tens interest rates are perceived as high and the immediate benefit for the issuance of variable rate debt is high (i.e., the difference between short- and long-term interest rates is large),then variable rate debt would be an attractive choice. Again, the prediction of future interest rates is a very difficult, if not impossible, task and therefore, the analysis as to whether or not the two aforementioned conditions exist is generally based on current market conditions in relation to historic averages. One approach for this type of analysis is to compare current market conditions to a two- dimensional matrix which plots the historic instances of these two parameters: (1) long-term interest rates and (2)the difference between short- and long-term interest rates), as shown below. As shown in the following chart, when current market conditions fall within in the upper right quadrant of the matrix (highlighted in yellow), the issuance of variable rate debt is deemed favorable. In other quadrants, the issuance of fixed rate debt may be beneficial. For example, in the upper left quadrant, when long-term interest rates are high but the benefit of variable rate debt is low (small difference between short- and long-term interest rates), the use of fixed rate debt avoids interest rate risk, at a relatively low cost, since it is possible to refund the debt lf interest rates were to decline in the future. Meanwhile, in the bottom half of the matrix, when long-term interest rates are low, the use of fixed rate debt may be attractive to lock in low rates. The use of fixed rate debt is especially appropriate in the lower left quadrant (highlighted in green) in which the benefit of variable rate debt over fixed rate debt is relatively low. 8820GO versus BB20GO less SIFMA(since 1990) 2.30% Favors Vadabie 7.5% -. ... .. ''..r.-.... ............. . .......... ....Rate OeSt-......_.. i � 1 r •• y p 6.5% i.. .... . .. '. ....... .. . . .. • . .. ... '. ....•..'... 6.0% ry Favors Fixed . • s 45/e _PaW OBbb l.fit }(1 r ... a ;�. +.1K -w .- . ................� Y�•� :r 1 cw}erh. 4.0% ae ;e ae ax X 0 K ae aE O N O N O Yf O N O 1n O O •- � Cl tV O! O! Q Q Fixed Rate versus Synthetic Debt Structure One implementation strategy to consider depending on market conditions is the use of synthetic rather than traditional debt structures. For instance, if the District chooses to issue additional fixed rate exposure, it could do so by either(1) issuing fixed rate COPS or(2) issuing variable rate COPS PRAG Book Page 28 Orange County Sanitation District Page 9 CIP Financing Plan Update— COPs. Series 2007E November 26, 2007 plus entering into a floating-to-fixed interest rate swap. In the latter case, the Floating rate receipt is expected to offset the variable rate debt service of the COPS, creating a net fixed rate obligation approximating the fixed swap rate. Under certain market conditions, synthetic fixed rate debt structures may generate a lower expected borrowing cost. The spread between traditional and synthetic fixed rate debt structures have fluctuated in the past. The following table illustrates this historic Fluctuation by comparing 20-year 65% of 1-month LIBOR (or London Interbank Offering Rate, which is a taxable short-term interest rate) swap rates to the 20-year AAA GO MMD (which is the market benchmark for 20-year tax-exempt interest rates). As shown in the graph below, the spread has fluctuated between 0.46% and 1.44%, as market conditions and the relationships between taxable and lax-exempt interest rates have shifted. Current market relationships between traditional fixed rate bonds and synthetic debt structures are not particularly compelling, especially given the recent concerns about the financial strength of certain traditional providers of interest rate swaps. Spread: 20-year Cal Insured MMD Less 20•year 65%of LIBOR Swap Rate _I Spread 1.4% - "swaps'- �,� Average Outperform I I ' 1.2% Average=0.96% n ! Current= 0.96% 0.8% Bonds 0.6% Outperform 0.4% ._. __ . .. . .. . ._ _ .__ m m g n or m m w N N N N N N N N N In addition, fluctuations between short-term taxable and tax-exempt interest rates can also impact the borrowing cost of synthetic fixed rate debt structures by changing not only the fixed swap rates paid on Floating-to-fixed rate swaps but also the hedging efficiency of interest rate swaps. In other words. while there is an expectation that floating rate receipt from the swap would match the variable rate debt service of the debt, actual results may differ significantly from this expectation which is referred to as "Basis Risk". As the result of Basis Risk, a synthetic fixed rate structure unlike a traditional fixed rate structure carries risk related to non-correlated interest rate movements. In addition. synthetic fixed rate structures entail other risks to an issuer, such as tax risk, credit enhancement risk, counterparty risk, and termination risk. The cost of fixed rate municipal debt call option is low which means the mathematically calculated value of the call option exceeds the actual cost of the call option. The fixed rate debt call option allows an issuer to take advantage of future lower interest rates. With synthetic fixed rate structures the cost of a call option typically equals the calculated value of the call option. Therefore, issuers of synthetic fixed rate structures should be confident that the fixed rate spread is sufficiently high because, unlike fixed rate municipal debt, there are limited opportunities to further lower interest costs. = PRAG Book Page 29 Orange County Sanitation District Page 10 CIP Financing Plan Update—COPs, Series 2007E November 26, 2007 Based on all of the above factors (especially, the less than optimal market relationships between traditional fixed rate bonds and synthetic rate debt), PRAG believes that the District should issue traditional fixed rate bonds for the upcoming sale, but should consider market conditions to re- evaluate this decision at the time of each future sale. Capital Improvement Proaram Financinn Strateov The CIP of the District is expected to be funded by a series of bond issuances through fiscal year 2013-14. As noted in the 2005 Report, a step-by-step financing implementation plan would be ideal; however, it would inevitably be inaccurate without the specific knowledge of future market trends and conditions. Therefore, PRAG continues to believe the District should focus its long- term planning on global strategic considerations, such as the timing of the financings and the target Variable/Fixed Ratios. Implementation strategies should be analyzed on an issue-by-issue basis subject to market conditions at the time of each sale. Consistent with this approach, we have amended the specific steps outlining a potential financing strategy to take into account changes in the District's financial condition, projections for future performance and general interest rate conditions. As in the 2005 Report, the preliminary financing strategy assumes the District believes that(1)future fixed interest rates are difficult to predict, (2)variable rates will ultimately be less than current fixed rates, and (3)the District will have sufficient liquidity to absorb any additional interest costs associated with potential variable rate interest spikes. The following considerations and steps outline our updated potential financing strategy for the District: 1) Determine target Net Variable/Fixed Ratio based on (a) the District's current Debt Policy, including recent written statements by the rating agencies, (b) outstanding hedges, (c) expected reserve amounts, (d) 1-to-1 Basis or another estimate based on the allocation of investments, and (a) expected cost effectiveness of variable rate. 2) PRAG assumes the issuance of next $300 million of COPS will be fixed rate obligations. A fixed rate issuance seems to be appropriate when analyzing historical short- and long-term interest rates. The District's reserve balance as shown in the most recent Treasurer's Report is$336.4 million, which is less than the outstanding amount of variable rate COPS of $393.2 million, although reserves are forecasted to grow to over$450 million by the end of the fiscal year. 3) With subsequent issuances, re-evaluate the District's Debt Policy and the target unhedged Variable/Fixed Ratio based on market conditions at the time. Of course, the target unhedged Variable/Fixed Ratio will likely change as the CIP unfolds and matures, and as new financing products become available to municipal issuers. The current amount of District reserves and the Debt Policy indicate the next sale of$300 million of COPS should be fixed rate obligations. After the issuance of these fixed rate COPS, there remains Flexibility for the District to continue to adjust its target Variable/Fixed Ratio. The following graph illustrates the extent to which the District may affect its aggregate (or gross) and Net Variable/Fixed Ratios through the issuance of either fixed or variable rate COPs in future years. PRAG Book Page 30 Orange County Sanitation District page if CIP Financing Plan Update—COPs, Series 2007B November 26, 2007 Potential Gross Variable/Fixed Ratios 70% 1 ............................................................... .......................................... 50% ...... ....................... .............................1.111.1...........I.......I'll,............ 40% L............................................................................... 30% .................................. ........................................................................ —L� .. ............................ .................... . ...... 20% F=—rMl.................................................................... Mianival 10% 4....... ...............................*........................... ........... Current 2008 2009 2010 2011 2012 2013 2014 Over time, PRAG believes that the District can prudently increase its Net Variable/Fixed Ratio to approximately 25%without jeopardizing its current credit ratings. To do so, it would be necessary to update the District's Debt Policy to allow for the amount of outstanding variable rate debt to exceed the level of the District's reserves. On the following page, PRAG has updated the preliminary financing plan of the CIP a version of which was originally provided in the 2005 Report. This updated plan assumes a revision to the District's Debt Policy and the use of variable rate debt to increase the District's Net Variable/Fixed Ratio to a maximum of 25% in future years. In particular, the plan assumes the issuance of 1011% variable rate COPS to fund the debt-financed portion of the CIP requirements in fiscal year 2008-09 (totaling $236 million). In addition, the plan assumes the issuance of hybrid structures with traditional fixed, synthetic fixed, and variable rate COPS structured to achieve 30-year level debt service. This assumption is intended to account for constant changes in market conditions over time and the preservation of the ability to evaluate these market conditions at the time of each sale to determine the most appropriate financing structure. M PRAG Book Page 31 Orange County Sanitation District Page 12 C1P Financing Plan Update-COPs, Series 20078 November 26, 2007 Orange County Sanitation District Preliminary Financing Plan -Estimated Debt Outstanding.Issued and Repaid (Amounts in$millions) rascal year 26b7.0e ? crag 200U lg 201013, n11-12 2012,13 s 4 2014-15 201516 2,6-1] 2017-18 2o10-19 2011920 eegmning Oulstanaing 9ala.' Treddi...I Fixed 2667 585.2 5804 649.0 697.2 731.3 776.8 790.6 780.1 789.1 757.5 745.3 732.6 synthetic Fixed 104.2 104.2 Sao 111.0 121.1 135.3 153.4 142.8 132.6 121.8 110.4 108.0 105.5 Traditional Variable(Hedgedl' 258.0 357.5 315.2 332.6 374 361.a 375.2 4021 4110 411.0 410.5 4297 4487 Traditional Vanable(Unhedgedt' 1352 35.7 313.2 358.E 388.0 3915 4116 384.6 355.7 334.5 3082 25(r3 2010 scheduled Princtpal Repayment' Taditonal Find it.5) (4.7) (4.9) (6.3) (7.4) (6q (11 2) (10.5) (11.0) (11.6) (12.2) (12.8) (134) Synthetic Fixed 00 (14.3) 115.2) (167) (6.3) (a.M (22B) (10.3) (10.8) (114) (2.4) (2.5) (2.6) Traditional Variable 00 (0a) (4.5) (56) (19.0) (17a) (22.41 (20.5) (21.3) (26]) (3 a) (34.2) (35.7) New Bond Issuance2 TratlOional Favor 300.0 0.0 73.5 544 41S 54.0 24.9 0.0 0.0 0.0 0.0 00 0.0 w synthetic Fixed! 0.0 00 36.2 26.8 20.5 266 12.3 oa all 0.0 00 0.0 0.0 O F TratlBional Variable 0.0 236.0 67.3 49.8 38.0 49.4 22.8 0.0 0.0 0.0 0.0 00 00 O w Ending Outstanding Balance' m Traditional Feed 585.2 580.4 649.0 697.2 731.3 776.9 790.6 780.1 769A 757.5 745.3 732.6 719.2 h'2 synthetic Fixed 1N.2 900 111.0 121A 135.3 153.4 142.8 132E 121.8 110.4 1080 105.5 102.8 N Traditional Vaneble(Hedged)) 357.5 3152 332.6 347A 361.8 375.2 402.7 4110 411.0 410.5 429.7 448] 460.1 Traditional Variable(Unhedged)' 35.7 313.2 358.6 380a 393.5 411.6 384.E 3557 334.5 308.2 256.3 203A 155.9 Percentage of Overall Debt Traditional Fixed 54.1% 447% 443% 44.9% 45.1% 45.2% 45.9% 484% 47.0% 477% 484% 492% 50.0% synthetic Fixed 9.6% 6.9% 7.6% 7.8% 8.3% 8.9% 8.3% 7.9% 7.4% 7.0% 70% 7.1% 7.2% Traditional Variable,(Hedged)' 33.0% 24.3% 22.9% 224% 22.3% 21.9% 23.4% 245% 25.1% 25.9% 27.9% 30.1% 32.0% Traditional Variable(Unhedged)' 3.3% 24.1% 24.7% 25.0% 24.3% 24.0% 22.4% 21.2% 20.4% 194% Ill 134% 10.8% 1 For projection purposes only. Future balances and percentages vdll vary dependng on Ma target VariablelFued Ratio and market conditions at the Ibne of each sale. 2 Assumes issue.of 5300 million of traditional fixed rate COPs in fiscal year 2007-08 and$236 million of variable hate COPS in fiscal year 200M9. All subsequent issuances are aSswnetl M use hybrid traditional and synthetic fxed(vartable rate debt structures amortized to achieve level debt service over 30 years based on a 5%interest rate. The MUD of fixed-lo-variable rate debt of Me hybrid structure used is assumed to be constant and targets total variable rate Punctual equal to the amount of Me District's projected reserves.while Me ratio of taditional-to-synthel c find rate debt attire hybrid is assumed to be 2-to-1. A al rates of fixed-lo-vanable rate debt wfil wry depending on market conditions at Me time a sale. 3 Calculated based on a 1-to-t Basic and the Cannot'.projected total reserves less debt service reserves. PRAG Orange County Sanitation District Page 13 CIP Financing Plan Update—COPs, Series 2007E November 26, 2007 As the District moves forward with its CIP, its debt service obligations are expected to increase significantly. At this time, by issuing fixed rate COPS when long-term interest rates are relatively low from a historic perspective, PRAG believes the District can mitigate the debt service costs of additional capital needs. The following table illustrates the rapid rise of aggregate net debt service due to these future issuances. ismml Aggregate Net Debt Service 150 ------.....--- ■Cument ®Sedes2007B ■Additional Future Financings 125 - _. ......_.. .__.. . .... .. 100 -......... ...._._. 75 -- 60 25 .........I 0 O O O O O O O ry O O O O O O O O O O N N N N N ry N N N N ry N ry N N N N PRAG Book Page 33 FINANCE DEPARTMENT POLICY AND PROCEDURE __T Indax: Finance Administration Subject: Debt Poli' Number. 201-3-1 Effective Dafe: August 13, 2003 Prepared by: Finance Administration Supersedes: September 19, 2001 Approved By: FAHR Committee 1.0 PURPOSE: The foundation of any well-managed debt program is a comprehensive debt policy. A debt policy sets forth the parameters for issuing debt and managing outstanding debt, and provides guidance to decision makers regarding the timing and purposes for which debt may be issued, types and amounts of permissible debt, methods of sale that may be used and structural features that may be incorporated. The debt policy should recognize a binding commitment to full and timely repayment of all debt as an intrinsic requirement for entry into the capital markets. Adherence to a debt policy helps to ensure that a government maintains a sound debt position and that credit quality is protected. Advantages of a debt policy are as follows: 1.1 enhances the quality of decisions by imposing order and discipline, and promoting consistency and continuity in decision making; 1.2 rationalizes the decision-making process; 1.3 identifies objectives for staff to implement; 1.4 demonstrates a commitment to long-term financial planning objectives,and; 1.5 is viewed positively by the rating agencies in reviewing credit quality. 2.0 ORGANIZATIONS AFFECTED: General Manager's Department, Finance Department, General Counsel,bond rating agencies, financial advisors, bond underwriters, bond counsel, and external independent auditors. Page 1 of 17 Book Page 34 3.0 REFERENCES: 3.1 2002 Interim Strategic Plan Update 3.2 1999 Strategic Plan Update. 3.3 1989 "2020 Vision" Master Plan. 3.4 Government Finance Officers Association publication "A Guide for Preparing a Debt Policy". 3.5 "Moody's on Municipals-An Introduction to Issuing Debt" by Moody's Investor Services. 3.6 Handbook for Muni-Bond Issuers by Joe Mysak, published by Bloomberg Professional Library. 4.0 POLICY: 4.1 Limitations on Indebtedness- 4.1.1 The District's debt capacity will not exceed legal limitations, such as coverage requirements or additional bonds tests imposed by existing bond covenants, and will not rise to a level that will impairthe District's bond ratings. 4.1.2 Before any new debt is issued, the impact of debt service payments on total annual fixed costs will be analyzed. In accordance with existing COP indenture agreements, Net Operating Revenues must be at least a 1.25 coverage ratio to the maximum annual debt service. 4.1.3 The District will restrict long-term borrowing to capital improvements that cannot be financed from current revenue. 4.1.4 Proceeds from long-term debt will not be used for current on-going operations. 4.2 Types of Debt- 4.2.1 The District may use short-term debt to cover temporary or emergency cash flow shortages. All short-term borrowing will be subject to Board approval by resolution. 4.2.2 The District may utilize Board approved intra-agency loans ratherthan outside debt instruments to meet short-term cash needs. Intra-agency loans will be permitted only if an analysis of the affected Revenue Areas indicates funds are available and the use of these fundswill not Page 2 of 17 Book Page 35 impact current operations. The principal, along with interest at the prevailing rate as established by the District's Treasurer, will be paid to the lending Revenue Area. 4.2.3 Commercial Paper- The District may issue short-term debt in the form of Commercial Paper. Interest rates on commercial paper are generally more favorable to an issuer in comparison to other forms of debt. 4.2.4 Revenue Bonds- The District may issue as special obligations various types of revenue securities including notes, warrants, interim debentures, bonds, and temporary bonds. Securities issued as special obligations do not constitute outstanding indebtedness of the District nor do they exhaust its legal debt-incurring power. Bonding should be limited to projects with available revenue sources,whether self-generated or dedicated from other sources such as user fees. Adequate financing feasibility studies should be performed for each revenue issue. Sufficiency of revenues should continue throughout the life of the bonds. 4.2.5 Certificates of Participation- Certificates of participation are essentially leases which are sold to the public. The lease payments are subject to annual appropriation. Investors purchase certificates representing their participation in the lease. Often, equipment or facilities being acquired serve as collateral. These securities are most useful when other means to finance are not available under state law. 4.2.6 Refundings-A refunding is generally the underwriting of anew bond issue whose proceeds are used to redeem an outstanding issue. 4.2.6.1 Prior to beginning a refunding bond issue, the District will review and estimate of the savings achievable from the refunding. The District may also review a pro forma schedule estimating the savings assuming that the refunding is done at various points in the future. Following are the conditions under which the District will consider refunding outstanding bonds: 4.2.6.1.1 Present value savings are at least three (3) percent of the par amount of the refunding bonds. 4.2.6.1.2 Present value savings exceed the costs of issuing the bonds. 4.2.6.1.3 The bonds to be refunded have restrictive or outdated covenants. Page 3 of 17 Book Page 36 4.2.6.1.4 Current savings are acceptable when compared to savings that could be achieved by waiting for more favorable interest rates and/or call premiums. 4.2.6.1.5 Restructuring debt is deemed to be desirable. 4.3 Debt Structure- 4.3.1 Debt will be structured to achieve the lowest possible net cost to the District given market conditions, the urgency of the capital program, and the nature and type of security to be provided. 4.3.2 The District will design the repayment of its overall debt so as to rapidly recapture its credit capacity for future use. 4.3.2.1 The term of District debt issues should not extend beyond the useful life of the project and generally should not extend beyond 30 years unless there are compelling factors which make it necessary to extend the term further. 4.3.3 Debt issued by the District should be structured to provide for either level principal or level debt service. Deferring the repayment of principal should be avoided except in select instances where it will take a period of time before project revenues are sufficient to pay debt service. Ascending debt service should generally be avoided. 4.3.4 Variable Rate Obligations- When appropriate, the District may choose to issue variable rate obligations, or securities that pay a rate of interest that varies according to a predetermined formula or results from a periodic remarketing of the securities. 4.3.4.1 The maximum level of variable rate obligations incurred shall not exceed the level of available invested reserves. 4.3.4.2 The District will maintain an overall fixed versus variable rate debt mix allowed for the District by the Rating Agencies. 4.4 Credit Objectives- 4.4.1 The District's goal is to maintain or improve its bond ratings. To that end, prudent financial management policies will be adhered to in all areas. 4.4.2 Rating Agencies - Page 4 of 17 Book Page 37 4.4.2.1 Full disclosure of operations will be made to the bond rating agencies. District staff, with the assistance of the financial advisors and bond counsel, will prepare the necessary materials for and presentation to the rating agencies. 4.4.2.2 The District will maintain a line of communications with the rating agencies (Moody's, Standard & Poor's, and Fitch), informing them of major financial events at the District as they occur. The Comprehensive Annual Financial Report (CAFR) shall be distributed to the rating agencies after it has been accepted by the Board of Directors. 4.4.2.3 The rating agencies will be notified when the District begins preparation for a debt issuance. After the initial contact, a formal ratings application will be prepared and sent along with the draft of the Official Statement relating to the bond sale to the rating agencies. This application and related documentation should be sent several weeks prior to the bond sale to give the rating agencies sufficient time to perform their review. 4.4.2.4 A personal meeting with representatives of the rating agencies will be scheduled every few years or whenever a major project is initiated. 4.4.3 Credit Enhancements- are mechanisms which guarantee principal and interest payments. They include bond insurance and a line or letter of credit. A credit enhancement, while costly, will sometimes bring a higher rating from the rating agencies and a lower interest rate on debt,thus lowering overall costs. Credit enhancements will only be used when net debt service is reduced by more than the cost of the enhancement. During the debt issuance planning, the Financial Advisor will advise the District which credit enhancements if any, should be purchased. 4.4.4 Dedicated Revenue Sources- In order to ensure the most favorable credit ratings, District revenues are dedicated to debt service in the following order: 4.4.4.1 Ad valorem property tax. 4.4.4.2 Sanitary sewer service charges. 4.4.4.3 Other revenues. 4.5 Method of Sale - Page 5 of 17 Book Page 38 4.5.1 The District will select a method of sale that is the most appropriate in light of financial, market, transaction-specific and issuer-related conditions, and explain the rationale for its decision. 4.5.1.1 Competitive Sales- Debt obligations are generally issued through a competitive sale. The District and its financial advisor will set the terms of the sale to encourage as many bidders as possible. By maximizing bidding, the District seeks to obtain the lowest possible interest rates on its bonds. 4.5.1.2 Negotiated Sales-When certain conditions favorable for a competitive sale do not exist and when a negotiated sale will provide significant benefits to the District that would not be achieved through a competitive sale, the District may elect to sell its debt obligations through a private or negotiated sale. Such determination may be made on an issue-by-issue basis,for a series of issues, or for part or all of a specific financing program upon approval by the Finance,Administration,and Human Resources Committee (FAHR). 4.6 Methods of Selecting Consultants- 4.6.1 Financial Advisor- The District will retain an external financial advisor, to be selected for a tens of up to four years, through a competitive process administered by the District's Finance Department. The utilization of the financial advisor for a particular bond sale will be on a case by case basis upon recommendation by the Director of Finance and approval by FAHR pursuant to a financial advisory service contract. For each District bond sale, the financial advisor will provide the District with information on pricing and underwriting fees for comparable sales by other issuers. 4.6.2 Underwriters-For all competitive and negotiated sales, underwriters will be required to demonstrate sufficient capitalization and experience related to the debt issuance. The selection of underwriters may be for an individual or series of financings or a specified time period. 4.6.3 Bond Counsel-The District will retain extemal bond counsel for all debt issues. All debt issued by the District will include a written opinion by bond counsel affirming that the District is authorized to issue the debt, stating that the District has met all state constitutional and statutory requirements necessary for issuance, and determining the debt's federal income tax status. Bond counsel will be selected for a term of up to four years through a competitive process administered Page 6 of 17 Book Page 39 by the District's Finance Department. The selection process will require comprehensive municipal debt experience. 4.6.4 Paying Agent- The District shall solicit periodically for paying agent services from qualified commercial and trustee banks. The cost of providing such services shall be used, along with other qualitative measurements, in developing a Paying Agent recommendation to the FAHR, along with the term of such agreement. 4.7 Disclosure and Arbitrage Compliance- 4.7.1 The District will follow all State and federal regulations and requirements regarding bond provisions, issuance, taxation, and disclosure. 4.7.2 The District will monitor compliance with bond covenants and adhere to federal arbitrage regulations. Any instances of noncompliance will be reported to the FAHR. 4.7.3 The District will maintain good communications with bond rating agencies about its financial condition and will follow a policy of full disclosure in every financial report and bond prospectus (Official Statement). 4.7.4 Official Statements accompanying debt issues, CAFRs, and continuous disclosure statements will meet, at a minimum, the standards articulated by the Municipal Standards Rulemaking Board (MSRB), the Government Accounting Standards Board (GASB), the National Federation of Municipal Analysts, the Securities and Exchange Commission (SEC), and Generally Accepted Accounting Principles (GAAP). The Finance Department will be responsible for ongoing disclosure to all Nationally Recognized Municipal Information Depositories(NRMSIRs) designated by the SEC and for maintaining compliance with disclosure standards promulgated by state and national regulatory bodies. 4.7.4.1 Quarterly compliance reports to NRMSIRs. 4.7.4.2 Copies of CAFR and updated tables from the Official Statement to NRMSIRs within six month of year end. 5.0 DEFIN177ONS: 5.1 ACCRUED INTERST- In the sale of a new issue of municipal bonds, the dollar amount, based on the stated rate or rates of interest, which has accrued on the bonds from the dated date, or other stated date, up to but not Page 7 of 17 Book Page 40 including the date of delivery. When a bond is purchased in the secondary market, the dollar amount, based upon the stated rate of interest, which has accrued on the bond from the most recent interest payment date, up to but not including the date of settlement. Accrued interest is paid to the seller by the purchaser and is usually calculated on a 360-day year basis (assumes each month has 30 days). 5.2 ADDITIONAL BONDS TEST- Refers to legal test found in resolution or ordinance securing bonds; governs ability to issue additional bonds having the same lien on pledged revenues. Usually expressed as a ratio in which historic earnings meet certain levels of future debt service coverage. 5.3 ADDITIONAL OBLIGATIONS TEST- Refers to legal test found in the resolution which governs an agencies ability to issue additional obligations having the same lien on pledged revenues. The District's additional obligations test is expressed as a ratio in which historic earnings must meet or exceed certain levels of future obligation service coverage. 5.4 AD VALOREM TAX- A direct tax based "according to value" of property. Counties and school districts and municipalities usually are, and special tax districts may be,authorized by law to levy ad valorem taxes on property other than intangible personal property. Local government bodies with taxing powers may issue bonds or short-term certificates payable from ad valorem taxation. 5.5 ADVANCE REFUNDING- A transaction in which new debt is issued to provide monies to pay interest on old, outstanding debt as it becomes due, and to pay the principal on the old debt either as it matures or at an earlier call date. An advance refunding occurs before the maturity or call date(more than 90 days before the maturity or call date) of the old debt, and the proceeds of the new debt are invested until the maturity or call date of the old debt. Most advance refundings result in defeasance of debt. 5.6 AMORTIZATION-The process of paying the principal amount of an issue of bonds by periodic payments either directly to certificate holders or to a sinking fund for the benefit of certificate holders. Payments are usually calculated to include interest in addition to a partial payment of the original principal amount. 5.7 ARBITRAGE-Classically,the simultaneous purchase and sale of the same or an equivalent security in order to profit from price discrepancies. The most common occurrence in the public sector involves the investment of the proceeds from the sale of tax-exempt securities in a taxable money market instrument that yields a higher rate,resulting in interest revenue in excess of interest costs. Page 8 of 17 Book Page 41 5.8 ARBITRAGE REBATE REQUIREMENTS-Arbitrage profits(interest revenue in excess of interest costs)from investment bond proceeds that are invested in taxable instruments must be rebated to the U.S. Treasury Department. 5.9 AVERAGE COUPON-Weighted average interest cost of an issue. 5.10 BANK INVESTMENT CONTRACT- A separate account at a financial institution that functions like a guaranteed investment contract,whereby the contract is designed to provide guarantees of principal and interest on funds deposited for a specified period. 5.11 BASIS POINT- Yields on municipal securities are usually quoted in basis points where one basis point is equal to 1/100 of one percent. 5.12 BOND- Written evidence of the issuer's obligation to repay a specified principal amount on a date certain(maturity date),together with interest at a stated rate, or according to a formula for determining that rate. Bonds are distinguishable from notes, which mature in a much shorter period of time. 5.13 BOND COUNSEL-An attorney(orfirm of attorneys)retained by the issuer to give a legal opinion on the legality and security of the issue and its tax exemption or taxability. Typically, bond counsel may prepare,or review and advise the issuer regarding, authorizing resolutions or ordinances, trust indentures, official statements, validation proceedings, and litigation. 5.14 BONDED DEBT- The portion of an issuer's total indebtedness as represented by outstanding bonds. 5.15 BOND INSURANCE- An insurance policy purchased by an issuer or an underwriter for either an entire issue or specific maturities,which guarantees the payment of principal and interest. This security provides a higher credit rating and thus a lower borrowing cost for an issuer. Bond insurance can be purchased directly by the District priorto the bond sale(direct purchase)orat the underwriter's option and expense (bidder's option). The District will attempt to qualify its bond issues for insurance with bond insurance companies rated AAA by Moody's Investors Services and Standard and Poor's Corporation when insurance is appropriate. 5.16 BOND RESOLUTION OR ORDINANCE- The document or documents representing action of the issuer authorizing the issuance and sale of municipal bonds. Issuance of the bonds is usually approved in the authorizing resolution or ordinance, and the sale is usually authorized in a separate document known as the "sale" or "award" resolution. All of such resolutions, read together, constitute the bond resolution, which describes the nature of the obligation and the issuer's duties to the bondholders. Page 9 of 17 Book Page 42 5.17 BROKER-A person or firm,other than a bank,which acts as an intermediary by purchasing and selling securities for others rather than for its own account. 5.18 CALLABLE BOND-A bond which permits or requires the issuer to redeem the obligation before the stated maturity date at a specified price, usually at or above par by giving notice of redemption in a manner specified in the bond contract. 5.19 CAPITALIZED INTEREST-Interest paid on long-term obligations during the period of time required to complete and prepare an asset for its intended use is capitalized as part of the acquisition cost of an asset. 5.20 CERTIFICATES OF PARTICIPATION- Obligations of a public entity based on a lease or installment sale agreement. These are not considered debt under Article 13 of the California Constitution. 5.21 CERTIFICATE HOLDER-The owner of a municipal certificate ofparticipation to whom payments of principal and interest are made. Generally certificates are registered, and the owner is the person whose name is noted on the certificate register. 5.22 CERTIFICATE REGISTER- The listing of names and addresses of the current registered owners of the certificates, as maintained by the trustee or certificate registrar. 5.23 COMPETITIVE SALE-The sale of bonds through sealed bids. 5.24 COST OF ISSUANCE- The expenses associated with the sale of a new issue of municipal securities, including such items as underwriters spread, printing, legal fees, and rating costs. 5.25 COVENANTS- The issuer's enforceable promise to perform or refrain from performing certain actions. Wdh respect to municipal bonds, covenants are generally stated in the bond contract, resolution, or indenture. 5.26 COVERAGE-The ratio of pledged revenues available annually to pay debt service obligations, as compared to the annual debt service obligation requirement. This ratio is one indication of the margin of safety for debt service obligations. 5.27 CREDIT ENHANCEMENT- The availability of additional outside support designed to improve an issuer's own credit standing. Examples include bank lines of credit or collateralized funds. 5.28 CURRENT REFUNDING-A refunding transaction in which the proceeds of the refunding debt are applied immediately (no more than 90 days from Page 10 of 17 Book Page 43 issuance) to redeem the debt to be refunded. This situation differs from an advance refunding,where the proceeds of the refunding bonds are placed in escrow pending the call date or maturity of the debt to be refunded. 5.29 CURRENT YIELD-The ratio of the annual dollar amount of interest to the purchase price of a bond, stated as a percentage. 5.30 CUSIP NUMBERS (COMMITTEE ON UNIFORM SECURITY IDENTIFICATION PROCEDURES) - Identification numbers assigned each maturity of a bond issue, and usually printed on the face of each individual bond in the issue. The CUSIP numbers are intended to facilitate identification and clearance of municipal securities. 5.31 DEBT LIMIT- The maximum amount of debt which an issuer of municipal securities is permitted to incur under constitutional, statutory, or charter provisions. 5.32 DEBT PER CAPITA- Bonded debt divided by population. 5.33 DEBT SERVICE OBLIGATION- The amount of funds necessary to pay principal and interest, and the required contributions to an amortization sinking fund for term certificates on an outstanding obligation. Debt service obligation on certificates may be calculated on a calendar-year or on a fiscal- year basis. 5.34 DEBT SERVICE RESERVE FUND- A fund usually amounting to principal and interest payments for one year and used only if pledged revenues do not generate sufficient funds to satisfy the debt service requirement. The reserve fund is typically funded in whole or in part from the proceeds of the debt issuance. The size and investment of the reserve fund are usually subject to arbitrage regulations. 5.35 DEBT SERVICE SCHEDULE-Atable listing the annual payments necessary to meet debt service requirements over the period of time the bonds are to be outstanding. 5.36 DEFAULT- Failure to make timely payment of principal and interest or to comply with other features of the indenture. 5.37 DEFEASANCE- Eliminating bonded indebtedness off an issuer's books through creation of a portfolio of Treasury securities sufficient to make all debt service payments on pre-refunded, outstanding bonds. 5.38 DIRECT DEBT- The debt that a governmental agency incurs in its own name. Page 11 of 17 n...a o.--n n 5.39 DISCOUNT- The amount by which par value exceeds the price paid for a security which generally represents the difference between the nominal interest rate and the actual or effective return to the investor. 5.40 DOUBLE-BARRELED BOND- Traditionally, a bond secured by a defined source of revenue plus the full faith and credit of the issuer. The term is occasionally, although erroneously, used to refer to bonds secured by any two sources of pledged revenue. 5.41 DOWNGRADE- The lowering of a bond rating by a rating service. A downgrade would be considered if the issuer encountered major financial difficulties or an economic decline,which may be viewed by the rating service as reducing the credit quality of the bond issue. 5.42 EFFECTIVE INTEREST RATE- The actual rate of interest earned by the investor on bonds purchased, after allowing for premiums, discounts, or accrued interest over the period of the investment. 5.43 FEASIBILITY STUDY-A report by an independent expert on the economic need and practicality of a proposed debt program. 5.44 FINANCIAL ADVISOR- Performs analysis as to the appropriateness of a bond sale and, if the governing body of the agency determines that a bond sale is necessary, they then assist in its planning and preparation. 5.45 FLOATER- A security sold with a variable rate that changes at intervals ranging from daily to annually. 5.46 FULL FAITH AND CREDIT-The pledge of a government's general taxing power to pay off its debt obligations. 5.47 GENERAL OBLIGATION BONDS-Bonds which are secured by the full faith and credit of the issuer. General obligation bonds are secured by a pledge of a portion of the ad valorem taxing power. Such bonds constitute debts of the issuer and require approval by election prior to issuance. 5.48 GUARANTEED INVESTMENT CONTRACT(GIC)-A group annuity contract designed to provide guarantees of principal and interest on funds deposited with an insurance company for a specified period. 5.49 HIGH GRADE BONDS-Top-rated bonds, usually triple-A. 5.50 INDENTURE-Legal document describing the terms and conditions of a bond offering, the rights of the bondholder, and the obligations of the issuer to the bondholder. The document is alternatively referred to as a bond resolution or deed of trust. Page 12 of 17 Book Page 45 5.51 INTEREST RATE SWAP-An agreement between two parties to exchange future flows of interest payments. One party agrees to pay the other a fixed rate; the other pays the first party an adjustable rate usually tied to a short- term index. 5.52 INVERTED YIELD CURVE-When short-term rates are higherthan long-term rates. 5.53 INVESTMENT GRADE- The broad credit designation given bonds which have a high probability of being paid. Such bonds, have few, if any, speculative features and are rated by the rating agencies in one of their top four categories, ranging from triple-A to BBB and Bea. 5.54 ISSUER- A state, political subdivision, agency, or authority that borrows money through the sale of bonds or notes. 5.55 JUNIOR LIEN BONDS- Bond with a subordinate claim against pledged revenues. 5.56 LETTER OF CREDIT- An agreement, usually with a commercial bank, to guarantee demands for payment upon compliance with conditions established in the agreement. Bank letters of credit are typically used as additional sources of security and liquidity with variable rate obligations. 5.57 LIQUIDITY-The ability to convert assets, such as investments, readily into cash. 5.58 MATURITY-The date on which the principal amount of a security is due and payable to the certificate holder. 5.59 NEGOTIATED SALE-The sale of a new issue of municipal securities by an issuerthrough an exclusive agreement with a previously selected underwriter or underwriting syndicate. A negotiated sale should be distinguished from a competitive sale,which requires public bidding by the underwriters. Primary points of negotiation for the issuer are the interest rate and purchase price, which reflect the issuer's cost of offering its securities in the market. 5.60 NET INTEREST COST(NIC) -Traditional method of calculating an issuer's borrowing cost. NIC is derived by adding the total volume of interest payments for the entire offering and dividing by the amount of certificates outstanding times the years they are outstanding. 5.61 NOTES- A written, short-term promise of the issuer to repay a specked principal amount on a certain date, together with interest at a stated rate, or according to a formula for determining that rate, payable from a defined source of anticipated revenue. Notes usually mature in less than five years. Notes are used to cover seasonal cash flow needs or interim financings. Page 13 of 17 Book Page 46 5.62 OFFICIAL STATEMENT (OS) - A document published by the issuer who generally discloses material information on a bond issue, including the purpose of the bond issue, how the bonds will be repaid, and the financial, economic,and demographic characteristics of the issuer. Investors may use this information to evaluate the credit quality of the bonds. 5.63 ORIGINAL ISSUE DISCOUNT(DID)-The discount from par atwhich a new issue comes to market. The capital gain represented by the OID is deemed tax-exempt by the IRS. 5.64 OVERLAPPING DEBT-The issuer's share of the debt of other local units. 5.65 PAR VALUE- The principal amount of a security, which must be paid at maturity. Par value is also referred to as the face amount of a security. 5.66 PARITY BONDS- Separate bond issues that have the same lien against pledged revenues. 5.67 PAY-AS-YOU GO BASIS-The financial policyofa municipality thatfinances all capital outlays from current revenues rather than from borrowing. 5.68 PAYING AGENT- The entity responsible for the payment of principal and interest on municipal obligations on behalf of the issuer. The paying agent is usually a bank or trust company. 5.69 PLEDGED REVENUES-Funds obligated for the payment of debt service and other deposits as required by the bond contract. 5.70 PRELIMINARY OFFICIAL STATEMENT(POS)-A preliminary version of the official statement which is used by the issuer or underwriter to describe the proposed issue of municipal bonds prior to the determination of an interest rate and offering price. The preliminary official statement is a marketing tool used to gauge buyer's interest in the issue and is relied upon by potential purchasers in making their investment decisions. 5.71 PREMIUM-The amount by which the price paid for a security exceeds par value,generally representing the difference between the nominal interest rate and the actual or effective return to the investor. 5.72 PRESENT VALUE SAVINGS-Present value of gross savings discounted at the refunding bond yield to the closing date plus accrued interest less any contribution from a reserve or debt service fund. 5.73 PRINCIPAL- The par value or face amount of a bond payable or issue of bonds payable on stated dates of maturity. Page 14 of 17 Book Page 47 5.74 PRIMARY MARKET-The market for new issues of municipal securities. 5.75 PRIVATE PLACEMENT- An original issue of municipal securities sold directly to an institutional or private investor by way of a negotiated sale rather than through a public offering. 5.76 RATE CONVENANT- A bond indenture provision requiring rate changes necessary to meet annual debt service payments. 5.77 RATINGS-Evaluations of the credit quality of notes and bonds usually made by independent rating services. Ratings generally measure the probability of the timely repayment of principal and interest on municipal bonds. 5.78 RATING AGENCIES-Credit quality evaluation of an issuer's securities made by independent rating services. The three primary rating agencies with regard to municipal debt are Moody's Investors Services, Standard& Poor's Corporation, and Fitch. 5.79 RATINGS- Evaluations of the credit quality of obligations usually made by independent rating services. Ratings generally measure the probability of the timely repayment of principal and interest on municipal obligations. The higher the credit rating,the more favorable the effect on the marketability of the security. 5.80 REDEMPTION- A transaction in which the issuer pays an outstanding obligation at a specified price, usually at or above par prior to the specified maturity date. Also known as a call. 5.81 REFUNDING-Selling a new bond issue for redemption or defeasance of an outstanding bond issue. There are generally two reasons for refunding: to reduce the issuer's interest costs or to remove a burdensome or restrictive covenant imposed by the terms of the bonds being refinanced. 5.82 REGISTRAR: The person or entity, responsible for maintaining records on behalf of the issuer for the purpose of noting the owners of registered obligations. The paying agent frequently performs this function. 5.83 REVENUE BONDS- Bonds payable from a specific source of revenue and which do not pledge the full faith and credit of the issuer. 5.84 SECONDARY MARKET- Market for bonds previously offered and sold. 5.85 SENIOR LIEN OBLIGATIONS: Obligations having a prior claim on pledge revenues. 5.86 SERIAL BONDS- Bonds of an issue in which some bonds mature in each year over a period of years. Page 15 of 17 Book Page 48 5.87 SETTLEMENT- Delivery of and payment for anew issue of municipal bonds. Settlement usually occurs within 30 days after the bonds are awarded to the underwriters,which allows for the printing of the bonds and the completion of certain legal matters. 5.88 SETTLEMENT DATE- The date used in price and interest computations, usually the date of delivery. 5.89 SINKING FU ND-A fund established in a bond indenture that contains money available to call bonds prior to maturity. 5.90 STANDBY BOND PURCHASE AGREEMENT- A legal agreement with a commercial bank or trust company whereby the bank agrees to purchase demand bonds which the remarketing agent was unable to remarket to other parties and chose not to purchase for itself. 5.91 SUBORDINATE (JUNIOR) LIEN OBLIGATIONS- Obligations having a subordinate claim against pledged revenues. 5.92 TAX-EXEMPT OBLIGATIONS-Obligations whose interest is exempt from federal income taxation pursuant to Section 103 of the Internal Revenue Code, and may or may not be exempt from state income or personal property taxation in the jurisdiction where issued. 5.93 TERM BONDS-Bonds coming due in a single maturity. The issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of term bonds before maturity or for payment at maturity. 5.94 TRUE INTEREST COST (TIC) - The present value borrowing cost of the issuer is reflected by taking into account the costs of issuance and underwriting. TIC is similar to NIC, but also accounts for the time value of money. 5,95 TRUSTEE-A financial institution with trust powers which ads in a fiduciary capacity for the benefit of bond holders in enforcing the terms of the bond indenture agreement. 5.96 TRUST INDENTURE-A contract between the issuer of municipal securities and a trustee, serving for the benefit of the security holders. 5.97 UNDERWRITER- A dealer at a bank or brokerage house who buys an agency's bonds in order for the firm's sales force to resell them to both institutional and retail investors. The underwriter may acquire the bonds either by negotiation with the issuer, or by award on the basis of competitive bidding. Page 16 of 17 Book Page 49 5.98 UNDERWRITERS COUNSEL- A lawyer involved in the transaction, who represents the securities firm buying an agency's bonds. 5.99 VARIABLE RATE OBLIGATIONS-A tax-exempt security whose interest rate is reset periodically by the remarketing agent according to a preset formula defined in the indenture agreement. The variable interest rate, also known as a"floater", is determined by the remarketing agent as the level at which all bonds trade at par. 5.100 YIELD CURVE- Graph displaying the term structure of interest rates by plotting the yields of all bonds of the same quality with maturities ranging from shortest to the longest available. 5.101 YIELD TO MATURITY- The rate of return to the investor earned from payments of principal and interest, which is compounded semiannually and assumes that interest paid is reinvested at the same rate. Yield to maturity takes into consideration the time value of the investment. 5.102 ZERO-COUPON BONDS- Bonds sold at a deep discount from par, which pay no interest and appreciate to full value at maturity. Also known as capital appreciation bonds. Page 17 of 17 Book Page 50 ORANGE COUNTY SANITATION DISTRICT (714) 962-2411 www.ocsd.com Mailing Address: P.O. Box 8127 Fountain Valley, California 92728-8127 Street Address: 10844 Ellis Avenue Fountain Valley, California 92708-7018