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HomeMy WebLinkAbout2008-11 ADM MINUTES OF THE REGULAR MEETING OF THE ADMINISTRATION COMMITTEE Orange County Sanitation District Wednesday, November 12, 2008, at 5:00 P.M. A meeting of the Administration Committee of the Orange County Sanitation District was held on November 12, 2008, at 5:00 p.m., in the Sanitation District's Administrative Office. Following the Pledge of Allegiance, a quorum was declared present, as follows: ADMINISTRATION COMMITTEE STAFF PRESENT: MEMBERS: Jim Ruth, General Manager Jim Herberg, Director of Engineering DIRECTORS PRESENT: Lorenzo Tyner, Director of Finance and Mark Waldman, Chair Administrative Services Phil Luebben, Vice Chair Lille Kovac, Committee Secretary Jim Ferryman Jeff Reed, Human Resources and Employee Relations Don Hansen Manager Darryl Miller Mike While, Controller Chris Norby Wes Bauer Brad Reese Norbert Gala Christina Shea Juanita Skillman Sal Tinajero Jim Winder Doug Davert, Board Chair OTHERS PRESENT: Larry Crandall, Board Vice Chair Brad Hogin, General Counsel Jennifer Farr DIRECTORS ABSENT: Brian Gruber ",` N�_01 F ICT Jon Dumitru Rich Kikuchi OBAF16�*E` sif�;'TI p Steven Parker Ed Soong NOV 19 2008 PUBLIC COMMENTS There were no public comments. �0 REPORT OF THE COMMITTEE CHAIR Chair Waldman did not give a report. REPORT OF THE GENERAL MANAGER General Manager, Jim Ruth, did not give a report. Minutes of the Administration Committee November 12, 2008 Page 2 REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES Lorenzo Tyner, Director of Finance and Administrative Services, did not give a report. REPORT OF GENERAL COUNSEL Brad Hogin, General Counsel, did not give a report. CONSENT CALENDAR ITEMS (1 -2) 1. MOVED, SECONDED AND DULY CARRIED: Approve minutes of the November 12, 2008 meeting of the Administration Committee. 2. ADMOS-33 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to approve the reclassification of four(4) OCSD positions affecting incumbents predicated on employees satisfying position qualifications and the indefinite and ongoing need to accomplish work at the higher level, and creation of a new classification providing for: a) Reclassification of two (2)Administrative Assistant positions PG 67 ($6,185/month)to Contracts/Purchasing Assistant PG 67 ($6,185/month) results in no change in pay; b) Reclassification of a Senior EDM Specialist position PG 80 ($8,121/month)to Senior Information Technology Analyst PG 83 ($8,743/month); c) 1) Reclassification of a Principal Information Technology Analyst position PG 87 ($10,133/month)to Principal Project Controls Analyst PG 87 ($10,133/month) results in no change in pay; and, 2) Creation of a new classification of Principal Project Controls Analyst with pay range placement at PG 87 (Attachment 1). ACTION ITEMS (3 -5) 3. ADM08-34 Mike White, Controller, briefly provided an overview of the Comprehensive Annual Financial Report (CAFR)for year end June 30, 2008 prepared by Mayer Hoffman McCann. Clarifications were made to Directors'questions, and minor typographical errors on the CAFR were noted to be corrected. It was then: • Minutes of the Administration Committee November 12, 2008 Page 3 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to receive and file: a) Comprehensive Annual Financial Report for the year ended June 30, 2008, prepared by staff and audited by Mayer Hoffman McCann, Certified Public Accountants; b) Report on Compliance and Internal Control for the year ended June 30, 2008; and c) Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. 4. ADM08-35 MOVED, SECONDED AND DULY CARRIED to recommend to the Board of Directors to: 1)Adopt Resolution No. OCSD 08- 20, Authorizing the Execution and Delivery by the District of one or more Installment Purchase Agreements, Trust Agreements, and Continuing Disclosure Agreements in connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, Series 2008C, and if necessary, Series 2009A,Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed$200,000,000, Approving the Distribution of one more Official Notice Inviting Bids and Official Statements in Connection with the Offerings and Sales of such Certificates and Authorizing the Execution of Necessary Documents and Related Actions; 2) That the Orange County Sanitation District Financing Corporation approve the documents supporting and authorizing the Certificates of Participation, Series 2008C, and if necessary, Series 2009A, in an aggregate amount not to exceed $200 million. Directors expressed concern over the request to execute and deliver one or more installment of certificates of participation without a specific rate or approval process. It was further MOVED, SECONDED AND DULY CARRIED to recommend to the Board of Directors to: 3) Establish a true interest cost target rate of 4.75%with a maximum rate of 5.25%; and, 4) Obtain final approval of the Board Chair and Administration Committee Chair prior to completing subject debt issuances. Mr. Tyner advised the Directors that an additional item would be going directly to the Board of Directors in November requesting approval to refund variable rate debt under Certificate Anticipation Notes until rates become more favorable due to the current financial crisis, for a period not to exceed 13 months. Minutes of the Administration Committee November 12, 2008 Page 4 5. ADM08-36 MOVED, SECONDED AND DULY CARRIED: a) Ratify Change Order No. 1 to P.O. 102681-OA, issued to Clean Harbors Environmental Service, Specification No. S-2006-300, for hazardous waste services for an additional amount of$50,000,for a total contract amount not to exceed $158,150,for the contract period ending December 31, 2008; b) Approve Change Order No. 2 to P.O. 102681-OA, issued to Clean Harbors Environmental Services, Specification No. S-2006- 300, for hazardous waste services, approving an increase of $51,850, for a total contract amount not to exceed $160,000, for the contract period January 1, 2009 through December 31, 2009, and all subsequent renewal periods; and, c) Approve an annual contingency of$16,000(10%). END OF CONSENT CALENDAR INFORMATIONAL ITEMS (6) 6. ADM08-37 Internal Audit Reports Controller Mike While introduced Rich Kikuchi and Brian Gruber of Lance, Soll & Lunghard, L-P, who then proceeded to review the audits' results which included contract change orders, Integrated Project Management Consultants (IPMC) operating agreement, CIP billing of design and construction progress payments, and travel and expense documentation and controls- (7) CLOSED SESSION There was no closed session. (8) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY There were none. (9) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT There were none. Minutes of the Administration Committee November 12, 2008 Page 5 (10)ADJOURNMENT AND FUTURE MEETING DATES The Chair declared the meeting adjourned at 6:08 p.m. The next regular Administration Committee meeting is scheduled for December 10, 2008, at 5:00 p.m. Submitted by: 1 Lilia Kovac Committee Secretary H:`dephagei a\Admin Cwmitte62008\1208\111208 Admin Minules.d= Distributed at the Admill7istraition Committee Meeting BOARD OF DIRECTO.— Meebrg Date Tod.of Dr- 1 1/19/08 AGENDA REPORT Item Number Item Number Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: REFUNDING CERTIFICATES OF PARTICIPATION, SERIES 2008D (CERTIFICATE ANTICIPATION NOTES) GENERAL MANAGER'S RECOMMENDATION 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, an Escrow Agreement, a Note Purchase Agreement, and a Continuing Disclosure Agreement in connection with the execution and delivery of Orange County Sanitation District Refunding Certificates of Participation, Series 2008D (Certificate Anticipation Notes), such Notes Evidencing Principal in an Aggregate Amount of Not to Exceed $198,000,000, Approving an Official Statement in Connection with the Offering and Sale of such Notes and Authorizing the Execution of Other Necessary Documents and Related Actions; and, 2) That the Orange County Sanitation District Financing Corporation approve the documents supporting and authorizing the Refunding Certificates of Participation, Series 2008D (Certificate Anticipation Notes) in an amount not to exceed $198,000,000. SUMMARY The current global financial crisis has negatively impacted the financial strength and ratings of many financial institutions that provide bank liquidity facilities securing variable rate bonds issued by municipal entities. Variable rate issues secured by banks with the least favorable investor perception have experienced higher than expected interest rate resets as investors are less willing to hold bonds secured by these weakening banks. In many cases, investors have tendered the bonds to the banks (Bank Bonds) to preempt any possibility of the liquidity bank not being able to provide funds in the future. The District's current variable rate debt exposure includes its outstanding Certificates of Participation, Series 2006 ("2006 COPS") secured by a liquidity facility from DEPFA Bank plc ("DEPFA")which is one of the banks experiencing financial difficulties, thus leading to higher than expected rate resets in general and more specifically Bank Bonds for the District. The current Bank Bond rate is based on the Prime Rate (currently 4%) with the rate increasing by an additional 0.75% beginning in January. Although the Bank Bond rate is less than current fixed rates, it is significantly higher than the recent variable rates the District is paying on its 2000 COPs (averaging less than 1%). As discussed in the Administration Committee Agenda Report on New Money Certificates of Participation (COPS) dated November 12, 2008, staff and the District's consultants have been monitoring this situation and began the process of requesting approval to use District funds to temporarily purchase From No.M-102 Agenda Repot-Board Revised 1=6406 Page 1 4 the 2006 COPS. The temporary purchase of the 2006 COPS would provide the maximum flexibility to the District in anticipation of better liquidity bank pricing or lower fixed rate debt costs. More recently, the current market yields on short-term securities issued in anticipation of permanent financing (Bond/Certificate Anticipation Notes or BANs) have significantly lowered in cost to issuers. In the current market, 13-month lax-exempt BANs are yielding less than 2%. Instead of using District funds to temporarily purchase Bank Bonds, the District could issue BANs to redeem the DEPFA Bank Bonds at a cost of less than 2%while waiting for the markets to stabilize. The District's 2006 COPS debt was issued in 2006 as daily variable rate debt and has averaged 3.25%to date. However, the current Bank Bond characteristics have increased recent costs to over 4.00%. Options Available to the District 1. Do Nothing Since the issuance of the 2006 COPs, the District has benefited from an average interest rate of 3.25%. The liquidity fee charged by DEPFA is only 11 basis points and is effective until March 2013. If the perception of DEPFA's financial condition improves, the 2006 COPS may once again be remarketed at market rates. However, if the District takes no action at this time,the current Bank Bond rate of 4.00%will increase by 0.75% in January. Also, the Bank Bond rate may further increase should DEPFA experience additional financial distress and its borrowing cost from other banks rise. In addition, the District will be required to start repaying principal to DEPFA starting in 2013 (District can pay interest only through 2013). 2. Replace DEPFA with New Bank The replacement of DEPFA with a stronger bank might allow the 2006 COPs to be remarketed at current attractive levels (recent rates on the 2000 COPs are averaging 0.90%). Due to the liquidity crisis facing many banks, there are a limited number of banks willing to provide credit facilities to municipalities, even highly rated issuers such as the District. The few banks willing to extend credit in the current market are requesting annual fees in excess of 100 basis points per year for no more than three years with relatively onerous terms and conditions. As a point of reference, the District's most recent Request of Proposals for banks in October 2007 resulted in two banks offering liquidity at ten basis points for three- year facilities. The District will be subject to unknown bank renewal or replacement risk upon the expiration of the liquidity facility. Meanwhile, the District would be subject to the risk of the creditworthiness of the replacement bank. It is important to recognize there are no assurances that even today's strongest financial institution will retain its financial strength for any extended period of time. FDM No.DW-102 Aqe Repm—sWN Re : 12/0gNg Page 2 The following is a cost comparison verses Option 1 (Do Nothing)over the next year: 0.900% COP Series 2000 Current Daily Rate 0.239% One Month Delay (Liquidity documentation negotiations) 1.125% Assumed Replacement Liquidity Fee 0.050% Remarketing Fee 0.033% Costs of Issuance 0.000% Underwriter Costs (0.160%) less Liquidity and Remarketing Fees (Option 1) (4.750%) less Assumed Bank Rate (Option 1) 2.551ln_or$5.1 million of savings compared to Option 1 3. Refund the 2006 COPS with Fixed Rate Debt The issuance of fixed rate refunding bonds will eliminate variable rate risks and financial exposure to DEPFA. After issuance, the District will not be subject to changing market conditions. The long average life of the 2006 COPS (21.2 years)would result in a fixed rate borrowing cost of approximately 5.30% in the current market. In addition, recent demand for long municipal bonds has been spotty and the District may cannibalize market access for its $200 million of fixed rate new money COPS with a fixed rate refunding of$196 million of 2006 COPS. The following is a cost comparison verses Option 1 (Do Nothing) over the next year. 5.300% Assumed Average Fixed Rate 0.000% One Month Delay (Liquidity documentation negotiations) 0.000% Assumed Replacement Liquidity Fee 0.000% Remarketing Fee 0.015% Costs of Issuance ($375,000 amortized over life of COPS) 0.040% Underwriter Costs ($980,000 amortized over life of COPS) (0.160%) less Liquidity and Remarketing Fees (Option 1) (4.750%) less Assumed Bank Rate (Option 1) 0.445% or$880,000 more costly than Option 1 (over first year only) 4. Refund the 2006 COPs with BANS The current market rate for BANS is less than 2.00%. The issuance of BANS to temporarily fix the rate at a low interest cost will allow the District to wait for a more attractive opportunity to structure a longer term solution for the 2006 COPs. The BAN structure will eliminate exposure to DEPFA and variable rate risks over the next year. Although current variable rates are low(Option 2), it is unknown whether rates will be expected to stay below 1.00%. A comparison of the economics of this BAN structure to Option 2 shows that unknown variable rates must average less than 0.593%over the next year for Option 2 to generate a better net economic result. Form No.M-102 Agora Repel-Board RwM : 11/00100 Page 3 The major risk with a BAN structure occurs if the District does not have market access to remarket the BANs at maturity. However, if the District currently contemplates using a portion of its reserves to temporarily redeem the 2006 COPs, the issuance of BANS allows the District to defer such action for approximately one year. Interest rates could be substantially higher upon maturity, but it is expected that the District would carefully monitor the market over the next year to take advantage of any low rate opportunities. The following is a cost comparison verses Option 1 (Do Nothing) over the next year: 1.750% Assumed One-Year Rate 0.000% One Month Delay (Liquidity documentation negotiations) 0.000% Replacement Liquidity Fee 0.000% Remarketing Fee 0.164% Costs of Issuance ($325,000 amortized over one year) 0.126% Underwriter Costs ($250,000 amortized over one year) (0.160%) less Liquidity and Remarketing Fees (Option 1) (4,750%) less Assumed Bank Rate (Option 1) (2.870%) or$5.7 million ofsavinds compared to Option 1 Staff is recommending Option 4 the refunding of the 2006 COPS with BANS that enables the District to lock-in a low rate for approximately one year without encumbering its cash reserves. If the District pursues Option 4 given the large single maturity, BANS are best sold in this uncertain market on a negotiated basis. Staff is recommending Banc of America Securities LLC to serve as underwriter on the BANs for the following reasons: 1) First firm to propose BAN concept for the 2006 COPS and has provided frequent updates. 2) Remarketing performance on 2000 COPS: a. Average rate of 2.10% since taking over the program from UBS in August 2008. b. Average rate of 0.71% in November 2008. 3) Dexia Credit Local is the liquidity bank on the 2000 COPS and many remarketing agents have tendered Dexia-backed bonds. Staff and consultants will make a brief presentation and provide an overview of the draft documents and the financing schedule at the Board meeting. PRIOR COMMITTEEIBOARD ACTIONS N/A ADDITIONAL INFORMATION The Board of Directors and the Financing Corporation will each be required to adopt separate Resolutions to complete this refinancing. Drafts of these two Resolutions are attached for review. A Financing Corporation is required by the structure of the COPS and was formed in April 2000, to satisfy this need. The Board of Directors of the Corporation is the same as the Board of Directors of the District and the Corporation meets after an adjournment of the OCSD Board. F.Ng M-M Age Re -B.M Reveetl: 17lgfiNfi Page 4 The OCSD Resolution authorizes the execution and delivery of certain legal documents and the execution and delivery of Refunding Certificates of Participation, Series 2008D (Certificate Anticipation Notes) evidencing principal in an aggregate amount of not to exceed $198,000,000 all as spelled out in the title as follows: "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, AN ESCROW AGREEMENT, A NOTE PURCHASE AGREEMENT,AND A CONTINUING DISCLOSURE AGREEMENT IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT REFUNDING CERTIFICATES OF PARTICIPATION, SERIES 2008D (CERTIFICATE ANTICIPATION NOTES), SUCH NOTES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED $198,000,000, APPROVING AN OFFICIAL STATEMENT IN CONNECTION WITH THE OFFERING AND SALE OF SUCH NOTES, AND AUTHORIZING THE EXECUTION OF OTHER NECESSARY DOCUMENTS AND RELATED ACTIONS." The Resolution of the Corporation is somewhat shorter and simpler. It authorizes three actions that are similarly enumerated in the title as follows: "A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION AUTHORIZING THE EXECUTION AND DELIVERY BY THE CORPORATION OF AN INSTALLMENT PURCHASE AGREEMENT AND A TRUST AGREEMENT IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT REFUNDING CERTIFICATES OF PARTICIPATION, SERIES 2008D (CERTIFICATE ANTICIPATION NOTES);AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH NOTES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT-TO-EXCEED $198,000.000 AND; AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND NOTES AND RELATED ACTIONS" Following is a chart listing the remaining steps to be completed for the issuance of the COP Series 2008D (Certificate Anticipation Notes) debt issuance: ➢ Board approval of legal and disclosure documents November D Receive Ratings from Bond Rating Agencies ➢ Negotiated Pricing December ➢ Closing ➢ Redemption Notice ATTACHMENTS 1. District Resolution 2. Corporation Resolution 3. Draft Trust Agreement 4. Draft Installment Purchase Agreement 5. Draft Continuing Disclosure Agreement 8. Draft Preliminary Official Statement 7. Draft Note Purchase Agreement 8. Draft Escrow Agreement rwm rya M-102 Agenda Repoil-Board Revised: 12/e8/0e Page 5 Distributed at the F'nan e Administration I U Meeting Administration Committee November 12,2008 CAFR Comprehensive Annual Financial Report For the year Ended June 30, 2008 a Orange Caunly Sonitalmn DnNq Comprehensive Annual Financial Report (CAFR) ♦ Fully explains financial operations of OCSD ♦ Prepared for the 15t^consecutive year ♦ Meets GFOA's Excellence Award Standard ♦ Important to bond rating agencies and investors Financial Measurements Financial Position Available Spending Resources Change In Cost Financial edormance 1 Administration Committee November 12, 2008 CAFR Net Assets Increased $86.3 Million 2008 20g] ree�ief_ Is.,m.an. fI6V9J ¢i za.esz vW a..n x ® i um. 13"3 e. �CW.B61 ]TI LS x95159 JI.M TOW 11eLWIW..'• :J m6. ea ned f 652]65 f e05.aci fl%seal ui 6 q Ne�N'. 3d11 a.9M (sea .I S.M unodt am]a1 zsaam tm.nr ,1 rw rrel a..w. a ew nu ]n eax Net Assets Increased S86.3 Million Over the Prior Year a1gD.8M Incraazein Beginning Net Asses ♦ 15.7 M Increase in Service Charges&F. Source + 4.7 M Increase In Property Taxes of Funds 2.5 M increase in Other Noo-oper. Use of Fulls 5a63 AN Increase in Net Assets over tha Prior Year Increase in Net Assets— Last Five Years wm—r FVL Year 0JM MM eaW e]Da 2 Administration Committee November 12, 2008 CAFR Cash and Investments Increased $160.8 Million G Pm+i r, $71.7 M Net Operating Activities 23.3 M Interest Earnings 30.3 M CFCC Fees and Capital Contribution 378.9 M Net Proceeds from Debt Issuance 64.4 M Property Tax Revenues $568.6 M Cash Provided Cash and Investments Decreased $160.8 Million. r'.. .Od $(275.4)M Net Capital Outlay (31.8)M Debt Interest Payments (96.5)M Debt Principal Payments (1.8)M Grants to Member Agencies (1.3)M Unrealized Loss on Fair Value of Invest (0.7)M Debt Issuance Cost (0.3)M Arbitrage Payment $(407.8)M Cash Used Collection, Treatment& Disposal Costs= $124.6 Million Increase of$10.3 Million or 7.6%Over Prior Year • Belmleeend B..Me lnsreeee4$12.0 M,w 18.7% Ptsllansmgivi d fSDMemmuYlM Mae4MNy.+M eWrw Yvavm1D2.5 M m58%prb,pnnp inW ♦ 84oeo114e 6011wr Wood OlepoeM 1..re 52.e M,or 21.o% nbvbe bwer®A-0eetmhry PeebM191YnW B M AVN➢6OWlmp mµM NY,Mnoo P ronwa'leaa • RNalro lMMWd$4.1 M,w WB% 0.V bPamm4m'Dmi%'pFedaMFl6 CgeaM tben%q • Odor COMMI a 01e1nHtllon Increased$1.0 M.or 107% LLVPoWpW amevr • Capeel Gran to Mronn Chbe davexool S357N,or 180% • OI,M counting Revenuer decreased 0242K,or 3.0% 3 Administration Committee November 12, 2008 CAFR Collection,Treatment and Disposal Cost —Comparison of Budget to Actual rvs.n.easamsa sam urs. •aW+ 1m.1 etu,gee e�rnie,,.is a dlpim+FR:rvws ftff9nem s1aa,3pf,3BT s reaslE xes Pa M+.aM.00% O.l .7M 2 .m 52 % WlTrsebnMB Oft�bpswe ftseA74,ede ftfe,fll,fW f10.fM$5+ 78% Cost Per Million Gallons lmr@UW Costs Associaled will)Mowng to Full Secondary Treatmenl Standards u.000 Et Set stsoe : $1,217 $1,268 MEN i E1,06E E1,09S s+Pao s o0 ss was was ssae IIB-07 ot.ae red ra, Questions? vlsaourweEsde: w .00SD.Com 4 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 November 12, 2008, was duly posted for public inspection in the main lobby of the Districts'offices on November 5, 2008. IN WITNESS WHEREOF, I have hereunto set my hand this 5D'day of July 2008. A� &� - Lilia 1 ovac, Committee ecretary Orange County Sanitation District HADEP GENDMADMIN COMMITTEMAGENDA CEFTIFICATION.DOC November 5, 2008 MEMORANDUM TO: Administration Committee Members James D. Ruth, General Manager FROM: Lorenzo Tyner Director of Finance and Administrative Services SUBJECT: Response to Crisis in the Financial Markets In your November Administration Committee package, there is an item requesting authorization to proceed with a fixed rate debt issuance. At the October Administration Committee, staff requested approval to begin the process to complete the regularly scheduled debt issuance for FY2008-09. This $200 million issuance is scheduled to be completed prior to December 31, 2008. Staff explained that as a result of the current financial markets, it may become necessary to delay this issuance into 2009. The Committee gave staff authorization to begin preparation of the necessary bond documents with the understanding that the item would be brought back to the Committee for additional discussion before moving to the full Board for action. There was a general concern that this may not be the most advantageous time to issue debt and that the Committee would like to understand the parameters by which staff would move forward. Staff and the District's financial advisor will discuss these various parameters and the process by which they were developed at the Committee meeting. The most significant of these parameters is that staff is proposing that an upper limit of 5.75% be set on the true interest cost on the COPS to be issued. This proposed limit compares favorably to current long-term proxy indices, such as the Bond Buyer Revenue 25 Index at 6.12% and the higher-rated benchmark Municipal Market Data's AAA GO 20-year index at 5.72%. Administration Committee Page 2 of 2 November 5, 2008 More detailed information can also be found in the Agenda report. For your review, I have included an excerpt from that report: These extremely volatile market conditions make it difficult for issuers, like the District, to forecast when may be a good time to enter the market and opportunities may arise suddenly. Therefore, it is prudent to provide for maximum flexibility with which to allow for the District's sale of COP debt. Although, today's borrowing costs may not be the most attractive by recent historic standards, by adopting the Resolutions this month, the District would have the ability, but not the obligation, to price its COP debt as soon as early December 2008. With this flexibility, the District could, if market conditions become more favorable, price the COP debt with less than a week's notice to the marketplace. Otherwise an approval by the Board in December, or later, would delay the earliest pricing date to January 2009 or beyond. Thus, by adopting the Resolutions in November, the District is afforded a larger window of opportunity over which it could price its COPs, and potentially mitigating pressure to sell under unfavorable market conditions. Additionally, at the October Administration meeting, information was requested regarding the District's variable debt program, specifically whether District bonds were being remarketed unfavorably due to the current financial crisis. Staff also has been contacted by the County of Orange Treasurers Office regarding possibly purchasing District debt. The County has recently entered into an agreement with the Orange County Transit Authority (OCTA) regarding the short-term purchase of some of their outstanding variable rate bonds. Staff has reviewed this agreement and, at present, believes that while it may be advantageous to the County and assists the OCTA because of its debt position, such an agreement would not be beneficial to the Sanitation District at this time. However, staff will continue to monitor all of its financing programs and will update the Committee as necessary. JDR:LT:lc a1 sex r rl ORANGE COUNTY SANITATION DISTRICT S "�2 1GE e ° o% rNt Fouru,4anlwb�y c NOTICE OF MEETING '270871118 _ Mnn°e,�tl8�i ADMINISTRATION COMMITTEE 10i 92729 12 7 Finance, Human Resources and Information Technology ....ad tc Phone (714)962 0411 Faa ORANGE COUNTY SANITATION DISTRICT (714)962i1356 _ Bemnq WEDNESDAY, NOVEMBER 12, 2008 - 5:00 P.M. awhalrn Bl.r, ADMINISTRATIVE OFFICES BJPI1fl PflM 10844 ELLIS AVENUE rynrre:, FOUNTAIN VALLEY, CALIFORNIA 92708 H,urrui Wa, wWW.00SD.COM R,nelmn G'wtlen anus Hunmlywrr Bnnrh _ Ilrna A regular meeting of the Administration Committee of the Orange La Ifahrs County Sanitation District will be held at the above location, date La PaFne and time. !ne Alemnns Nenpai Baeulr Prer!ye Plarrenrle Benu are Baal B.:h samm� Liam, Villa Perk M Linde Cua.Web &,ca'necr '. MiM',Lky Banda'eiantint II'mna Ranch _ Watar lMhn:t COWN al U'al,a2 '� M p/ da public he&M and Me emmnment by providing egectiure maze+xter collection, treatment,and recycling. L ADMINISTRATION COMMITTEE MEETING DATES Meeting Date Board Meeting Dates November 12, 2008 *November 19, 2008 December 10, 2008 *December 17, 2008 January 2009 - Dark January 28, 2009 February 11, 2009 February 25, 2009 j March 11, 2009 March 25, 2009 L April 8, 2009 April 22, 2009 I May 13, 2009 *May 20, 2009l.l June 10, 2009 June 24, 2009 j July 8, 2009 July 22, 2009 August 2009 - Dark August 26, 2009 L1 September 9, 2009 September 23, 2009 October 14, 2009 October 28, 2009 I it November 11, 2009 *November 18, 2009 December 9, 2009 *December 16, 2009 L *Meetings being held the third Wednesday of the month. L L L .., ROLL CALL ADMINISTRATION COMMITTEE Finance, Human Resources and Information Technology Meeting Date: November 12, 2008 Time: 5:00 p.m. r Adjourn: COMMITTEE MEMBERS (13) r Mark Waldman Chair Phil Luebben Ice Chair r Jon Dumitru Jim Ferryman Don Hansen Darryl Miller Chris Norb Brad Reese Christina Shea Sal Tina'ero Jim Winder Doug Davert Board Chair Larry Crandall Board Vice Chair r OTHERS Brad Ho in, General Counsel •+ STAFF Jim Ruth, General Manager Bob Ghirelli,Assistant General Manager Nick Arhontes, Dir. of Operations & Maintenance Jim Herber , Director of Engineering Ed Torres, Director of Technical Services Lorenzo Tyner, Director of Finance and Administrative Services Lilia Kovac, Committee Secretary Jeff Reed, Human Resources and Employee r Relations Mana er Mike White, Controller r r H:WepMgenda%Admm Cwnnddee12008Y110B102.RoU Cald= r AGENDA REGULAR MEETING OF THE ADMINISTRATION COMMITTEE ORANGE COUNTY SANITATION DISTRICT WEDNESDAY, NOVEMBER 12, 2008, AT 5:00 P.M. ADMINISTRATIVE OFFICE 10844 Ellis Avenue Fountain Valley, California 92708 www.ocsd.com PLEDGE OF ALLEGIANCE DECLARATION OF QUORUM PUBLIC COMMENTS „. REPORT OF COMMITTEE CHAIR REPORT OF GENERAL MANAGER 'r REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES _ CONSENT CALENDAR ITEMS (1 -2) 1. Approve minutes of the October 8, 2008, meeting of the Administration Committee. 2. ADM08-33 Recommend to the Board of Directors to approve the reclassification of four(4) OCSD positions affecting incumbents predicated on employees satisfying position qualifications and the �+ indefinite and ongoing need to accomplish work at the higher level, and creation of a new classification providing for: ..i a) Reclassification of two (2)Administrative Assistant positions PG 67 ($6,185/month) to Contracts/Purchasing Assistant PG 67 ($6,185/month) results in no change in pay; r b) Reclassification of a Senior EDM Specialist position PG 80 ($8,121/month)to Senior Information Technology Analyst PG 83 ($8,743/month); Book Page I ) i November 12, 2008 Page 2 y ii V c) 1) Reclassification of a Principal Information Technology Analyst position PG 87($10,133/month)to Principal Project Controls Analyst PG 87($10,133/month) results in no change in pay; and, c) 2) Creation of a new classification of Principal Project Controls Analyst with pay range placement at PG 87(Attachment 1). (Book Page 9) L ACTION ITEMS (3 -5) L 3. ADMOB-34 Recommend to the Board of Directors to receive and file: a) Comprehensive Annual Financial Report for the year ended June 30, 2008, prepared by staff and audited by Mayer Hoffman McCann, Certfied Public Accountants; b) Report on Compliance and Internal Control for the year ended June 30, 2008; and c) Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. (Book Page 12) L 4. ADMOB-35 Recommend to the Board of Directors to: a)Adopt Resolution No. OCSD-XX, a Resolution of the Board of Directors of the Orange County Sanitation District Authorizing the Execution and Delivery U by the District of one or more Installment Purchase Agreements, Trust Agreements, and Continuing Disclosure Agreements in connection with the execution and delivery of Orange County L Sanitation District Certificates of Participation, in one or more series, Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not L to Exceed $200,000,000,Approving the Distribution of one more Official Notice Inviting Bids and Official Statements in Connection ; with the Offerings and Sales of such Certificates and Authorizing L the Execution of Necessary Documents and Related Actions; and, b) That the Orange County Sanitation District Financing L Corporation approve the documents supporting and authorizing the Certificates of Participation, in one or more series in an amount not to exceed $200 million. (Book Page 21) L 5. ADM08-36 a) Ratify Change Order No. 1 to P.O. 102681-OA, issued to Clean Harbors Environmental Service, Specification No. 5-2006-300, for L hazardous waste services for an additional amount of$50,000,for a total contract amount not to exceed $158,150, for the contract period i ending December 31, 2008; V L L Book Page 2 November 12, 2008 Page 3 u b) Approve Change Order No. 2 to P.O. 102681-OA, issued to Clean Harbors Environmental Services, Specification No. 5-2006-300, for rl hazardous waste services, approving an increase of$51,850, for a total contract amount not to exceed $160,000, for the contract period January 1, 2009 through December 31, 2009, and all subsequent ■j renewal periods; and, c) Approve an annual contingency of$16,000 (10%). (Book Page 216) J INFORMATIONAL ITEMS (6) as 6. ADMO8-37 Internal Audit Reports (Book Page 218) CLOSED SESSION ................................................................._.................-...-............--.......--....--..........__.....--.........._......-............ _..---..._...-------r ' During the oourse of conducting the business set forth on this agenda as a regular meeting of the Committee, i the Chair may convene the Committee In dosed session to consider matters of pending real estate negotiations, I I pending or potential litigation,or personnel matters, pursuard to Govemment Code Sections 54956.8, 64956.9, ! j 64957 or 54957.6,as noted. ! ! Reports relating to (a) purchase and sale of real property; (b) matters of pending or potential litigation; (c) j employee actions or negotiations with employee representatives; or which ere exempt from public disclosure under the California Public Records Ad, may be reviewed by the Committee during a permitted closed session and are not available for public inspection. At such time as final actions ere taken by the Committee on any of ! these subjects:the minulea.M!reeed.A!!reguimd.disclosures of lnformadon. i ...._.-.. ............................- -----.--._--...-....-'-'---....-r r Convene in closed session. Reconvene in regular session. Consideration of action, if any, on matters considered in closed session. 7. Other business and communications or supplemental agenda items, if any. 8. Ad!oumment: The next regular Administration Committee meeting is scheduled for Wednesday, December 10, 2008, at 5 p.m. r r ri Book Page 3 L November 12, 2008 Page 4 Agenda Posting: In accordance with the requirements of California Government Code Section 54954.2,this agenda L 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 public records relating to each agenda item, including any public records distributed less I than 72 hours prior to the meeting to all,or a majority of all, of the members of District's Board, are available for public y j inspection in the office of the Clerk of the Board, located at 10844 Ellis Avenue, Fountain Valley, California. 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, R will be done in compliance with Section 54954.2(b) as an emergency Rem or because u 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 Rem is taken for discussion and remarks may be limited to three minutes. W 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 Rem is requested to be removed from the consent calendar by a Director of staff i member,there will be no separate discussion of these items. All items on the consent calendar will be enacted by L 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). Ld Meeting Adjournment: 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 L 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 L 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: I.+ 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)827-1969 Committee Secretary: Lilia Kovac (714)593-7124 Ikovac&)=d.com General Manager: Jim Ruth (714)593-7110 irulh(ctocsd.com Assistant General Manager Bob Ghirelli (714)593-7400 mhirelli(o'lacsd.com 61 Director of Finance and Lorenzo Tyner (714)593-75M hvner(Mocsd.com Administrative Services Human Resources and Employee Jeff Reed (714)593-7144 ireed0ocsd.com Relations Manager L HldepnagendaWdmin Cnmmftt e\20D8\110e\03.111203 Admin Agenda.d=x L I+ Y L Book Page 4 h a r November 12, 2008 ADMINISTRATION COMMITTEE AGENDA CALENDAR Item Action December Employee Recognition and Rewards Program Information December Deferred Compensation Program Information r r r Book Page 5 r MINUTES OF THE REGULAR MEETING OF THE ADMINISTRATION COMMITTEE Orange County Sanitation District Wednesday, October 8, 2008, at 5:00 P.M. r A meeting of the Administration Committee of the Orange County Sanitation District was held on October 8, 2008, at 5:00 p.m., in the Sanitation District's Administrative Office. 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 Jon Dumitru Lilia Kovac, Committee Secretary Jim Ferryman Norbert Gaia Don Hansen Jeff Reed r Chris Norby Mike White, Controller Brad Reese Bob Geggie Christina Shea Juanita Skillman Sal Tinajero Jim Winder OTHERS PRESENT: Doug Davert, Board Chair Brad Hogin, General Counsel Larry Crandall, Board Vice Chair Derek Fan Rudy Pimentel DIRECTORS ABSENT: Ed Soong r Darryl Miller Christine Telish PUBLIC COMMENTS There were no public comments. r REPORT OF THE COMMITTEE CHAIR d Chair Waldman did not give a report. r REPORT OF THE GENERAL MANAGER r General Manager, Jim Ruth, referred to a letter he recently sent to the directors addressing the current financial crisis and steps being taken to minimize the effects to the Sanitation District by imposing a hiring freeze; delay on debt issuance; deferral of CIP projects to help mitigate potential rate increases; defer operating equipment and materials; and reduction in travel. r r Book Page 6 Minutes of the Administration Committee V October 8, 2008 Page 2 V REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES I . bl Lorenzo Tyner, Director of Finance and Administrative Services, introduced Christine Telish of PIMCO, the District's investment manager,who provided the Committee with an overview of the OCSD investment portfolio and answered questions regarding the current status of the financial d markets. PIMCO noted that the District's investment portfolio is traditional in nature and has done well against the applicable benchmarks. L REPORT OF GENERAL COUNSEL Brad Hogin, General Counsel, did not give a report. (9) CONSENT CALENDAR ITEMS L Consideration of motion to approve all agenda items appearing on the Consent Calendar not I specifically removed from same, as follows: .. 1. MOVED, SECONDED AND DULY CARRIED: Approve minutes of the September 10, 2008 meeting of the Administration Committee. 2. ADMOB-31 MOVED, SECONDED AND DULY CARRIED:Authorize preparation of bond documents for the issuance of up to$200 million in fixed-rate certificates of participation (COP)debt; and, direct staff to report back to the Committee for final approval of the bond documents. L END OF CONSENT CALENDAR INFORMATIONAL ITEMS L a. ADM0B-32 Alternative Billing Methodologies. Staff was directed to investigate alternative billing methods that might 1.1 result in a more equitable billing methodology for sewer services to ratepayers. A more equitable basis for billing would be based on sewer - - effluent meters or metering readings of water consumption. After } researching other public sewer agencies, none could be found that bill all of their customers based on sewer effluent alone. In addition, the cost to purchase, install, maintain, and perform periodic meter reads would exceed the savings. It was also determined that billing by metered water V consumption was not feasible as the vast majority of the 17 water - providers within the District's service area would not release water I consumption data to the District without authorization from each individual L water customer that totals approximately 650,000. L L Book Page 7 W Minutes of the Administration Committee October 8, 2008 Page 3 W (13) OTHER BUSINESS. COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY W - There were none. W (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT ^+ There were none. W (15)ADJOURNMENT AND FUTURE MEETING DATES The Chair declared the meeting adjourned at 5:56 p.m. The next regular Administration Committee meeting is scheduled for November 12, 2008, at 5:00 p.m. Submitted by: Lilia Kovac Committee Secretary r H:WepMegendMAdmin CanmitleeU00811008\100808 Mmin Minutes.d= r W r r r r r Book Page 8 r ADMINISTRATION COMMITTEE "Tr Dale TOBE.Or .D1r. 11/12/08 11/19/08 r AGENDA REPORT Bern Number Rem Number ADMDB-33 Orange County Sanitation District r FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services r SUBJECT: MID-YEAR STAFFING MODIFICATIONS- RECLASSIFICATION ADJUSTMENTS GENERAL MANAGER'S RECOMMENDATION r Approve the reclassification of four(4) OCSD positions affecting incumbents predicated on employees satisfying position qualifications and the indefinite and ongoing need to accomplish work at the higher level, and creation of a new classification providing for: 1) Reclassification of two (2)Administrative Assistant positions PG 67 r ($6,185/month)to Contracts/Purchasing Assistant PG 67($6,185/month) results in no change in pay; 2) Reclassification of a Senior EDM Specialist position PG 80($8,121/month)to Senior Information Technology Analyst PG 83 ($8,743/month); 3) a) Reclassification of a Principal Information Technology Analyst position PG 87 ($10,133/month)to Principal Project Controls Analyst PG 87 ($10,133/month) results in no change in pay; and, b) Creation of a new classification of Principal Project Controls Analyst with pay range placement at PG 87. SUMMARY In an effort to support OCSD's staffing plan, It is necessary to review and modify job titles and pay grades to address changes in work. This occurs in situations where staffing requirements result in the need for higher levels of skill and knowledge. Furthermore,the need for the higher skill and knowledge levels must be indefinite and ongoing. The Personnel Policies and Procedures Manual Section 2.1, as well as bargaining unit Memorandums of Understanding, address this process. Both state that requests are considered twice per year, once during the annual budgeting process and again in November. r During the current period, nine(9) requests were submitted for consideration. The Human Resources Division reviewed each request in detail and discussions ensued with „+ the appropriate supervisor, manager, or department head. Consequently, the Human Resources Division recommends that four(4) of the requests be approved. r Four(4)of the nine(9)requests will result in classification changes to positions with incumbents, effective immediately following Board approval. Three(3) of the four(4) classification changes to positions are lateral reclassifications with no change in salary, r Form No.owiaza BerNea:omrmr Page 1 r Book Page 9 u only changes in classifications that properly reflect the nature of the work being performed. The remaining classification change is a result of the employee performing a higher level of duties. This employee has met the criteria outlined in the Reclassification Guidelines,which are summarized below: 1. The incumbent has been in the position being considered for reclassification and �+ performing the higher level duties for at least 6 months. _ 2. The incumbent meets the qualifications for the position being considered for I reclassification. L 3. The incumbent's classification is not being reclassified from a non-supervisory to a supervisory classification. _ L Detailed information regarding each of the requests is documented in the additional information section. PRIOR COMMITTEE/BOARD ACTIONS N/A V ADDITIONAL INFORMATION I 230—Contracts. Purchasing, and Materials Management Division y Laterally reclassify two (2)Administrative Assistant positions at PG 67 ($6,185/month)to Contracts/Purchasing Assistant positions at PG 67 ($6,185/month)to properly reflect the I nature of the work being performed. These changes place the positions in the proper L job family, and will not result in any changes in pay. 740 —Engineering Planning Division and 250—Information Technology(IT) Division L Reclassify and transfer position occupied by Doug Rulison from Senior Engineering Data Management Specialist PG 80($8,121/month) in the Engineering Planning Division 740 to Senior Information Technology Analyst PG 83($8,743/month)in the Information Technology Division 250. Moving the position from the Engineering Planning Division to the IT Division will increase District effectiveness and efficiency by providing support to the Engineering tr• Department's entire technology portfolios that include enterprise GIS, CAD, and Enterprise Content Management Systems. I The IT Strategic Plan stipulates that all enterprise applications and technology solutions Ll will be supported by embedding IT staff in specific business units. The IT Strategic Plan commits to a business-driven consultative approach where senior IT staff is distributed within key business units. With IT support embedded within the Engineering Department, the duties and L responsibilities of the incumbent Doug Rulison have broadened in scope to cover managing all technology-related solutions and projects for engineering. In aligning with the IT Strategic Plan, the Enterprise Content Management Systems will envelope L several Engineering stand-alone efforts. L L Form No,CW1U I grown mptmr Page 2 L Book Page 10 750 —Proiect Management Office(Engineering Department) Laterally reclassify position occupied by Robert Thiede from Principal IT Analyst tr PG 87($10,133(month)to Principal Project Controls Analyst PG 87 ($10,133/month), and will not result in any changes in pay. This change requires creating a new classification of Principal Project Controls Analyst. r The Director of Engineering has transferred functions from the vendor, Integrated Project Management Consultants (IPMC), to District staff to reduce District costs. r Part of IPMC's responsibility was establishing and managing cost throughout the fife cycle of the District's Capital Improvement Program cash outlays. Establishment of this infrastructure was critical to ensure the scopes of the projects were appropriate, and that the cost estimates were accurate. The functions transferred from the vendor provide professional and technical expertise in the following three(3)distinct categories: . Data Management . Construction Scheduling . Cost Estimating Construction scheduling and cost estimating data feed into the data management r system from which forecast, trends, and variance analyses, are conducted to assist in management decision-making. Over the past year, Robert Thiede, Principal Information Technology Analyst, has been directed to understand, from a functional and enterprise- wide systems perspective, all aspects of the data management system currently handled by IPMC. Data management is the hub and backbone into which data flows. By laterally reclassifying Robert Thiede to the new classification of Principal Project Controls Analyst, it will more appropriately reflect current functions and responsibilities. RECLASSIFICATION REQUESTS r I Current I Propose,! Employee ON Classification Title Reel.mlfic.U..Title Hagerty.Wanoa 230 Administrative Assistant ContractslPurdtasinp Assistant r Evans,Therese Step 5 PG 67 Step 5 PG 67 $a 186/MonN t85/MOnM I senior EDM Specialiat I Senior IT Analyst r Ruiison.Doug 7" i Step 4-PG 80 Step 4-PG W i From Div 740 To Div 250 3B 121NIanM W TtI ]43IMonN r i ierle.Robert [ 750 Pritp 5- 87 An Pr Pn» Gonads Analyst lE i Step S-PG B] i Step S-PG 87 r i I From Div 2W i To Div 750 $1013aMIbne, E10133ALtM NEW CLASSIFICATION REQUEST r I Propoaetl Div Job TNle j Pr Protect Controls Analyst r Erpineering Dept i 760 i PG 87 i I ($10,133/month) r F.NaO iw a psalm Page 3 r Book Page I I r ADMINISTRATION COMMITTEE Meeting Date Toed.ofDir. 11112/08 11/19/08 r AGENDA REPORT Itern Number Item Number ADMOB-34 Orange County Sanitation District r FROM: James D. Ruth, General Manager r Originator: Lorenzo Tyner, Director of Finance and Administrative Services r SUBJECT: ORANGE COUNTY SANITATION DISTRICT COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR) FOR THE YEAR ENDED JUNE 30, 2008 r GENERAL MANAGER'S RECOMMENDATION r Receive and file the: ,r 1) Sanitation District's Comprehensive Annual Financial Report for the year ended June 30, 2008, prepared by staff and audited by Mayer Hoffman McCann, Certified Public Accountants; r 2) Report on Compliance and Internal Control for the year ended June 30,2008; and r 3) Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets r SUMMARY r The Sanitation District's independent auditors, Mayer Hoffman McCann P.C. (MHM), have completed their examination of the Sanitation District's financial •+ statements for the year ended June 30, 2008, and have issued an unqualified opinion. Each year, the Administration Committee reviews the results of the audit and the corresponding Auditor's report to the Committee. During the audit -� performed by MHM, no matters involving the internal control over financial reporting and its operations that the auditors consider to be material weakness were noted. Jennifer Farr, Partner, will attend the meeting to respond to any r questions of Directors. This year, staff has again prepared the Comprehensive Annual Financial Report that includes the audited financial statements. For the last fourteen years, the Sanitation District has earned the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association (GFOA). This year's report will again be submitted to GFOA for their review in anticipation of another award. r Form No.ovatax a awiwa:wmtmr Page 1 .. Book Page 12 u The Comprehensive Annual Financial Report, including the Auditor's opinion letter, the Auditor's Report to the Committee, the Auditor's Report on Compliance and Internal Control Over Financial Reporting, the Auditor's Appropriations Limit Report, and the Auditors Single Audit Report are attached. L ATTACHMENTS U 1. Comprehensive Annual Financial Report for the year ended June 30, 2008. I ' (Separately bound document.) L� 2. Report on Compliance and Internal Control Over Financial Reporting. 3. Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. `J 4. Report on Required Communication with Those in Governance. L L fL Li L L u (L L� u rLI U Form No.W IM3 ,yyy�pSyyW Page 2 u Hods Page 13 Mayer Hoffman McCann P.C. M Inclepender4 CPA Finn Conrad Government Services Division — 2301 Dupont Drive, Suite 200 Irvine, California 92612 949474-2020 ph 949463-5520 fx — v .mhlnpcxom Board of Directors Orange County Sanitation District Fountain Valley,CA In planning and performing our audit of the financial statements of the Orange County Sanitation District ("District") as of and for the year ended June 30, 2008, in accordance with auditing standards generally accepted in the United States of America, we considered Orange County Sanitation District's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements,but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we do not express an opinion on the effectiveness of the District's internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the District's financial statements that is more than inconsequential will not be prevented or detected by the District's internal control. Matters conforming to this definition are as follows: (1) Capital Asset Deletions The District has good controls to identify and write off old furniture and equipment that has been disposed of. For disposal of larger capital assets (pipelines, facilities), the Project Manager informs the Finance Department of replacement projects when the capital project is established in the accounting system. During our testing of capital asset additions, we noted certain projects that involved replacement of old folly depreciated assets. Since the Finance Department was not made aware of the disposal of old assets, the assets were not removed from the accounting system. The financial impact of removing these assets is SO because the assets had been fully depreciated. However, it is important that the District's subsidiary listing of capital assets only include assets currently in use. Recommendation We recommend that the District review the capital asset detail for fully depreciated assets that may no longer be in use. These assets should be removed from the District's accounting records. Book Page 14 Orange County Sanitation District u Page 2 (2) Adherence to Purchasing Policv The District's purchasing policy requires purchase orders for all goods and services V greater than $100. During our test of cash disbursement transactions, we noted that two transactions requiring purchase orders were initiated prior to obtaining the purchase order. This was evidenced by a purchase order date that was later than the date on the :. vendor invoice. Recommendation We recommend that the District follow the purchasing policy by obtaining purchase orders prior to initiating purchases. Ir (3) System User Access 1 Lr During our review of computer system access controls, we investigated user access for terminated employees. The District's policy is to change a terminated employee's password and disable the account immediately upon termination. After the employees' jr department is sure there is no pertinent data remaining in the account, the District personnel delete the account. Our review of terminated employees detected that the passwords had been changed; however, user accounts had not been deleted for one L former employee who had been terminated for over six months. Recommendation To prevent unauthorized access, we recommend that terminated employees' accounts be L disabled immediately upon termination. L This communication is intended solely for the information and use of management, Board of Directors and others within the organization,and is not intended to be and should not be used by anyone other than these specified parties. L Irvine, California October 30,2008 L L V L L L Book Page 15 Mayer Hoffman McCann P.C. M Inaepentlent CM F. Conrad Government Services Division 2301 Dupont Drive, Suite 200 Irvine.California 92612 1 949.474-2020 ph 949-263-5520 tX vmw.mhmpc.com Board Of Directors Orange County Sanitation District Fountain Valley, California Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets We have applied the procedures enumerated below to the appropriations limit worksheets prepared by the Orange County Sanitation District for the year ended June 30, 2008. These procedures, which were agreed to by the Orange County Sanitation District and the League of California Cities (as presented in the League publication entitled Article MIIB Appropriations Limitation Uniform Guidelines) were performed solely to assist the Orange County Sanitation District in meeting the requirements of Section 1.5 of Article XIIIB of the California Constitution. This engagement to apply agreed-upon procedures was performed in accordance with standards established by the American Institute of Certified Public Accountants. The sufficiency of the procedures is solely the responsibility of the specified users of the report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures performed and the results of those procedures were as follows: 1. We obtained the worksheets referred to above and compared the limit and annual adjustment factors included in those worksheets to the limit and annual adjustment factors that were adopted by resolution of the Board of Directors. We also compared the population and inflation options included in the aforementioned worksheets to those that were selected by a recorded vote. Results: No exceptions were noted as a result of our procedures. 2. We recalculated the mathematical computations reflected in the District worksheets. Results: No exceptions were noted as a result of our procedures. Book Page 16 L Board of Directors L Orange County Sanitation District Page Two L I L 3. We compared the current year information used to determine the current year limit and found that it agreed to worksheets prepared by the District and to information provided by the State Department of Finance. Results: No exceptions were noted as a result of our procedures. 6. 4. We compared the amount of the prior year appropriations limit presented in the worksheets to the amount adopted by the Board of Directors for the prior year. Results: No exceptions were noted as a result of our procedures. ! L We were not engaged to, and did not, perform an audit, the objective of which would be the L expression of an opinion on the worksheets referred to above. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. No procedures have been performed with respect V to the determination of the appropriation limit for the base year, as defined by the League publication entitled Article AMB Appropriations Limitation Uniform Guidelines. L This report is intended solely for the information and use of the specified users listed above and is not intended to be and should not be used by anyone other than these specified parties. Irvine,California October 30, 2008 I La L Book Page 17 er Hoffman McCann P.C. An Independent CPA Firm _ 2301 Dupont Drive,Suite 200 Irvine,California 9261.2 949-474-2020 ph 949-263-5520& w .mhmpcxom Administration Committee Orange County Sanitation District Fountain Valley, CA We have audited the financial statements of the Orange County Sanitation District for the year ended June 30, 2008 and have issued our report thereon dated October 30, 2008. Professional standards require that we provide you with the following information related to our audit. Our Responsibility under U.S. Generally Accepted Auditing Standards Our responsibility, as described by professional standards, is to express opinions about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit of the financial statements does not relieve you or management of your responsibilities. Scope and Timing of the Audit The scope and timing of the audit was communicated to the Chair of the Administration Committee in a separate letter dated May 19,2008. Significant Audit Findings Oualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. We will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the District's are described in Note 1 to the financial statements. GASB Statement No. 45 was implemented during the fiscal year ended June 30, 2008. No other new accounting policies were adapted and the application of existing policies was not changed during the fiscal year. We noted no transactions entered into by the District during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the Financial statements in a different period than when the transaction occurred. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimate affecting the financial statements is: Management's judgments concerning which projects should be expensed as ordinary maintenance activities necessary to keep an asset operational for its originally intended useful life versus significant improvement, replacement, and life extending projects that should be Book Page 18 Administration Committee b Orange County Sanitation District Page 2 capitalized as additions to capital assets. We select a sample of capital asset additions to determine that management's judgments are reasonable in relation to the financial statements L taken as a whole. Difficulties Encountered in Performing the Audit We encountered no difficulties in performing and completing our audit. i Corrected and Uncorrected Misstatements L Professional standards require us to accumulate all known and likely misstatements identified L during the audit, other than those that are trivial, and communicate them to the appropriate level of management.The following adjustments were detected by the audit process: Adjustment to GASB 45 OPEB liability of approximately $1 million to account for changes to the liability balance subsequent to the actuarial valuation date. Management has corrected this misstatement. In addition, District staff chose to account for the following item in a manner that is not in 1 conformance with generally accepted accounting principles due to the lack of materiality to the financial statements taken as a whole. Additional capitalization of interest in accordance with FASB 34 in the amount of$13.8 L million to account for interest allocated to capital projects that did not have bond funding. In essence, District staff preferred to immediately recognize interest expense of$13.8 million as opposed to amortizing this expense over the life of the capital projects that did not have bond funding. Disagreements with Management L For purposes of this letter, professional standards define a disagreement with management as a 1 financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, 6d that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. ri Management Representations We have requested certain representations from management that are included in the L management representation letter dated October 30,2008. Management Consultations with Other Independent Accountants L In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a u consultation involves application of an accounting principle to the District's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts.To our knowledge, there were no such consultations with other accountants. V Book Page 19 r Administration Committee Orange County Sanitation District Page 3 r Other Audit Findings or Issues r We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the District's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. This information is intended solely for the use of the Administration Committee and management of the District and is not intended to be and should not be used by anyone other than these specified parties. October 30,2008 Irvine, California r r r hI r r r r r r Book Page 20 r ADMINISTRATION COMMITTEE Meeting Date TO Bd.or[*. 11/1ZO 11/19/013 AGENDA REPORT AADDM"xS� 7°� Number Orange County Sanitation District r FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services r SUBJECT: NEW MONEY CERTIFICATES OF PARTICIPATION (COPS) r GENERAL MANAGER'S RECOMMENDATION r 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 r District of one or more Installment Purchase Agreements, Trust Agreements, and Continuing Disclosure Agreements in connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, in one or more r series, Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed $200,000,000,Approving the Distribution of one more Official Notice Inviting Bids and Official Statements in ,+ Connection with the Offerings and Sales of such Certificates and Authorizing the Execution of Necessary Documents and Related Actions; and, 2) That the Orange County Sanitation District Financing Corporation approve the `y documents supporting and authorizing the Certificates of Participation, in one or more series in an aggregate amount not to exceed $200 million. SUMMARY The Administration Committee and the Board of Directors have previously authorized the execution and delivery of$200 million of new Certificates of Participation and approved the financing team consisting of an independent financial advisor, Public Resources Advisory Group, and bond and disclosure counsel, Fulbright&Jaworski. Woodruff, -+ Spradlin & Smart, the District's General Counsel, has also been assisting staff. The purpose of the financing is to provide a portion of the funding required for the capital r improvement program of FY 2008-09 and FY 2009-10. None of the proceeds will be used for operations and maintenance needs. This financing is included in the 2008-09 approved budget. The financing is structured as new fixed rate Certificates of Participation that is to be sold in one or more competitive sales. The draft documents will be presented to the r Board and the OCSD Financing Corporation on November 19, 2008, for final approval. Staff and consultants will make a brief presentation and provide an overview of the draft documents and the financing schedule at the Administration Committee meeting. A current Financing Schedule is attached. r r Fo1m No.IXNto2a nawea:oaoim7- Page 1 r Book Page 21 PRIOR COMMITTEEIBOARD ACTIONS October 22, 2008: Approved Resolution declaring District's intent to reimburse ourselves for capital outlays from a future long-term financing. October 8, 2008: Directed staff to initiate procedures to issue up to $200 million in — new fixed-rate Certificates of Participation (COP) debt. September 12, 2007: Approved a Consulting Services Agreement with Fulbright& Jaworski, L.L.P to provide bond counsel services. ADDITIONAL INFORMATION Strategy _ The impact of the global financial crisis has also negatively affected the municipal bond market. Immediately following the bankruptcy of Lehman Brothers and the Federal bailout of AIG in mid- September, investor demand for tax-exempt bonds became nearly non-existent, causing tax- _ exempt interest rates to dramatically increase and primary market bond sales volume to precipitously shrink due to lack of investor demand (and heavy selling by large investors). However, in recent weeks, investors have returned to the municipal bond market, accompanied by lower yields and increasing sales volume. The following charts illustrate the recent volatility of the tax-exempt interest rates and the changes in issuance volume. Bond Buyer Revenue 25 Index (RBI) 7.0 60% .. 6.5 RBI Index 50% m Volatility K 6.0 40% 6 o m c 5.5 30% d ro 5.0 20% 'A 4.5 10% j 4.0 0% r r r n n r m oo m co ro ro 0 0 0 0 0 0 0 0 0 0 0 0 r m Municipal Bond Primary Issuance Volume by Week 10 Isel 8.5 8 6.5 5-Year Average 5.7 6 5.2 = $7.68 4.6 4 2.6 _ 1.9 2 1.5 1.0 0 _ 912 919 9116 9123 9130 1017 10114 10121 10128 Form N. ow 1U 1 R—wd:03rov07 Page 2 Book Page 22 r These extremely volatile market conditions make it difficult for issuers, like the District, to forecast when may be a good time to enter the market and opportunifies may arise suddenly. �+ Therefore, it is prudent to provide for maximum flexibility with which to allow for the District's sale of COP debt. Although, today's borrowing costs may not be the most attractive by recent historic standards, by adopting the Resolutions this month, the District would have the ability, r but not the obligation, to price its COP debt as soon as early December 2008. With this flexibility, the District could, if market conditions become more favorable, price the COP debt with less than a week's notice to the marketplace. Otherwise an approval by the Board in December, or later, would delay the earliest pricing date to January 2009 or beyond. Thus, by adopting the Resolutions in November, the District is afforded a larger window of opportunity over which it could price its COPS, and potentially mitigating pressure to sell under unfavorable market conditions. To ensure that the District would be issuing debt when the market conditions are relatively favorable, staff is proposing that an upper limit of 5.75% be set on the true interest cost on the COPs to be issued. Although it is higher than tax-exempt interest rates prior to the current global financial crisis, the proposed limit compares favorably to current long-term proxy indices, such as the Bond Buyer Revenue 25 Index at 6.12% and the higher-rated benchmark Municipal �r Market Data's AAA GO 20-year index at 5.72%. In addition, bid parameters for the sale will include provisions to allow the District to retain the ability to economically refund the COPS in the event tax-exempt interest rates were to decline in the future, limiting the District's exposure r to higher interest cost. Impact on Financing Ratios ,y The most recent Strategic Plan capital improvement program requires approximately $1.074 billion over the next five years, of which approximately $550 million is to be financed through long-term borrowings over the next five years in accordance with the District's long-term debt fiscal policy and cash flow projections. The issuance of$200 million of COP debt this fiscal year is anticipated for a portion of capital improvements to be constructed over the next year. As shown in the report prepared by the District's financial advisor and included as an `V attachment in the October 8, 2008 Agenda Report, the issuance of$200 million in COP debt will preserve strong financial ratios for the District, including debt service coverage, debt-to-equity ratio, and liquidity ratios. r Variable Rate Debt Exposure Another result of the current global financial crisis has been the impact on the financial strength and ratings on various financial institutions which provide bank liquidity facilities used for the issuance of variable rate bonds issued by municipal entities. As a result,these related variable rate bonds have experienced higher than expected interest rate resets as investors are unwilling r to hold bonds secured by these weakening financial institutions. The universe of financial institutions that are not perceived by investors of having financial difficulties is shrinking and these remaining banks have limited ability to service the entire$500 billion tax-exempt variable rate market. The issuance of fixed rate debt will provide the District with a balanced overall debt portfolio consisting of a mix of fixed rate and variable rate debt, while limiting additional exposure in this uncertain market. The District's current variable rate debt exposure includes its outstanding 2006 COPs secured by a liquidity facility from DEPFA Bank plc which is one of the financial institutions experiencing financial difficulties, thus leading to higher than expected rate resets for the District. Staff and the District's consultants have been monitoring this situation and have developed both a short- and a long-term strategy to manage this exposure. In particular, staff is exploring the optimal r Form No.owloia geuisetl'0Y01N7 Page 3 d Book Page 23 L method to have the District purchase the 2006 COPS on a temporary basis. (Note that, in response to the recent market dislocations, the Internal Revenue Service (IRS) now allows municipal issuers to purchase their own debt obligations without cancellation and without impact on the tax-exempt status of such purchased bonds through December 2009.) The optimal method may possibly involve actions by the Orange County Sanitation District Financing Corporation, require amendments to existing bond documents and/or the investment policy of Lr the District. The District's General Counsel is currently reviewing what necessary steps must be taken to allow for these purchases. Prior to the expiry of the December 2009 temporary period i allowed by the Internal Revenue Code, it is anticipated that market conditions will normalize V making either liquidity facilities or fixed rate bonds less costly. At that time,the 2006 COPs will either be secured by a new liquidity facility or refunded with fixed rate bonds, depending on market conditions. Interest and Issuance Costs j The$200 million that is borrowed will be repaid with interest over the next 30 years. The total V interest cost is expected to be less than 5.75% (or less than approximately$225 million). Some of the interest cost will be offset by interest earnings while the funds are waiting to be used, and earnings from a debt service reserve fund. The financing of the $200 million of fixed rate COP debt may be completed with more than one - issuance. Based on an arbitrage analysis conducted by PRAG in the Capital Improvement Program Financing Plan, dated October 1, 2008, a multi-sale issuance structure would (1) _ reduce negative arbitrage and (2) mitigate potential size penalties in the current uncertain market resulting in a net savings to the District of approximately$1.5 million. L The Consultant Services Agreements with PRAG and Fulbright total a not-to-exceed amount of $185,000 for each series issued under the authorized Resolution, excluding expenses. These I and other costs, such as printing the Official Statement, underwriters' discount, rating agency L: fees and trustee's fees will be paid from the proceeds of each series issued under the authorized Resolution. I� Legal Authorization and Approvals The Board of Directors and the Financing Corporation will each be required to adopt separate -- Resolutions to complete this borrowing. Drafts of these two Resolutions are attached for review. A Financing Corporation is required by the structure of the COPS and was formed in April 2000, solely to satisfy this need. The Board of Directors of the Corporation is the same as the Board of Directors of the District and the Corporation meets after an adjournment of the OCSD Board. The OCSD Resolution authorizes the execution and delivery of certain legal documents and the execution and delivery of Certificates of Participation evidencing principal in an aggregate amount of not to exceed $200,000,000 all as spelled out in the title as follows: °A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT AUTHORIZING THE EXECUTION AND DELIVERY BY THE DISTRICT OF ONE OR MORE INSTALLMENT PURCHASE AGREEMENTS, ONE OR MORE - TRUST AGREEMENTS,AND ONE OR MORE CONTINUING DISCLOSURE AGREEMENTS L: IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION IN ONE OR MORE SERIES, AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED$200,000,000,APPROVING ONE OR MORE NOTICES OF INTENTION TO SELL, AUTHORIZING THE DISTRIBUTION V F.n0.OYV1@d Page • e 4 L Book Page 24 r OF ONE OR MORE OFFICIAL NOTICES INVITING BIDS AND ONE OR MORE OFFICIAL STATEMENTS IN CONNECTION WITH THE OFFERING AND SALE OF SUCH w CERTIFICATES,AND AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND RELATED ACTIONS." The Resolution of the Corporation is somewhat shorter and simpler. It authorizes three actions that are similarly enumerated in the title as follows: "A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION AUTHORIZING THE EXECUTION AND DELIVERY BY THE CORPORATION OF ONE OR MORE INSTALLMENT PURCHASE AGREEMENTS AND ONE OR MORE TRUST AGREEMENTS IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION IN ONE OR MORE SERIES;AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT-TO-EXCEED $200,000,000 AND;AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND CERTIFICATES AND RELATED ACTIONS.' r Following is a chart listing the steps to be completed for the initial (if more than one) issuance of r the new money COP debt issuance assuming the earliest possible pricing date: n Finalize debt service and cash flow modeling November D Board approval of legal and disclosure documents r t, Rating Agency Presentations ➢ Marketing and Sale of the COPs through a Competilive Sale r Process(depending on market conditions,earliest possible December Ding date) • Execute up to$200 million Fixed-Rate COP issue a Investment of Bond Proceeds r ➢ Debt Administration r ATTACHMENTS 1. District Resolution 2. Corporation Resolution 3. Draft Trust Agreement 4. Draft Installment Purchase Agreement 5. Draft Continuing Disclosure Agreement ,r 8. Draft Preliminary Official Statement 7. Draft Official Notice Inviting Bids 8. Draft Notice of Intention to Sell r JDR:LT:MW r r Fw NO.OvP102.8 aewea:6Yo1Nr Page 5 r Book Page 25 r r RESOLUTION NO. OCSD OS-_ r, A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT AUTHORIZING THE EXECUTION AND DELIVERY BY THE DISTRICT OF ONE OR MORE INSTALLMENT PURCHASE AGREEMENTS, ONE OR MORE TRUST AGREEMENTS, AND ONE OR MORE CONTINUING DISCLOSURE AGREEMENTS IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION IN ONE OR MORE SERIES, AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH r CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED $200,000,000, APPROVING ONE OR MORE NOTICES OF INTENTION TO SELL, AUTHORIZING THE r DISTRIBUTION OF ONE OR MORE OFFICIAL NOTICE INVITING BIDS AND ONE OR MORE OFFICIAL STATEMENTS IN CONNECTION WITH THE OFFERING AND SALE OF SUCH r CERTIFICATES AND AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND RELATED ACTIONS r WHEREAS,the Orange County Sanitation District(the"District')desires to finance the acquisition, construction and installation of certain improvements to its wastewater system (the "Project'); WHEREAS,to finance the Project, the District desires to purchase the Project from the Orange County Sanitation District Financing Corporation (the "Corporation"), and the Corporation desires to sell the Project to the District, for the installment payments (the r "Installment Payments")to be made by the District pursuant to one or more Installment Purchase Agreements (collectively, the "Installment Purchase Agreement"), by and between the District r and the Corporation; WHEREAS, the Corporation intends to assign without recourse certain of its rights under and pursuant to each Installment Purchase Agreement to Union Bank of California,N.A., r as trustee(the"Trustee"),pursuant to a Trust Agreement among the Trustee,the Corporation and the District (each such Trust Agreement, in the form presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution, being referred to r herein collectively as the "Trust Agreement"); WHEREAS, in consideration of such assignment and the execution and delivery of the Trust Agreement, the Trustee intends to execute and deliver Orange County Sanitation District Certificates of Participation, in one or more series (the "Certificates"), evidencing direct, undivided fractional interests in the Installment Payments,and the interest thereon; •+ WHEREAS, the District desires to provide for the public sale of each series of the Certificates in one or more discrete sale transactions; r r 80341666.4 r Book Page 26 i u WHEREAS, a form of the Notice of Intention to Sell to be published in connection with L the public offering and sale of the Certificates has been prepared (such Notice of Intention to Sell, in the form presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution, being referred to herein as the"Notice of Intention to Sell"); WHEREAS, a form of the Official Notice Inviting Bids to be distributed in connection with the public offering and sale of the Certificates has been prepared (such Official Notice Inviting Bids, in the form presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution, being referred to herein as the"Notice Inviting Bids"); WHEREAS, a form of the Preliminary Official Statement to be distributed in connection with the public offering of the Certificates has been prepared (such Preliminary Official _ Statement in the form presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution, being referred to herein as the "Preliminary Official Statement"); , WHEREAS, Rule 15c2-12 promulgated by the Securities and Exchange Commission y under the Securities Exchange Act of 1934, as amended ("Rule 15c2-12"), requires that the underwriter thereof must have reasonably determined that the District has undertaken in a written agreement or contract for the benefit of the holders of the Certificates to provide disclosure of 6, certain financial information and certain material events on an ongoing basis; WHEREAS, to cause such requirement to be satisfied, the District desires to enter into one or more Continuing Disclosure Agreements(each such Continuing Disclosure Agreement in the form presented to this meeting, with such changes, insertions and omissions as are made _ pursuant to this Resolution, being refereed to herein as the "Continuing Disclosure Agreement"); WHEREAS,there have been prepared and submitted to this meeting forms of.- (a) the Installment Purchase Agreement; V (b) the Trust Agreement; (c) the Notice of Intention to Sell; L' (d) the Notice Inviting Bids; y (e) the Preliminary Official Statement; and (f) the Continuing Disclosure Agreement; o. WHEREAS, all acts, conditions and things required by the Constitution and laws of the State of California to exist, to have happened and to have been performed precedent to and in L connection with the consummation of the financing authorized hereby do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the District is now duly authorized and empowered, pursuant to each and every requirement of law, to consummate such financing for the purpose, in the manner and upon the terms herein provided; L. 90341666.4 2 La Book Page 27 r r NOW, THEREFORE, the Board of Directors of the District DOES HEREBY RESOLVE, DETERMINE AND ORDER: Section 1. All of the recitals herein contained are true and correct and the Board of Directors of the District(the"Board") so finds. Section 2. The Installment Purchase Agreement, in substantially the form submitted to this meeting and made a part hereof as though set forth herein, be and the same is hereby approved. The Chair of the Board, and such other member of the Board as the Chair may designate, the General Manager of the District, the Director of Finance and Administrative r Services of the District, and such other officers of the District as the Director of Finance and Administrative Services may designate (the "Authorized Officers") are, and each of them is, hereby authorized and directed, for and in the name of the District, to execute and deliver one or more Installment Purchase Agreements in the form submitted to this meeting, with such changes, insertions and omissions as the Authorized Officer executing the same may require or approve, such requirement or approval to be conclusively evidenced by the execution of such Installment r Purchase Agreement by such Authorized Officer; provided, however, that such changes, insertions and omissions shall not result in an aggregate principal amount of Installment Payments in excess of$200,000,000, shall not result in a true interest cost for the Installment ~ Payments in excess of 5.75% and shall not result in a final Installment Payment later than February 1,2039. r Section 3. The Trust Agreement, in substantially the form submitted to this meeting and made a part hereof as though set forth in full herein, be and the same is hereby approved. The Authorized Officers are, and each of them is, hereby authorized and directed, for and in the name of the District,to execute and deliver one or more Trust Agreements in the form presented to this meeting,with such changes, insertions and omissions as the Authorized Officer executing r, the same may require or approve, such requirement or approval to be conclusively evidenced by the execution of the Trust Agreement by such Authorized Officer. r Section 4. The execution and delivery of the Certificates evidencing principal in an aggregate amount of not to exceed $200,000,000, payable in the years and in the amounts, and evidencing principal of and interest on the applicable Installment Payments as specified in the r applicable Trust Agreement as finally executed, are hereby authorized and approved. The Certificates may be executed and delivered in one or more series, and sold in one or more discrete sale transactions,all as determined by an Authorized Officer. Section 5. The form of Notice of Intention to Sell, in substantially the form submitted to this meeting and made a part hereof as though set forth in full herein, with such changes, r insertions and omissions therein as may be approved by an Authorized Officer, is hereby approved, and the use of the applicable Notice of Intention to Sell in connection with the offering and sale of a series of the Certificates is hereby approved. The Authorized Officers are each r hereby authorized and directed, for and in the name and on behalf of the District,to cause one or more Notices of Intention to Sell to be published in The Bond Buyer (or in such other financial publication generally circulated throughout the State of California or reasonably expected to be disseminated among prospective bidders for the Certificates as an Authorized Officer shall approve as being in the best interests of the District) at least five days prior to the date set for the opening of bids under the applicable Notice Inviting Bids, with such changes, insertions and 803416664 3 Book Page 28 L omissions therein as an Authorized Officer may require or approve, such requirement or L approval to be conclusively evidenced by the publishing of such Notice of Intention to Sell. Section 6. The Notice Inviting Bids, in substantially the form submitted to this v meeting and made a part hereof as though set forth herein, with such changes, insertions and omissions therein as may be approved by an Authorized Officer, be and the same is hereby approved, and the use of one or more Notices Inviting Bids in connection with the offering and lr sale of the Certificates is hereby authorized and approved. The terms and conditions of the offering and sale of a series of the Certificates shall be as specified in applicable Notice Inviting Bids. Bids for the purchase of a series of the Certificates shall be received at the time and place set forth in the applicable Notice Inviting Bids. The Authorized Officers are each hereby authorized and directed, for and in the name and on behalf of the District, to accept the bid for a series of the Certificates with the lowest true interest cost, or to reject all bids therefor, in accordance with the terms of the applicable Notice Inviting Bids. _ Section 7. The Preliminary Official Statement, in substantially the form presented to this meeting and made a part hereof as though set forth in full herein, with such changes, _ insertions and omissions therein as may be approved by an Authorized Officer, is hereby L approved, and the use of one or more Preliminary Official Statements in connection with the offering and sale of a series of the Certificates is hereby authorized and approved. The _ Authorized Officers are each hereby authorized to certify on behalf of the District that a Preliminary Official Statement with respect to a series of the Certificates is deemed final as of its Y1 date, within the meaning of Rule 15c2-12 (except for the omission of certain information — permitted by Rule 15c2-12 to be omitted). The Authorized Officers are each hereby authorized and directed to furnish, or cause to be furnished, to prospective bidders for a series of the Certificates a reasonable number of copies of the applicable Preliminary Official Statement. - Section S. The preparation and delivery of one or more final Official Statements (the "Official Statement"), and their use in connection with the offering and sale of a series of the Certificates, be and the same is hereby authorized and approved. An Official Statement shall be in substantially the form of the applicable Preliminary Official Statement, with such changes, insertions and omissions as may be approved by an Authorized Officer, such approval to be - conclusively evidenced by the execution and delivery thereof. The Authorized Officers are, and each of them is, hereby authorized and directed to execute a final Official Statement and any amendment or supplement thereto,for and in the name of the District. - - Section 9. The Continuing Disclosure Agreement, in substantially the form submitted to this meeting and made a part hereof as though set forth herein, be and the same is hereby approved. The Authorized Officers are, and each of them is, hereby authorized and directed, for and in the name of the District, to execute and deliver one or more Continuing Disclosure Ltl Agreements in the form submitted to this meeting, with such changes, insertions and omissions as the Authorized Officer executing the same may require or approve, such requirement or 14 approval to be conclusively evidenced by the execution of such Continuing Disclosure Agreement by such Authorized Officer. u y 8O41b 4 4 4ri Book Page 29 r r Section 10. The Authorized Officers are, and each of them hereby is, authorized and directed to execute and deliver any and all documents and instruments and to do and cause to be done any and all acts and things necessary or proper for carrying out the execution and delivery of the Certificates and the transactions contemplated by the notices, agreements and documents referenced in this Resolution. r Section 11. All actions heretofore taken by the officers and employees of the District with respect to the execution, delivery and sale of the Certificates, or in connection with or related to any of the agreements or documents referenced in this Resolution, are hereby approved,confirmed and ratified. Section 12. This Resolution shall take effect immediately upon its adoption. r r r r r r r r r r r 80341666.4 5 r Book Page 30 i L.1 PASSED AND ADOPTED at a regular meeting held on November 19, 2008. L i-� �r Chair ATTEST: L I ' u Clerk of the Board _ I • LJ APPROVED: V General Counsel I Orange County Sanitation District L I ' W I ` 61 L: IL+ 4 I � u i w W 80341666.4 6 6r Book Page 31 STATE OF CALIFORNIA ) ss COUNTY OF ORANGE ) 1, Penny M. Kyle, Clerk of the Board of Directors of the Orange County Sanitation 'r District, do hereby certify that the foregoing Resolution No. OCSD 08- -- was passed and adopted at a regular meeting of said Board on the 191° day of November 2008, by the following vote,to wit: r AYES: NOES: ABSTENTIONS: ABSENT: IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of Orange County Sanitation District this 191h day of November 2008. r Clerk of the Board of Directors Orange County Sanitation District r r r r r r r 803416664 r Book Page 32 r r RESOLUTION NO. FC- A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION AUTHORIZING THE EXECUTION AND DELIVERY BY THE CORPORATION OF ONE OR MORE INSTALLMENT PURCHASE AGREEMENTS AND ONE OR MORE TRUST AGREEMENTS IN CONNECTION WITH THE EXECUTION AND DELIVERY OF r ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION IN ONE OR MORE SERIES, AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED $200,000,000 AND AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND RELATED ACTIONS. r WHEREAS,the Orange County Sanitation District (the"District") desires to finance the acquisition, construction and installation of certain improvements to its wastewater system (the "Project"); WHEREAS, to finance the Project, the District desires to purchase the Project from the ,r Orange County Sanitation District Financing Corporation (the "Corporation"), and the Corporation desires to sell the Project to the District, for the installment payments (the "Installment Payments") to be made by the District pursuant to one or more Installment Purchase ,r Agreement (collectively, the "Installment Purchase Agreement"), by and between the District and the Corporation; WHEREAS, the Corporation intends to assign without recourse certain of its rights under and pursuant to each applicable Installment Purchase Agreement to Union Bank of California, N.A., as trustee (the "Trustee"), pursuant to one or more Trust Agreements each r among the Trustee, the Corporation and the District (each such Trust Agreement, in the forth presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution,being referred to herein collectively as the"Trust Agreement'); r WHEREAS, in consideration of such assignment and the execution and delivery of the Trust Agreement, the Trustee intends to execute and deliver Orange County Sanitation District <, Certificates of Participation in one or more series (the "Certificates"), evidencing direct, undivided fractional interests in the applicable Installment Payments, and the interest thereon; WHEREAS,there have been prepared and submitted to this meeting forms of (a) the Installment Purchase Agreement;and r (b) the Trust Agreement; r r 80JJ16104 r Book Page 33 L WHEREAS, all acts, conditions and things required by the Constitution and laws of the L State of California to exist, to have happened and to have been performed precedent to and in connection with the consummation of the actions authorized hereby do exist, have happened and ` have been performed in regular and due time, form and manner as required by law, and the Corporation is now duly authorized and empowered, pursuant to each and every requirement of law, to consummate such actions for the purpose, in the manner and upon the terms herein provided; NOW, THEREFORE, the Board of Directors of the Corporation DOES HEREBY RESOLVE, DETERMINE AND ORDER: Section 1. All of the recitals herein contained are true and correct and the Board of ` Directors of the Corporation (the`Board")so finds. 4 Section 2. The Installment Purchase Agreement, in substantially the form submitted to this meeting and made a part hereof as though set forth herein, be and the same is hereby �+ approved. The President of the Corporation,the Vice-president of the Corporation,the Treasurer of the Corporation and the Secretary of the Corporation, and such other officer of the Corporation as the President may designate (the"Authorized Officers") are,and each of them is, �+ hereby authorized and directed, for and in the name of the Corporation, to execute and deliver _ one or more Installment Purchase Agreements in the form submitted to this meeting, with such changes, insertions and omissions as the Authorized Officer executing the same may require or approve, such requirement or approval to be conclusively evidenced by the execution of such Installment Purchase Agreement by such Authorized Officer; provided, however, that such changes, insertions and omissions shall not result in an aggregate principal amount of Installment Payments in excess of$200,000,000, shall not result in a true interest cost for the Installment Payments in excess of 5.75% and shall not result in a final Installment Payment later than February 1,2039. Section 3. The Trust Agreement, in substantially the form submitted to this meeting and made a part hereof as though set forth in full herein, be and the same is hereby approved. The Authorized Officers are, and each of them is, hereby authorized and directed, for and in the -. name of the Corporation, to execute and deliver one or more Trust Agreements in the form - presented to this meeting, with such changes, insertions and omissions as the Authorized Officer executing the same may require or approve, such requirement or approval to be conclusively evidenced by the execution of such Trust Agreement by such Authorized Officer. i 4+ Section 4. The execution and delivery of Certificates evidencing principal in an aggregate amount of not to exceed $200,000,000, payable in the years and in the amounts, and evidencing direct, undivided fractional interests in the applicable Installment Payments, and the interest thereon, as specified in the applicable Trust Agreement as finally executed, are hereby .. authorized and approved. ! Y+ Section 5. The officers and agents of the Corporation are, and each of them hereby is, _ authorized and directed to execute and deliver any and all documents and instruments and to do and cause to be done any and all acts and things necessary or proper for carrying out the 1✓ 90341610.4 2 Book Page 34 r r execution and delivery of the Certificates and the transactions contemplated by the agreements or documents referenced in this Resolution. Section 6. All actions heretofore taken by the officers and agents of the Corporation with respect to the execution, delivery and sale of the Certificates, or in connection with or related to any of the agreements or documents referenced in this Resolution, are hereby approved,confirmed and ratified. Section 7. This Resolution shall take effect immediately upon its adoption. r PASSED AND ADOPTED at a meeting held on November 19,2008. r r President,Orange County Sanitation District Financing Corporation ATTEST: r ,r Secretary of the Board of Directors, Orange County Sanitation District Financing Corporation r APPROVED: r r General Counsel, Orange County Sanitation District Financing Corporation r r r r r r 80341610A 3 r Book Page 35 L STATE OF CALIFORNIA ) V ss COUNTY OF ORANGE ) I, Penny M. Kyle, Secretary of the Board of Directors of the Orange County Sanitation ;r District Financing Corporation, do hereby certify that the foregoing Resolution No. FC- , was passed and adopted at a regular meeting of said Board on the 19' day of November 2008,by the following vote,to wit: r, AYES: L. NOES: ABSTENTIONS: u ABSENT: 6. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of . . Orange County Sanitation District Financing Corporation this 190 day of November 2008. V Secretary of the Board of Directors, Orange County Sanitation District •+ Financing Corporation Y. ♦Y La 4. 6d L+ 80341610.4 u Book Page 36 Fulbright&Jaworski L.L.P.—Draft 10/31/08 r r TRUST AGREEMENT r by and among r _ UNION BANK OF CALIFORNIA,N.A., as Trustee, r ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION r r and r ORANGE COUNTY SANITATION DISTRICT r r Dated as of December 1, 2008 r Relating to $_,000,000 ,r Orange County Sanitation District Certificates of Participation Series2008C r 8034N85.3 Book Page 37 r TABLE OF CONTENTS r Page ARTICLE I DEFINITIONS;EQUAL SECURITY `. Section 1.01. Definitions........................................................................................................2 Section 1.02. Definitions in Installment Purchase Agreement..............................................9 Section1.03. Equal Security................................................................................................ 10 r ARTICLE I TERMS AND CONDITIONS OF CERTIFICATES a. Section 2.01. Preparation and Delivery of Certificates........................................................ 10 Section 2.02. Denomination,Medium and Dating of Certificates....................................... 10 r Section 2.03. Payment Dates of Certificates;Interest Computation.................................... 10 Section 2.04. Form of Certificates....................................................................................... 12 Section 2.05. Execution of Certificates and Replacement Certificates. The r Certificates shall be executed by the Trustee by the manual signature of an authorized signatory of the Trustee...................................................... 12 Section 2.06. Transfer and Payment of Certificates;Exchange of Certificates................... 12 Section 2.07. Certificate Registration Books....................................................................... 12 Section2.08. Temporary Certificates.................................................................................. 13 Section 2.09. Certificates Mutilated,Lost,Destroyed or Stolen......................................... 13 Section2.10. Book-Entry System................................................................_...................... 13 ARTICLE III ,r PROCEEDS OF CERTIFICATES Section 3.01. Delivery of Certificates..................................._.......................................... 16 Section 3.02. Deposit of Proceeds of Certificates.................._............................................ 16 Section 3.03. Costs of Issuance Fund.................................................................................. 16 Section 3.04. Use of Moneys in the Acquisition Fund........................................................ 16 ARTICLE IV PREPAYMENT OF CERTIFICATES r Section4.01. Optional Prepayment..................................................................................... 17 Section 4.02. Mandatory Sinking Account Prepayment...................................................... 17 r Section 4.03. Selection of Certificates for Optional Prepayment........................................ Is Section 4.04. Notice of Prepayment.................................................................................... Is Section 4.05. Partial Prepayment of Certificates..................._............................................ 19 ..� Section 4.06. Effect of Prepayment......................................._............................................ 19 ARTICLE V ASSIGNMENT AND PLEDGE;FUNDS AND ACCOUNTS r Section 5.01. Assignment and Pledge......................................................................_.......... 19 8034 253 1 r Book Page 38 L TABLE OF CONTENTS (continued) V Page I ' Section5.02. Installment Payment Fund.............................................................................20 Section5.03. Reserve Fund.................................................................................................21 Section5.04. Rebate Fund...................................................................................................22 Section 5.05. Investment of Moneys....................................................................................23 Section 5.06. Brokerage Confirmations...............................................................................24 ARTICLE VI Lo COVENANTS Section 6.01. Compliance with Trust Agreement................................................................24 Ld Section 6.02. Compliance with Installment Purchase Agreement.......................................24 Section 6.03. Compliance with Master Agreement.............................................................24 Section 6.04. Observance of Laws and Regulations............................................................24 L Section6.05. Other Liens.....................................................................................................24 Section 6.06. Prosecution and Defense of Suits..................................................................25 L+ Section 6.07. Accounting Records and Statements.............................................................25 Section6.08. Tax Covenants...............................................................................................25 Section 6.09. Continuing Disclosure...................................................................................28 Section 6.10. Further Assurances.........................................................................................29 L. ARTICLE VII I DEFAULT AND LIMITATIONS OF LIABILITY u Section 7.01. Action upon Event of Default........................................................................29 j Section 7.02. Other Remedies of the Trustee......................................................................29 W Section7.03. Non-Waiver........................................................................................_..........30 Section7.04. Remedies Not Exclusive................................................................................30 Section 7.05. Application of Amounts After Def tuft..........................................................30 L Section 7.06. Trustee May Enforce Claims Without Possession of Certificates.................31 Section 7.07. Limitation on Suits.........................................................................................31 Section 7.08. No Liability by the Corporation to the Owner...............................................31 �+ Section 7.09. No Liability by the District to the Owners.....................................................32 Section 7.10. No Liability of the Trustee to the Owners.....................................................32 ARTICLE VBI THE TRUSTEE I L Section 8.01. Employment of the Trustee;Duties...............................................................32 Section 8.02. Removal and Resignation of the Trustee.......................................................32 Section 8.03. Compensation and Indemnification of the Trustee........................................33 y Section9.04. Protection of the Trustee................................................................................34 .r V 90340485.3 ii Book Page 39 r TABLE OF CONTENTS r (continued) Page ARTICLE IX AMENDMENT OF OR SUPPLEMENT TO TRUST AGREEMENT Section9.01. Amendment or Supplement...........................................................................36 Section 9.02. Disqualified Certificates................................................................................36 Section 9.03. Endorsement or Replacement of Certificates After Amendment or `+ Supplement....................................................................................................37 Section 9.04. Amendment by Mutual Consent....................................................................37 r ARTICLE X DEFEASANCE r Section 10.01. Discharge of Certificates and Trust Agreement.............................................37 Section10.02. Unclaimed Moneys........................................................................................39 r ARTICLE XI MISCELLANEOUS r Section 11.01. Benefits of Trust Agreement..........................................................................39 Section 11.02. Successor Deemed Included in all References to Predecessor......................39 Section 11.03. Execution of Documents by Owners.............................................................39 r Section 11.04. Waiver of Personal Liability..........................................................................40 Section 11.05. Acquisition of Certificates by District...........................................................40 Section 11.06. Content of Certificates...................................................................................40 r Section 11.07. Funds and Accounts.......................................................................................40 Section 11.08. Article and Section Headings,Gender and References.................................41 Section 11.09. Partial Invalidity.............................................................................................41 Section11.10. California Law...............................................................................................41 Section11.11. Notices...........................................................................................................41 Section11.12. Effective Date................................................................................................42 Section 11.13. Execution in Counterparts..............................................................................42 EXHIBIT A—FORM OF CERTIFICATE r r r r 'r 80340485.3 III r Book Page 40 r r TRUST AGREEMENT THIS TRUST AGREEMENT(this "Trust Agreement'),dated as of December 1, 2008, r' by and among UNION BANK OF CALIFORNIA, N.A., a national banking association organized and existing under the laws of the United States of America, as Trustee (the "Trustee"), the ORANGE COUNTY SANITATION DISTRICT FINANCING r CORPORATION, a nonprofit public benefit corporation organized and existing under the laws of the State of California (the "Corporation'), and the ORANGE COUNTY SANITATION DISTRICT, a county sanitation district organized and existing under the laws of the State of California(the"District'). WITNESSETH: r WHEREAS, the District desires to finance the acquisition, construction and installation of certain improvements to its wastewater system (the"Project'); r WHEREAS, in order to finance the Project, the District desires to purchase the Project from the Corporation, and the Corporation desires to sell the Project to the District, for the r installment payments (the 'Installment Payments") to be made by the District pursuant to the Installment Purchase Agreement, dated as of December 1, 2008 (the 'Installment Purchase Agreement'), by and between the District and the Corporation; r WHEREAS, the Corporation proposes to assign without recourse certain of its rights under and pursuant to the Installment Purchase Agreement to the Trustee; r WHEREAS, in consideration of such assignment and the execution and delivery of this Trust Agreement, the Trustee has agreed to execute and deliver Orange County Sanitation r District Certificates of Participation, Series 2008C (the "Certificates"), evidencing direct, undivided fractional interests in the Installment Payments,and the interest thereon; r WHEREAS, all acts, conditions and things required by law to exist, to have happened and to have been performed precedent to and in connection with the execution and delivery of this Trust Agreement do exist, have happened and have been performed in regular and due time, r form and manner as required by law, and the parties hereto are now duly authorized to execute and deliver this Trust Agreement; r NOW, THEREFORE, in consideration of the premises and of the mutual agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged,the parties hereto do hereby agree as follows: r r r r 803404853 r Book Page 41 tir ARTICLEI4 DEFINITIONS; EQUAL SECURITY L Section 1.01. Definitions. Except as provided in Section 1.02 hereof or unless the context otherwise requires, the terms defined in this Section shall for all purposes hereof and of L any amendment hereof or supplement hereto and of the Certificates and of any certificate, opinion, request or other document mentioned herein or therein have the meanings defined herein, the following definitions to be equally applicable to both the singular and plural forms of any of the terns defined herein: "Acquisition Costs"means all costs of acquiring, constructing and installing the Project, including but not limited to: it (a) all costs which the Corporation or the District shall be required to pay to a manufacturer,vendor or contractor or any other Person under the terms of any contract or contracts for the construction,acquisition or installation of the Project; (b) obligations of the Corporation or the District incurred for labor and W materials (including obligations payable to the Corporation or the District for actual out-of-pocket expenses of the Corporation or the District) in connection with the construction, acquisition or installation of the Project, including reimbursement to the Corporation or the District for all advances and payments made in connection with the Project prior to or after delivery of the Certificates; Ind (c) the costs of performance or other bonds and any and all types of insurance that may be necessary or appropriate to have in effect during the course of construction, acquisition and installation of the Project; v (d) all costs of engineering, architectural and other consulting services, including the actual out-of-pocket costs of the Corporation or the District for test borings, surveys, estimates, plans and specifications and preliminary investigations therefor, of development fees and sales commissions, and for supervising the construction, acquisition and installation of the Project, as well as for the performance of all other w duties required by or consequent to the proper construction,acquisition and installation of the Project;and V (e) any sums required to reimburse the Corporation or the District for advances made by the Corporation or the District for any of the above items or for any other costs incurred and for work done by the Corporation or the District which the Corporation or the District determine are properly chargeable to the construction, acquisition or installation of the Project. u "Acquisition Fund" means the fund by that name established in accordance with Section 3.04 hereof. u "Authorized Corporation Representative"means the President,the Vice President, the Treasurer and the Secretary of the Corporation,and any other Person authorized by the President U 80340485.3 2 ri Book Page 42 r of the Corporation to act on behalf of the Corporation under or with respect to this Trust Agreement. "Authorized Denominations" means$5,000 and integral multiples thereof. "Authorized District Representative" means the General Manager of the District, the Director of Finance and Administrative Services of the District,the Controller of the District and any other Person authorized by the Director of Finance and Administrative Services of the District to act on behalf of the District under or with respect to this Trust Agreement. "Beneficial Owners" means those individuals, partnerships, corporations or other entities for which the Participants have caused the Depository to hold Book-Entry Certificates. r "Book-Entry Certificates"means the Certificates registered in the name of the nominee of DTC,or any successor securities depository for the Certificates, as the Owner thereof pursuant r to the terms and provisions of Section 2.10 hereof. "Business Day" means a day other than (a) Saturday or Sunday, (b)a day on which r banking institutions in the city in which the Principal Office is located are authorized or required by law to be closed, and (c)a day on which the New York Stock Exchange is authorized or obligated by law or executive order to be closed. r "Cede & Co." means Cede & Co., the nominee of DTC, and any successor nominee of DTC with respect to the Certificates. "Certificate Year" means each twelve-month period beginning on February 2 in each year and extending to the next succeeding February 1, both dates inclusive, except that the first r Certificate Year shall begin on the Closing Date and end on February 1,2009. "Certificates" means the Orange County Sanitation District Certificates of Participation, r Series 2008C, executed and delivered by the Trustee pursuant hereto. "Closing Date"means December_,2008. "Code"means the Internal Revenue Code of 1986. "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement, dated as of the date hereof, by and between the District and Digital Assurance Certification LLC, as originally executed and as it may from time to time be amended in accordance with the terms thereof. r "Corporation" means the Orange County Sanitation District Financing Corporation, a nonprofit public benefit corporation organized and existing under the laws of the State. r "Costs of Issuance" means all the costs of executing and delivering the Certificates, including, but not limited to, all printing and document preparation expenses in connection with r this Trust Agreement, the Installment Purchase Agreement, the Certificates and any preliminary official statement and final official statement pertaining to the Certificates, rating agency fees, r 80340485.3 3 r Book Page 43 market study fees, legal fees and expenses of counsel with respect to the execution and delivery ly of the Certificates,the initial fees and expenses of the Trustee and its counsel and other fees and expenses incurred in connection with the execution and delivery of the Certificates,to the extent such fees and expenses are approved by the District. "Costs of Issuance Fund" means the fund by that name established in accordance with Section 3.03 hereof. �+ "Depository" means the securities depository acting as Depository pursuant to Section 2.10 hereof. ri "District" means the Orange County Sanitation District, a county sanitation district organized and existing under the laws of the State,and any successor thereto. V "DTC"means The Depository Trust Company,New York,New York and its successors. Y� "Event of Default" shall have the meaning set forth in Section 6.01 of the Installment Purchase Agreement. V "Government Obligations" means any of the following which are noncallable by the issuer thereof except to the extent not permitted by the laws of the State as an investment for the moneys to be invested therein at the time of investment: LW (i) (a)direct general obligations of the United States of America, (b)obligations the payment of the principal of and interest on which are unconditionally v guaranteed as to the full and timely payment by the United States of America, or (c)any fund or other pooling arrangement whose assets consist exclusively of the obligations listed in clause(a) or(b) of this clause(i) and which is rated at least "P-1" by Moody's; r provided that, such obligations shall not include unit investment trusts or mutual fund obligations; V (ii) advance refunded tax-exempt obligations secured by the obligations specified in clause(i) which tax-exempt obligations are rated "Am" by Moody's and "AAA" by S&P as a result of such obligations being secured by said obligations; v (iii) bonds, debentures or notes issued by any of the following federal agencies: Federal Farm Credit Bank, Federal Home Loan Mortgage Corporation or Federal National Mortgage Association; provided that such bonds, debentures or notes shall be the senior obligations of such agencies (including participation certificates) and rated"An"by Moody's and"AAA"by S&P; and r (iv) bonds, debentures or notes issued by any Federal agency hereafter created by an act of Congress, the payment of the principal of and interest on which are u unconditionally guaranteed by the United States of America as to the full and timely payment; provided, that, such obligations shall not include unit investment trusts or mutual fund obligations. it 90340485.3 4 u Book Page 44 r r "Installment Payment Fund" means the fund by that name established in accordance with Section 5.02 hereof. r, "Installment Payments" means the Installment Payments required to be made by the District pursuant to Section 3.02 of the Installment Purchase Agreement. "Installment Purchase Agreement" means the Installment Purchase Agreement, dated as of the date hereof, by and between the District and the Corporation, as originally executed and as it may from time to time be amended in accordance with the provisions thereof r "Interest Account" means the account by that name within the Installment Payment Fund established in accordance with Section 5.02 hereof. r "Interest Payment Date" means February 1 and August 1 of each year, commencing February 1,2009. r "Letter of Representations"means the letter of the District delivered to and accepted by the Depository on or prior to the delivery of the Certificates as Book-Entry Certificates setting r forth the basis on which the Depository serves as depository for such Book-Entry Certificates, as originally executed or as it maybe supplemented or revised or replaced by a letter to a substitute Depository. r "Mandatory Sinking Account Payment"means the amount required to be deposited by the District in the Principal Account for the prepayment of Term Certificates pursuant to Section r 4.02 hereof. "Master Agreement" means the Master Agreement for District Obligations, dated as of August 1, 2000, by and between the District and the Corporation, as originally executed and as it r may from time to time be amended or supplemented in accordance with the terms thereof "Moody's" means Moody's Investors Service, a corporation organized and existing r under the laws of the State of Delaware, its successors and assigns, except that if such corporation shall no longer perform the function of a securities rating agency for any reason, the _ term "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District. "Nominee" means the nominee of the Depository, which may be the Depository, as r determined from time to time pursuant to Section 2.11 hereof. "Opinion of Counsel" means a written opinion of Fulbright & ]aworski L.L.P. or any r other counsel of recognized national standing in the field of law relating to municipal bonds, appointed and paid by the District. "Outstanding,"when used as of any particular time with reference to Certificates,means (subject to the provisions of Section 9.02 hereof) all Certificates except (a)Certificates previously canceled by the Trustee or delivered to the Trustee for cancellation, (b) Certificates " paid or deemed to have been paid within the meaning of Section 10.01 hereof, and r 80340495.3 5 r Book Page 45 M (c)Certificates in lieu of or in substitution for which other Certificates shall have been executed " and delivered by the Trustee pursuant to Section 2.09 hereof. "Owner" means any Person who shall be the registered owner of any Outstanding Certificate as indicated in the registration books of the Trustee required to be maintained pursuant to Section 2.07 hereof u "Participants" means those broker-dealers, banks and other financial institutions from time to time for which the Depository holds Book-Entry Certificates as securities depository. r "Participating Underwriter" has the meaning ascribed thereto in the Continuing Disclosure Agreement. L "Permitted Investments" means any of the following, except to the extent not permitted by the laws of the State as an investment for the moneys to be invested therein at the time of investment: L (1) Government Obligations; V (2) Bonds, debentures, notes, participation certificates or other evidences of indebtedness issued, or the principal of and interest on which are unconditionally guaranteed, by the Federal Intermediate Credit Bank, the Federal Home Loan Bank jr System, the Government National Mortgage Association or any other agency or instrumentality of or corporation wholly owned by the United States of America when such obligations are backed by the full faith and credit of the United States for the full and timely payment of principal and interest; (3) Obligations of any state of the United States or any political subdivision thereof, which at the time of investment are rated "Aa3" or higher by Moody's and "AA-"or higher by S&P;or which are rated by Moody's "VMIGI"or better and by S&P "A-I+" or better with respect to commercial paper, or "VMIGI" and "SP-I", respectively,with respect to municipal notes; (4) Bank time deposits evidenced by certificates of deposit, deposit accounts, and bankers' acceptances, issued by any bank, trust company or national banking association insured by the Federal Deposit Insurance Corporation(including the Trustee); provided that (a)such bank, trust company or national banking association be rated L "Aa3" or better by Moody's and "AA-" or better by S&P; and (b)the aggregate of such bank time deposits and bankers' acceptances issued by any bank, trust company or banking association does not exceed at any one time 100/9 of the aggregate of the capital L. stock, surplus and undivided profits of such bank, trust company or banking association and that such capital stock, surplus and undivided profits shall not be less$15,000,000; ! (5) Repurchase agreements with any bank, trust company or national banking association insured by the Federal Deposit Insurance Corporation(including the Trustee), with subsidiaries (of a parent company), provided the obligations of the subsidiary under r the agreement are unconditionally guaranteed by the parent, or with any government bond dealer recognized as a primary dealer by the Federal Reserve Bank of New York, L 90340495.3 6 v Book Page 46 r which agreements are fully and continuously secured by a valid and perfected first priority security interest in obligations described in paragraph (1)or(2) of this definition, provided that either such bank, trust company or national banking association which (or r senior debt or claims paying ability of the financial entity's guarantor) is rated,at the time of investment,"Aa3"or better by Moody's and "AA-"or better by S&P; r (6) Repurchase agreements with maturities of not more than one year entered into with financial institutions such as banks or trust companies organized under state law or national banks or banking associations(including the Trustee), insurance companies or government bond dealers reporting to, trading with, and recognized as a primary dealer by, the Federal Reserve Bank of New York and a member of the Securities Investor Protection Corporation or with a dealer or parent holding company that is rated, at the r time of investment, or whose long-term debt obligations (or senior debt or claims paying ability of the financial entity's guarantor) are rated, at the time of investment, "Aa3" or better by Moody's and"AA-"or better by S&P,provided such repurchase agreements are r in writing, secured by obligations described in paragraphs(1) and (2) of this definition having a fair market value, exclusive of accrued interest, at least equal to the amount invested in the repurchase agreements and in which the Trustee has a perfected first lien r in,and retains possession of, such obligations free from all third party claims; (7) Investment agreements, forward purchase agreements and reserve fund put agreements with any corporation, including banking or financial institutions, or agreements entered into with subsidiaries(of a parent company), provided the obligations of the subsidiary under the agreement are unconditionally guaranteed by the parent, the r corporate debt of which (or senior debt or claims paying ability of the financial entity's guarantor) is rated, at the time of investment, "Aa3" or better by Moody's and"AA-" or better by S&P; r (8) Guaranteed investment contracts or similar funding agreements issued by insurance companies, provided that either the long tern corporate debt of such insurance �r company,at the time of investment, is rated, at the time of investment, "Aa3"or better by Moody's and "AA-" or better by S&P or which agreements are fully and continuously secured by a valid and perfected first priority security interest in obligations described in paragraph(1) or (2) of this definition, or that the following conditions are met: (a)the market value of the collateral is maintained at levels acceptable to Moody's and S&P, (b)the Trustee or a third party acting solely as agent for the Trustee has possession of the collateral, (c)the Trustee has a perfected first priority security interest in the collateral, (d)the collateral is free and clear of third-party liens, and (e) failure to maintain the requisite collateral level will require the Trustee to liquidate collateral; r (9) Corporate commercial paper rated"P-1" or better by Moody's and "A-I+" or better by S&P at the time of investment; r (10) Taxable government money market portfolios restricted to obligations the payment of principal and interest with respect to which is guaranteed by the United States r of America or repurchase agreements secured by such obligations, and which are rated r 80340485.3 7 r Book Page 47 u "AAAm" or "AAAm-G" by S&P and "P-l" by Moody's (including funds for which the L Trustee or an affiliate provides investment advice or similar services); i (11) Deposits with the local Agency Investment Fund of the State, as may �+ otherwise be permitted by law; and (12) Shares in the Franklin Adjustable U.S. Government Securities Fond or any L. other similar fund having at least $1,000,000,000 in assets and invested solely in securities directly guaranteed by the U.S. government or its agencies and rated "AAAf' by S&P or a comparable rating by Moody's. `+ "Person" means an individual, corporation, limited liability company, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or b+ any agency or political subdivision thereof. "Prepayment Account"means the account by that name within the Installment Payment L. Fund established in accordance with Section 5.02 hereof. "Principal Account" means the account by that name within the Installment Payment 6, Fund established in accordance with Section 5.02 hereof. "Principal Office" means the Trustee's principal corporate trust office in Los Angeles, L, California. "Principal Payment Date"means a date on which an Installment Payment evidenced by the Certificates becomes due and payable. "Project"has the meaning ascribed thereto in the recitals hereto. "Rebate Fund" means the fund by that name established in accordance with Section 5.04 hereof. I. "Rebate Requirement"has the meaning ascribed thereto in the Tax Certificate. "Record Date" means, with respect to the interest payable on any Interest Payment Date, L' the 15th day of the calendar month immediately preceding such Interest Payment Date, whether or not such day is a Business Day. r "Reserve Facility" means any line of credit, letter of credit, insurance policy, surety bond or other funding instrument issued by an entity the long-term unsecured obligations of which are then rated "Aa3" or better by Moody's and "AA-" or better by S&P and deposited with the Trustee pursuant to Section 5.03 hereof. "Reserve Fund" means the fund by that name established in accordance with Section 5.03 hereof. "Reserve Requirement" means, as of any date of calculation, an amount equal to the least of(a) 10% of the original aggregate amount of principal evidenced by the Certificates(or if I. 80340485.3 S V Book Page 48 r r the amount of original issue discount or premium applicable to the Certificates exceeds 2%, then 10% of the issue price of the Certificates), (b)the maximum amount of remaining Installment Payments, and the interest thereon, coming due in any one Certificate Year, and(c) 125% of the average amount of remaining Installment Payments, and the interest thereon, coming due in each Certificate Year. r "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and assigns, except that if such entity shall no longer perform the functions of a r securities rating agency for any reason, the term "S&P" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District. r "State"means the State of California. "Tax Certificate" means the Tax Certificate executed by the District at the time of ,r execution and delivery of the Certificates relating to the requirements of section 148 of the Code, as originally executed and as it may from time to time be amended in accordance with the provisions thereof. r "Term Certificates" means Certificates payable at or before their specified maturity date or dates from Mandatory Sinking Account Payments established for that purpose and calculated ,r to retire such Certificates on or before their specified maturity date or dates. "Trust Agreement" means this Trust Agreement, dated as of December 1, 2008, by and among the Trustee, the Corporation and the District, as originally executed and delivered and as it may from time to time be amended or supplemented in accordance with the provisions hereof. r "Trustee" means Union Bank of California, N.A., a national banking association duly organized and existing under the laws of the United States of America,or any other bank or trust company which may at any time be substituted in its place as provided in Section 10.02 hereof. r "Written Certificate"and "Written Request"mean(a)with respect to the Corporation, a written certificate or written request, respectively, signed in the name of the Corporation by an r Authorized Corporation Representative, and (b)with respect to the District, a written certificate or written request, respectively, signed in the name of the District by an Authorized District Representative. Any such certificate or request may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. r Section 1.02. Definitions in Installment Purchase Agreement. Except as otherwise herein defined and unless the context otherwise requires, the terms defined in the Installment Purchase Agreement shall for all purposes hereof and of any amendment hereof or supplement hereto and of any report or other document mentioned herein have the meanings defined therein, such definitions to be equally applicable to both the singular and plural forms of any of the terms defined therein. With respect to any defined term which is given a different meaning under this Trust Agreement than under the Installment Purchase Agreement, as used herein it shall have the meaning given herein. r 80340485.3 9 Book Page 49 u Section 1.03. Equal Security. In consideration of the acceptance of the Certificates by v the Owners,this Trust Agreement shall be deemed to be and shall constitute a contract between the Trustee and the Owners to secure the full and final payment of the interest and principal evidenced by the Certificates which may be executed and delivered hereunder, subject to each of the agreements, conditions, covenants and terms contained herein; and all agreements, conditions, covenants and terms contained herein required to be observed or performed by or on L behalf of the Trustee shall be for the equal and proportionate benefit, protection and security of all Owners without distinction, preference or priority as to security or otherwise of any Certificates over any other Certificates by reason of the number or date thereof or the time of execution or delivery thereof or for any cause whatsoever,except as expressly provided herein or therein. ARTICLE II TERMS AND CONDITIONS OF CERTIFICATES i✓ Section 2.01. Preparation and Delivery of Certificates. The Trustee is hereby authorized,upon the Written Request of the District,to execute and deliver the Certificates in the aggregate principal amount of$_,000,000, evidencing the aggregate principal amount of the Installment Payments and each evidencing a direct, fractional undivided interest in the Installment Payments, and the interest thereon. The Installment Payments evidenced by each Certificate shall constitute the principal evidenced thereby and the interest on such Installment Payments shall constitute the interest evidenced thereby. The Certificates shall be numbered, with or without prefixes,as directed by the Trustee. u Section 2.02. Denomination. Medium and Dating of Certificates. The Certificates shall be designated "Orange County Sanitation District Certificates of Participation, Series 2008C" shall be prepared in the form of fully registered Certificates, without coupons, in Authorized Denominations and shall be payable in lawful money of the United States of America. w The Certificates shall be dated as of the Closing Date. Each Certificate shall evidence interest from the Interest Payment Date next preceding its date of execution to which interest has been paid in full, unless such date of execution shall be after a Record Date and on or prior to the following Interest Payment Date, in which case such Certificate shall evidence interest from such Interest Payment Date, or unless such date of execution shall be on or prior to January 15, 2009, in which case such Certificate shall represent interest from the Closing Date. Notwithstanding, 6" the foregoing, if, as shown by the records of the Trustee, interest evidenced by the Certificates shall be in default, each Certificate shall evidence interest from the last Interest Payment Date to which such interest has been paid in full or duly provided for. ` Section 2.03. Payment Dates of Certificates: Interest Computation. (a)Method and Place of Payment. The principal evidenced by the Certificates shall become due and payable, subject to prior prepayment, on February I of the years, in the amounts, and shall evidence interest accruing at the rates per annum set forth below: r 1r 90340485.3 10 Ir Book Page 50 r r Principal Payment Date Principal Interest (February 1) Component Rate r r r r r r r r r ti r Except as otherwise provided in the Letter of Representations, payments of interest „r evidenced by the Certificates shall be made to the Owners thereof(as determined at the close of business on the Record Date next preceding the related Interest Payment Date) by check or draft of the Trustee mailed to the address of each such Owner as it appears on the registration books ,r maintained by the Trustee pursuant to Section 2.07 hereof, or to such other address as may be furnished in writing to the Trustee by each such Owner. Except as otherwise provided in the Letter of Representations, payment of principal and prepayment premium, if any, evidenced by r the Certificates, on their stated Principal Payment Dates or on prepayment in whole or in part prior thereto, shall be made only upon presentation and surrender of the Certificates at the Principal Office. r r 90340485.3 I 1 r Book Page 51 u (b) Computation of Interest. The interest evidenced by the Certificates shall be �+ payable on each Interest Payment Date to and including their respective Principal Payment Dates or prepayment prior thereto, and shall represent the sum of the interest on the Installment Payments coming due on the Interest Payment Dates in each year. The principal evidenced by �+ the Certificates shall be payable on their respective Principal Payment Dates in each year and shall represent the Installment Payments coming due on the Principal Payment Dates in each year. Interest evidenced by the Certificates shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Section 2.04. Form of Certificates. The Certificates shall be in substantially the form of Exhibit A hereto, with necessary or appropriate insertions, omissions and variations as permitted or required hereby. u Section 2.05. Execution of Certificates and Replacement Certificates. The Certificates shall be executed by the Trustee by the manual signature of an authorized signatory of the Trustee. The Trustee shall deliver replacement Certificates in the manner and as u contemplated by this Article. Such replacement Certificates shall be executed as herein provided and shall be in Authorized Denominations. �r Section 2.06. Transfer and Payment of Certificates; Exchapee of Certificates. Each Certificate is transferable by the Owner thereof, in person or by his attorney duly authorized in writing, at the Principal Office, on the registration books maintained by the Trustee pursuant to the provisions of Section 2.07 hereof, upon surrender of such Certificate for cancellation accompanied by delivery of a duly executed written instrument of transfer in a form acceptable to the Trustee. The Trustee may treat the Owner of any Certificate as the absolute owner of such Certificate for all purposes, whether or not the principal or interest evidenced by such Certificate shall be overdue, and the Trustee shall not be affected by any knowledge or notice to the contrary; and payment of the interest and principal evidenced by such Certificate shall be made only to such Owner, which payments shall be valid and effectual to satisfy and discharge the liability evidenced by such Certificate to the extent of the sum or sums so paid. u Whenever any Certificate shall be surrendered for transfer, the Trustee shall execute and deliver a new Certificate or Certificates evidencing principal in the same aggregate amount and having the same stated Principal Payment Date. The Trustee shall require the payment by any Owner requesting such transfer of any tax or other governments] charge required to be paid with respect to such transfer. w Each Certificate may be exchanged at the Principal Office for Certificates evidencing principal in a like aggregate principal amount having the same stated Principal Payment Date in such Authorized Denominations as the Owner thereof may request. The Trustee shall require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. Ir Section 2.07. Certificate Reeistration Books. The Trustee shall keep at its Principal Office sufficient books for the registration and transfer of the Certificates, which books shall be available for inspection and copying by the District at reasonable hours and under reasonable conditions; and upon presentation for such purpose the Trustee shall, under such reasonable 80340185.3 12 Book Page 52 r r regulations as it may prescribe, register or transfer the Certificates on such books as hereinabove provided. r Section 2.08. Temoorary Certificates. The Certificates may be initially delivered in temporary form exchangeable for definitive Certificates when ready for delivery, which temporary Certificates shall be printed, lithographed or typewritten, shall be of such denominations as may be determined by the Trustee, shall be in fully registered form and shall contain such reference to any of the provisions hereof as may be appropriate. Every temporary Certificate shall be executed and delivered by the Trustee upon the same conditions and terms r and in substantially the same manner as definitive Certificates. If the Trustee executes and delivers temporary Certificates, it shall prepare and execute definitive Certificates without delay, and thereupon the temporary Certificates may be surrendered at the Principal Office in exchange .r for such definitive Certificates, and until so exchanged such temporary Certificates shall be entitled to the same benefits hereunder as definitive Certificates executed and delivered hereunder. r Section 2.09. Certificates Mutilated, Lost, Destroyed or Stolen. If any Certificate shall become mutilated, the Trustee, at the expense of the Owner thereof, shall execute and r deliver a new Certificate evidencing a like principal amount and having the same stated Principal Payment Date and number in exchange and substitution for the Certificate so mutilated, but only upon surrender to the Trustee of the Certificate so mutilated. Every mutilated Certificate so r surrendered to the Trustee shall be canceled by it. If any Certificate shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee, and if such evidence is satisfactory to the Trustee and indemnity satisfactory to the Trustee shall be given, r the Trustee, at the expense of the Owner thereof, shall execute and deliver a new Certificate evidencing a like principal amount and having the same stated Principal Payment Date, numbered as the Trustee shall determine, in lieu of and in substitution for the Certificate so lost, destroyed or stolen. The Trustee may require payment of a sum not exceeding the actual cost of preparing each new Certificate executed and delivered by it under this Section and of the expenses which may be incurred by it under this Section. Any Certificate executed and delivered under the provisions of this Section in lieu of any Certificate alleged to be lost, destroyed or stolen shall be equally and proportionately entitled to the benefits hereof with all other Certificates executed and delivered hereunder, and the Trustee shall not be required to treat both the original Certificate and any replacement Certificate as being Outstanding for the purpose of determining the amount of Certificates which may be executed and delivered hereunder or for the purpose of determining any percentage of Certificates Outstanding hereunder, but both the r original and replacement Certificate shall be treated as one and the same. Notwithstanding any other provision of this Section, in lieu of executing and delivering a new Certificate for a Certificate which has been lost, destroyed or stolen and which evidences principal that is then payable, the Trustee may make payment of such Certificate to the Owner thereof if so instructed by the District. Section 2.10. Book-Entry System. (a)The Certificates shall be initially executed and delivered as Book-Entry Certificates, and the Certificates for each stated Principal Payment Date shall be in the form of a separate single fully registered Certificate (which may be typewritten). r Upon initial execution and delivery, the ownership of each Certificate shall be registered in the r 80340485.3 13 r Book Page 53 registration books maintained by the Trustee in the name of the Nominee, as nominee of the �+ Depository. i Payment of principal or interest evidenced by any Book-Entry Certificate registered in the name of the Nominee shall be made on the applicable Interest Payment Date by wire transfer of New York clearing house or equivalent next day funds or by wire transfer of same day funds to the account of the Nominee. Such payments shall be made to the Nominee at the address which is,on the Record Date, shown for the Nominee in the registration books maintained by the Trustee. r (b) With respect to Book-Entry Certificates, the District, the Corporation and the Trustee shall have no responsibility or obligation to any Participant or to any Person on behalf of which such a Participant holds an interest in such Book-Entry Certificates. Without limiting the �+ immediately preceding sentence, the District, the Corporation and the Trustee shall have no responsibility or obligation with respect to (i)the accuracy of the records of the Depository, the j Nominee or any Participant with respect to any ownership interest in Book-Entry Certificates, (ii)the delivery to any Participant or any other Person, other than an Owner as shown in the registration books maintained by the Trustee, of any notice with respect to Book-Entry Certificates, including any notice of prepayment, (iii)the selection by the Depository and its Participants of the beneficial interests in Book-Entry Certificates to be prepaid in the event Certificates are prepaid in part, (iv)the payment to any Participant or any other Person, other than an Owner as shown in the registration books maintained by the Trustee, of any amount with respect to principal,premium, if any, or interest evidenced by Book-Entry Certificates,or(v)any consent given or other action taken by the Depository as Owner. u (c) The District,the Corporation and the Trustee may treat and consider the Person in whose name each Book-Entry Certificate is registered in the registration books maintained by the Trustee as the absolute Owner of such Book-Entry Certificate for the purpose of payment of principal, prepayment premium, if any, and interest evidenced by such Certificate, for the purpose of selecting any Certificates, or portions thereof,to be prepaid, for the purpose of giving I notices of prepayment and other matters with respect to such Certificate, for the purpose of registering transfers with respect to such Certificate, for the purpose of obtaining any consent or other action to be taken by Owners and for all other purposes whatsoever, and the District, the Corporation and the Trustee shall not be affected by any notice to the contrary. (d) Reserved. 4 (e) The Trustee shall pay all principal, premium, if any, and interest evidenced by the Certificates to the respective Owner, as shown in the registration books maintained by the Trustee, or his respective attorney duly authorized in writing, and all such payments shall be 61 valid and effective to fully satisfy and discharge the obligations with respect to payment of principal, premium, if any, and interest evidenced by the Certificates to the extent of the sum or sums so paid. No Person other than an Owner, as shown in the registration books maintained by the Trustee, shall receive a Certificate evidencing principal, premium, if any, and interest evidenced by the Certificates. Upon delivery by the Depository to the Owners, the Trustee and the District of written notice to the effect that the Depository has determined to substitute a new u it 80340485.3 14 it Book Page 54 .. nominee in place of the Nominee, and subject to the provisions herein with respect to Record Dates,the word Nominee in this Trust Agreement shall refer to such nominee of the Depository. (f) In order to qualify the Book-Entry Certificates for the Depository's book-entry system, the District shall execute and deliver to the Depository a Letter of Representations. The execution and delivery of a Letter of Representations shall not in any way impose upon the .r Corporation, the District or the Trustee any obligation whatsoever with respect to Persons having, interests in such Book-Entry Certificates other than the Owners, as shown on the registration books maintained by the Trustee. Such Letter of Representations may provide the .. time, form, content and manner of transmission, of notices to the Depository. In addition to the execution and delivery of a Letter of Representations by the District,the District,the Corporation and the Trustee shall take such other actions, not inconsistent with this Trust Agreement, as are �++ reasonably necessary to qualify Book-Entry Certificates for the Depository's book-entry program- (g) In the event the District determines that it is in the best interests of the Beneficial Owners that they be able to obtain certificated Certificates and that such Certificates should therefore be made available and notifies the Depository and the Trustee of such determination, the Depository will notify the Participants of the availability through the Depository of certificated Certificates. In such event, the Trustee shall transfer and exchange certificated Certificates as requested by the Depository and any other Owners in appropriate amounts. In the d+ event(i)the Depository determines not to continue to act as securities depository for Book-Entry Certificates, or(ii)the Depository shall no longer so act and gives notice to the Trustee of such determination,then the District shall discontinue the Book-Entry system with the Depository. If the District determines to replace the Depository with another qualified securities depository,the District shall prepare or direct the preparation of a new single, separate, fully registered Certificate for each stated Principal Payment Date of such Book-Entry Certificates, registered in the mane of such successor or substitute qualified securities depository or its nominee. If the District fails to identify another qualified securities depository to replace the Depository,then the Certificates shall no longer be restricted to being registered in the registration books maintained by the Trustee in the name of the Nominee, but shall be registered in whatever name or names the Owners transferring or exchanging such Certificates shall designate, in accordance with the provisions of Sections 2.06 and 2.09 hereof. Whenever the Depository requests the District to do so, the District will cooperate with the Depository in taking appropriate action after reasonable notice (i)to make available one or more separate certificates evidencing the Book-Entry Certificates to any Participant having Book-Entry Certificates credited to its account with the Depository, p ry, and (ii)to arrange for another securities depository to maintain custody of certificates evidencing the Book-Entry Certificates. (h) Notwithstanding any other provision of this Trust Agreement to the contrary, if DTC is the sole Owner of the Certificates, so long as any Book-Entry Certificate is registered in the name of the Nominee, all payments of principal, premium, if any, and interest evidenced by such Certificate and all notices with respect to such Certificate shall be made and given, respectively, as provided in the Letter of Representations or as otherwise instructed by the Depository. r 80340485.3 15 r Book Page 55 (i) In connection with any notice or other communication to be provided to Owners V pursuant to the Trust Agreement by the District, the Corporation or the Trustee, with respect to any consent or other action to be taken by Owners, the Trustee shall establish a record date for such consent or other action and give the Depository notice of such record date not less than 15 calendar days in advance of such record date to the extent possible. Notice to the Depository shall be given only when DTC is the sole Owner of the Certificates. L ARTICLE III PROCEEDS OF CERTIFICATES 6' Section 3.01. Delivery of Certificates. The Trustee is hereby authorized to execute the Certificates and deliver the Certificates to the original purchaser thereof upon receipt of a Written Request of the District and upon receipt of the proceeds of sale thereof. Section 3.02. Deposit of Proceeds of Certificates. The net proceeds received by the v Trustee from the sale of the Certificates in the amount of$ shall be deposited by the Trustee as follows: V (a) the Trustee shall deposit in the Costs of Issuance Fund the amount of$ , (b) the Trustee shall deposit in the Reserve Fund the amount of$ , which is V equal to the initial Reserve Requirement;and (c) the Trustee shall deposit in the Acquisition Fund the amount of$ Lr Section 3.03. Costs of Issuance Fund. The Trustee shall establish and maintain a separate special fund to be held by the Trustee known as the Costs of Issuance Fund. There shall be deposited in the Costs of Issuance Fund on the Closing Date the amount required to be deposited therein pursuant to Section 3.02 hereof. The Trustee shall disburse moneys from the Costs of Issuance Fund on such dates and in such amounts as are necessary to pay Costs of r, Issuance, in each case upon the Written Request of the District stating the Person to whom payment is to be made, the amount to be paid,the purpose for which the obligation was incurred and that such payment is a proper charge against the Costs of Issuance Fund. On the date that is six months after the Closing Date, the Trustee shall transfer any amounts then remaining in the Costs of Issuance Fund to the Installment Payment Fund. Upon such transfer, the Costs of Issuance Fund shall be closed. V Section 3.04. Use of Moneys in the Acquisition Fund. The Trustee shall establish and maintain a separate special fund to be known as the Acquisition Fund. All moneys in the 6. Acquisition Fund shall be held by the Trustee in trust and applied by the Trustee, as provided in this Section,to the payment of Acquisition Costs. Before any payment is made from the Acquisition Fund by the Trustee, the District shall cause to be filed with the Trustee a Written Request of the District showing with respect to each payment to be made: .. (a) the item number of the payment; V 90340485.3 16 v Book Page 56 ,. (b) the name of the Person to whom payment is due; (c) the amount to be paid; and r (d) the purpose for which the obligation to be paid was incurred. r Each such Written Request shall also state, and shall be sufficient evidence to the Trustee, (a) that obligations in the stated amounts have been incurred by the District or the Corporation, and (b)that each item thereof is a proper charge against the Acquisition Fund and is an Acquisition Cost properly allocable to the Project. Each such Written Request shall further specify in reasonable detail the nature of the obligation to be paid. .. Upon receipt of each such Written Request, the Trustee shall pay the amount set forth in such Written Request as directed by the terms thereof. The Trustee need not make any such payment if it has received written notice of any lien, right to lien or attachment upon, or claim affecting the right to receive payment of, any of the moneys to be so paid, which has not been released or will not be released simultaneously with such payment, unless a payment bond has been posted with the Trustee in the full amount of such lien or claim. r Upon the filing with the Trustee of a Written Certificate of the District (i) stating that the Project has been completed and that all costs of the Project have been paid or are not required to r be paid from the Acquisition Fund, or (ii) stating that the Project has been substantially completed and that all remaining costs of the Project have been determined and specifying the amount to be retained therefor,the Trustee shall transfer and apply the amount, if any, remaining ,r in the Acquisition Fund (less any such retention) to the Installment Payment Fund. Upon such transfer and the release of any retained funds,the Acquisition Fund shall be closed. ARTICLE IV PREPAYMENT OF CERTIFICATES r Section 4.01. Optional Prepayment. The Certificates are subject to optional prepayment prior to their stated Principal Payment Dates, on any date on or after August 1,2018, ,r in whole or in part, in Authorized Denominations, from and to the extent of prepaid Installment Payments paid pursuant to Section 4.01 of the Installment Purchase Agreement or from any other source of available funds, any such prepayment to be at a price equal to the principal evidenced by the Certificates to be prepaid, plus accrued interest evidenced thereby to the date fixed for prepayment,without premium. Section 4.02. Mandatory Sinking Account Preoavment. The Term Certificates maturing on February 1, 20_are subject to prepayment prior to their stated maturity, in part, by lot, on any February 1 on and after February 1, 20_, at the principal amount thereof, plus ,r accrued interest to the date fixed for prepayment, without premium, from Mandatory Sinking Account Payments deposited in the Principal Account. The Term Certificates maturing on February 1, 20_ shall be prepaid (or paid at maturity, as the case may be) by application of Mandatory Sinking Account Payments in the amounts and upon the dates set forth below: 80340485.3 17 Book Page 57 V Term Certificates Maturing February 1,20_ Mandatory Sinking Account Mandatory u Payment Dates Sinking Account (February 1) Payments V L.i Ln Section 4.03. Selection of Certificates for Optional Prepayment. Whenever less than all the Outstanding Certificates are to be prepaid on any one date pursuant to Section 4.01 hereof, the Trustee shall select the Certificates to be prepaid among Certificates with different Principal w Payment Dates as directed in a Written Request of the District. Whenever less than all the Outstanding Certificates with the same stated Principal Payment Date are to be prepaid on any one date pursuant hereto, the Trustee shall select the Certificates with such Principal Payment r, Date to be prepaid as directed in a Written Request of the District, or at the discretion of the District by lot in any manner that the Trustee deems fair and appropriate, which decision shall be final and binding upon the District and the Owners. The Trustee shall promptly notify the L. District in writing of the numbers of the Certificates so selected for prepayment on such date. For purposes of such selection, any Certificate may be prepaid in part in Authorized Denominations. L Section 4.04. Notice of Prepayment. When prepayment of Certificates is authorized pursuant to Section 4.01 or 4.02 hereof, the Trustee shall give notice, at the expense of the ,. District, of the prepayment of the Certificates. The notice of prepayment shall specify (a)the _ Certificates or designated portions thereof(in the case of prepayment of the Certificates in part but not in whole) which are to be prepaid, (b)the date of prepayment, (c)the place or places u where the prepayment will be made, including the name and address of any paying agent,(d)the prepayment price, (e)the CUSIP numbers assigned to the Certificates to be prepaid, (t)the numbers of the Certificates to be prepaid in whole or in part and, in the case of any Certificate to �. be prepaid in part only, the principal evidenced by such Certificate to be prepaid, and (g)the _ interest rate and stated Principal Payment Date of each Certificate to be prepaid in whole or in part. Such notice of prepayment shall further state that on the specified date there shall become �+ due and payable upon each Certificate or portion thereof being prepaid the prepayment price and that from and after such date interest evidenced thereby shall cease to accrue and be payable. With respect to any notice of prepayment of Certificates pursuant to Section 4.01 hereof, unless 6' at the time such notice is given the Certificates to be prepaid shall be deemed to have been paid within the meaning of Section 10.01 hereof, such notice shall state that such prepayment is conditional upon receipt by the Trustee, on or prior to the date fixed for such prepayment, of moneys sufficient to pay for the prepayment price of the Certificates to be prepaid, and that if such moneys shall not have been so received said notice shall be of no force and effect and the District shall not be required to prepay such Certificates. If a notice of prepayment of Certificates contains such a condition and such moneys are not so received,the prepayment of Certificates as i L 8034N$5.3 18 v Book Page 58 r r described in the conditional notice of prepayment shall not be made and the Tmstee shall, within a reasonable time after the date on which such prepayment was to occur, give notice to the persons and in the manner in which the notice of prepayment was given, that such moneys were r not so received and that there shall be no prepayment of Certificates pursuant to such notice of prepayment. The Trustee shall, at least 20 but not more than 60 days prior to any prepayment date, give notice of prepayment to the respective Owners of Certificates designated for prepayment by first-class mail, postage prepaid, at their addresses appearing on the registration books .. maintained by the Trustee as of the close of business on the day before such notice of prepayment is given. r The actual receipt by the Owner of any notice of such prepayment shall not be a condition precedent to prepayment, and neither failure to receive such notice nor any defect therein shall affect the validity of the proceedings for the prepayment of such Certificates or the �. cessation of interest evidenced thereby on the date fixed for prepayment. A certificate by the Trustee that notice of prepayment has been given to Owners as herein r provided shall be conclusive as against all parties, and no Owner whose Certificate is called for prepayment may object thereto or object to the cessation of interest evidenced thereby on the fixed prepayment date by any claim or showing that said Owner failed to actually receive such notice of prepayment. Section 4.05. Partial Prepayment of Certificates. Upon surrender of any Certificate r prepaid in part only,the Trustee shall execute and deliver to the Owner thereof a new Certificate or Certificates evidencing the unprepaid principal with respect to the Certificate surrendered. Section 4.06. Effect of Prepayment. If notice of prepayment has been duly given as aforesaid and moneys for the payment of the prepayment price of the Certificates to be prepaid are held by the Trustee, then on the prepayment date designated in such notice, the Certificates ,. so called for prepayment shall become payable at the prepayment price specified in such notice; and from and after the date so designated, interest evidenced by the Certificates so called for prepayment shall cease to accrue, such Certificates shall cease to be entitled to any benefit or r security hereunder and the Owners of such Certificates shall have no rights in respect thereof except to receive payment of the prepayment price thereof. The Trustee shall, upon surrender for payment of any of the Certificates to be prepaid, pay such Certificates at the prepayment price r thereof, and such moneys shall be pledged to such payment. All Certificates prepaid pursuant to the provisions of this Article shall be canceled by the Trustee and shall not be redelivered. r ARTICLE V ASSIGNMENT AND PLEDGE; FUNDS AND ACCOUNTS Section 5.01. Assignment and Pledge. The Corporation hereby transfers, conveys and assigns to the Trustee, for the benefit of the Owners, all of the Corporation's rights, title and interest in and to the Installment Purchase Agreement (excepting its rights to indemnification thereunder), including the right to receive Installment Payments, and the interest thereon, from r 803eoo85.0 19 r Book Page 59 V the District and the right to exercise any remedies provided therein in the event of a default by �1 the District thereunder. The Trustee hereby accepts said transfer, conveyance and assignment, solely in its capacity as Trustee, for the benefit of the Owners, subject to the provisions of this Trust Agreement. All Installment Payments, and the interest thereon, shall be paid directly by �+ the District to the Trustee, and if received by the Corporation at any time shall be deposited by the Corporation with the Trustee immediately upon the receipt thereof. L In order to secure the respective rights of the Owners to the payments required to be made thereto as provided herein, the Corporation and the District hereby irrevocably pledge to the Trustee, for the benefit of the Owners, all of their right,title and interest, if any, in and to all amounts on deposit from time to time in the funds and accounts established hereunder (other than the Rebate Fund). This pledge shall constitute a first lien on the amounts on deposit in such funds and accounts. 6` Section 5.02. Installment Payment Fund. (a)The Trustee shall establish and maintain the Installment Payment Fund until all required Installment Payments, and the interest thereon, are paid in full pursuant to the Installment Purchase Agreement and until the first date upon _. which the Certificates are no longer Outstanding. The Trustee shall deposit in the Installment L Payment Fund all Installment Payments, and the interest thereon, paid by the District and received by the Trustee. The moneys in the Installment Payment Fund shall be held in trust by _ the Trustee for the benefit of the Owners and shall be used and disbursed only for the purposes and uses herein authorized. (b) The Trustee shall transfer the amounts on deposit in the Installment Payment Fund, at the times and in the manner hereinafter provided, to the following respective accounts 6. within the Installment Payment Fund, each of which the Trustee hereby agrees to establish and maintain until all required Installment Payments, and the interest thereon, are paid in full pursuant to the Installment Purchase Agreement and until the first date upon which the 6, Certificates are no longer Outstanding. The moneys in each of such accounts shall be held in _ trust by the Trustee for the benefit of the Owners and shall be used and disbursed only for the purposes and uses herein authorized. (i) Interest Account. The Trustee, on each Interest Payment Date, shall deposit in the Interest Account that amount of moneys representing the interest on the L Installment Payments coming due on such Interest Payment Date. Moneys in the Interest Account shall be used by the Trustee for the purpose of paying the interest evidenced by the Certificates when due and payable. (ii) Principal Account. The Trustee, on each Principal Payment Date, shall deposit in the Principal Account that amount of moneys representing the Installment Payments coming due on such Principal Payment Date. Moneys in the Principal Account - shall be used by the Trustee for the purpose of paying the principal or Mandatory Sinking Account Payments evidenced by the Certificates when due and payable. " (iii) Prepayment Account. The Trustee, on the prepayment date specified in the Written Request of the District filed with the Trustee at the time that any prepaid Installment Payment is paid to the Trustee pursuant to the Installment Purchase L sosnass.a 20 G Book Page 60 r r Agreement, shall deposit in the Prepayment Account that amount of moneys representing such prepaid Installment Payment, the accrued interest thereon to the prepayment date and any premium payable with respect thereto. The Trustee shall deposit in the .. Prepayment Account any other amounts made available by the District that the District, pursuant to a Written Request of the District, instructs the Trustee to apply to the prepayment of Certificates pursuant to Section 4.01 hereof. Moneys in the Prepayment r Account shall be used by the Trustee for the purpose of paying the interest, premium, if any, and principal evidenced by the Certificates to be prepaid pursuant to Section 4.01 hereof Section 5.03. Reserve Fund. (a)The Trustee shall establish and maintain the Reserve Fund until all required Installment Payments, and the interest thereon, are paid in full pursuant to r the Installment Purchase Agreement and until the first date upon which no Certificates are Outstanding. The moneys in the Reserve Fund, and any Reserve Facility, shall be held in trust by the Trustee for the benefit of the Owners and shall be used and disbursed only for the purposes and uses herein authorized. There shall be deposited in the Reserve Fund on the Closing Date the amount required to be deposited therein pursuant to Section 3.02 hereof r (b) The District may substitute a Reserve Facility for all or a part of the moneys on deposit in the Reserve Fund by depositing such Reserve Facility with the Trustee so long as, at the time of such substitution, the amount on deposit in the Reserve Fund, together with the amount available under such Reserve Facility and any previously substituted Reserve Facilities, shall be at least equal to the Reserve Requirement. Moneys for which a Reserve Facility has been substituted as provided herein shall be transferred, at the election of the District, to the �+ Installment Payment Fund, or upon receipt of an Opinion of Counsel to the effect that such transfer, in and of itself, will not adversely affect the exclusion of interest evidenced by the Certificates from gross income for federal income tax purposes, to a special account to be held r by the Trustee and applied to the payment of capital costs of the District, as directed in a Written Request of the District. Any amounts paid pursuant to any Reserve Facility shall be deposited in the Reserve Fund. (c) If, on any Interest Payment Date,the amount on deposit in the Interest Account is insufficient to pay the interest evidenced by the Certificates on such Interest Payment Date, the r Trustee shall transfer from the Reserve Fund and deposit in the Interest Account an amount sufficient to make up such deficiency. If a Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, the Trustee shall make a claim for payment under such Reserve Facility, in accordance with the provisions thereof, in an amount which, together with other available moneys in the Reserve Fund, will be sufficient to make said deposit in the Interest Account. If, on any Principal Payment Date, the amount on deposit in the Principal Account is insufficient to pay the principal evidenced by the Certificates on such Principal Payment Date, the Trustee shall transfer from the Reserve Fund and deposit in the Principal Account an amount sufficient to make up such deficiency. If a Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, the Trustee shall make a claim for payment under such Reserve Facility, in accordance with the provisions thereof, in an amount which, together 80340485.3 21 r Book Page 61 with other available moneys in the Reserve Fund, will be sufficient to make said deposit in the •+ Principal Account. Moneys, if any, on deposit in the Reserve Fund shall be withdrawn and applied by the v Trustee for the final payment of principal and interest evidenced by the Certificates. i (d) Amounts on deposit in the Reserve Fund which were not derived from payments under any Reserve Facility credited to the Reserve Fund to satisfy a portion of the Reserve Requirement shall be used and withdrawn by the Trustee prior to using and withdrawing any amounts derived from payments under any such Reserve Facility. In order to accomplish such W use and withdrawal of such amounts not derived from payments under any such Reserve Facility, _ the Trustee shall, as and to the extent necessary, liquidate any investments purchased with such amounts. If and to the extent that more than one Reserve Facility is credited to the Reserve Fund V to satisfy a portion of the Reserve Requirement,drawings thereunder,and repayment of expenses with respect thereto, shall be made on a pro rara basis (calculated by reference to the policy limits available thereunder). (e) Upon any transfer from the Reserve Fund or the making of any claim under any Reserve Facility, the Trustee shall, within five days thereafter, provide written notice to the District of the amount and the date of such transfer or claim. (f) The Trustee shall, from amounts received from the District pursuant to V Section 3.03 of the Installment Purchase Agreement, deposit in the Reserve Fund an amount of _ money which, together with the amount already on deposit therein and the amounts available under all Reserve Facilities, will be equal to the Reserve Requirement. No deposit need be made in the Reserve Fund so long as there shall be on deposit therein a sum equal to the amount which, together with the amounts available under all Reserve Facilities, is at least the Reserve Requirement. The Trustee shall promptly notify the District in writing if the amount on deposit is less than the Reserve Requirement. _ (g) If, as a result of the scheduled payment of principal or interest evidenced by the Certificates, the Reserve Requirement is reduced, the Trustee shall transfer an amount equal to the amount of such reduction to the Installment Payment Fund. V (h) On any date on which Certificates are defeased in accordance with Article X _ hereof, the Trustee shall, if so directed in a Written Request of the District,transfer any moneys in the Reserve Fund in excess of the Reserve Requirement resulting from such defeasance to the ' entity or fund so specified in such Written Request of the District, to be applied to such defeasance. L Section 5.04. Rebate Fund. (a)In addition to the other funds and accounts created _ pursuant hereto, the Trustee shall establish and maintain the Rebate Fund. The District shall deliver to the Trustee for deposit in the Rebate Fund such amounts as are required to be 6. deposited therein pursuant to the Tax Certificate. All money at any time deposited in the Rebate Fund shall be held by the Trustee in trust, to the extent required to satisfy the Rebate Requirement, for payment to the United States of America upon the Written Request of the District. Notwithstanding defeasance of the Certificates pursuant to Article X hereof or anything 6. 80340485.3 22 V Book Page 62 ,,. to the contrary contained herein, all amounts required to be deposited into or on deposit in the Rebate Fund shall be governed exclusively by this Section and by the Tax Certificate (which is incorporated herein by reference). The Trustee shall be deemed conclusively to have complied .r with such provisions if it follows the written directions of the District, and shall have no liability or responsibility to enforce compliance by the District with the terms of the Tax Certificate. The Trustee may conclusively rely upon the District's determinations, calculations and certifications r required by the Tax Certificate. The Trustee shall have no responsibility to independently make any calculation or determination or to review the District's calculations. r (b) Any funds remaining in the Rebate Fund after payment in full of all of the principal and interest evidenced by the Certificates and after payment of any amounts described in this Section,shall be withdrawn by the Trustee and remitted to the District. ti Section 5.05. Investment of Moneys. Except as otherwise provided herein, all moneys in any of the funds or accounts established pursuant to this Trust Agreement shall be invested by ,. the Trustee solely in Permitted Investments, as directed by the District pursuant to a Written Request of the District at least two Business Days prior to the making of such investment. Moneys in all funds and accounts held by the Trustee shall be invested in Permitted Investments �+ maturing not later than the date on which it is estimated that such moneys will be required for the purposes specified in this Trust Agreement; provided, however, that Permitted Investments in which moneys in the Reserve Fund are so invested shall mature no later than the final Principal r Payment Date of the Certificates. Absent timely written direction from the District, the Trustee shall invest any funds held by it in Permitted Investments described in clause(10) of the definition thereof. Permitted Investments that are registerable securities shall be registered in the �+ name of the Trustee. All interest,profits and other income received from the investment of moneys in any fund r or account established pursuant to this Trust Agreement (other than the Reserve Fund) shall be retained therein. All interest, profits and other income received from the investment of moneys in the Reserve Fund shall be deposited in the Installment Payment Fund; provided, however, e+ that,notwithstanding the foregoing,any such transfer shall be made only if and to the extent that, after such transfer, the amount on deposit in the Reserve Fund is at least equal to the Reserve Requirement. r Permitted Investments acquired as an investment of moneys in any fund or account established under this Trust Agreement shall be credited to such fund or account. For the purpose of determining the amount in any fund, all Permitted Investments credited to such fund shall be valued by the Trustee at the market value thereof, such valuation to be performed not less frequently than semiannually on or before each January 15 and July 15. r The Trustee may act as principal or agent in the making or disposing of any investment. The Trustee shall sell or present for redemption any Permitted Investment whenever it shall be +�+ necessary to provide moneys to meet any required payment,transfer,withdrawal or disbursement from the fund or account to which such Permitted Investment is credited, and the Trustee shall not be liable or responsible for any loss resulting from any investment made or sold pursuant to r+ this Section. For purposes of investment, the Trustee may commingle moneys in any of the funds and accounts established hereunder. r 80340485.5 23 r Book Page 63 W The Trustee is hereby authorized, in making or disposing of any investment permitted by L this Section, to deal with itself (in its individual capacity) or with any one or more of its _ affiliates, whether or not such affiliate is acting as an agent of the Trustee or for any third Person i or dealing as principal for its own account. L' Section 5.06. Brokerage Confirmations. The District acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the �+ District the right to receive brokerage confirmations of securities transactions under this Trust Agreement,the District specifically waives receipt of such confirmations to the extent permitted by law. The Trustee is required hereunder to fumish the District with periodic cash transaction 6' statements which include detail for all securities transactions made by the Trustee on behalf of — the District hereunder. �a ARTICLE VI COVENANTS Section 6.01. Compliance with Trust Agreement. The Trustee will not execute or deliver any Certificates in any manner other than in accordance with the provisions hereof, and 60 the Corporation and the District will not suffer or permit any default by them to occur hereunder, but will faithfully comply with, keep, observe and perform all the agreements, conditions, i covenants and terms hereof required to be complied with, kept,observed and performed by them. 1 ' Section 6.02. Compliance with Installment Purchase Agreement. The Corporation and the District will faithfully comply with, keep, observe and perform all the agreements, conditions, covenants and terms contained in the Installment Purchase Agreement required to be complied with, kept, observed and performed by them and, together with the Trustee, will enforce the Installment Purchase Agreement against the other party thereto in accordance with its 6' terms. Section 6.03. Compliance with Master Agreement. The Corporation and the District will faithfully comply with, keep, observe and perform all the agreements, conditions, covenants and terms contained in the Master Agreement required to be complied with, kept, observed and performed by them and,together with the Trustee, will enforce the Master Agreement against the v other party thereto in accordance with its terms. i Section 6.04. Observance of Laws and Regulations. The Corporation and the District will faithfully comply with, keep, observe and perform all valid and lawful obligations or _ regulations now or hereafter imposed on them by contract, or prescribed by any law of the United States of America or of the State, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of each and every franchise, right or privilege now owned or hereafter acquired by them, including their right to exist and i carry on their respective businesses,to the end that such franchises,rights and privileges shall be maintained and preserved and shall not become abandoned, forfeited or in any manner impaired. V 80340485.3 24 u Book Page 64 r ,. Section 6.05. Other Liens. None of the Trustee, the Corporation or the District shall create or suffer to be created any pledge of or lien on the amounts on deposit in any of the funds or accounts created hereunder,other than the pledge and lien hereof. r Section 6.06. Prosecution and Defense of Suits. The District will defend against every action, suit or other proceeding at any time brought against the Trustee or any Owner upon any claim arising out of the receipt, deposit or disbursement of any of the Installment Payments, or the interest thereon, or involving the rights of the Trustee or any Owner hereunder; provided, however,that the Trustee or any Owner at its or his election may appear in and defend any such r action,suit or other proceeding. Section 6.07. Accounting Records and Statements. The Trustee will keep proper accounting records in which complete and correct entries shall be made of all transactions made by the Trustee relating to the receipt, deposit and disbursement of the Installment Payments, and the interest thereon, and such accounting records shall be available for inspection by the Corporation and the District at reasonable hours and under reasonable conditions. The Trustee shall not be obligated to provide an accounting for any fund or account that (a)has a balance of $0.00 and (b)has not had any activity since the last reporting date. The Trustee will, upon ,.� written request, make copies of the foregoing available to any Owner (at the expense of such Owner). Section 6.08. Tax Covenants. (a) Special Definitions. When used in this Section,the following terms shall have the ,r following meanings: "Code"means the Internal Revenue Code of 1986. r "Computation Date" has the meaning set forth in section 1.148-1(b) of the Tax Regulations. r "Gross Proceeds" means any Proceeds and any replacement proceeds as defined in section 1.148-1(c)of the Tax Regulations,of the Certificates. r "Investment"has the meaning set forth in section 1.148-I(b)of the Tax Regulations. "Nonpurpose Investment"means any investment property, as defined in section 148(b)of r the Code, in which Gross Proceeds of the issue are invested and that is not acquired to carry out the governmental purposes of that series of Certificates. r "Proceeds," with respect to an issue of governmental obligations, has the meaning set forth in has the meaning set forth in section 1.148-1(b)of the Tax Regulations (referring to sales, investment and transferred proceeds but not replacement proceeds). r "Rebate Amount"has the meaning set forth in section 1.148-1(b)of the Tax Regulations. "Special Counsel" means Fulbright ,& Jaworski L.L.P. or any other firm of nationally recognized standing in the field of municipal finance selected by the District. r 80840485 3 25 r Book Page 65 L "Tax Regulations" means the United States Treasury Regulations promulgated pursuant L to sections 103 and 141 through 150 of the Code. "Yield" of any Investment has the meaning set forth in section 1.148-5 of the Tax lu Regulations; and in respect of the Certificates has the meaning set forth in section 1.1484 of the Tax Regulations. L.i (b) Not to Cause Interest to Become Taxable. The District covenants that it shall not _ use, and shall not permit the use of, and shall not omit to use Gross Proceeds or any other amounts(or any property the acquisition,construction or improvement of which is to be financed u directly or indirectly with Gross Proceeds) in a manner that if made or omitted, respectively, could cause the interest with respect to any Certificate to fail to be excluded pursuant to section 103(a) of the Code from the gross income of the owner thereof for federal income tax purposes. r+ Without limiting the generality of the foregoing, unless and until the Trustee receives a written opinion of Special Counsel to the effect that failure to comply with such covenant will not L adversely affect such exclusion of the interest with respect to any Certificate from the gross income of the owner thereof for federal income tax purposes, the District shall comply with each of the specific covenants in this Section. ti (c) Private Use and Private Payments. Except as would not cause any Certificate to become a "private activity bond" within the meaning of section 141 of the Code and the Tax Regulations, the District shall take all actions necessary to assure that the District at all times 6w prior to the final cancellation of the last of the Certificates to be retired: (i) exclusively owns, operates,possesses and provides any services necessary to allow and maintain each function of every property the acquisition, construction or improvement of which is to be financed or refinanced directly or indirectly with Gross Proceeds of the Certificates and not use or permit the use of such Gross Proceeds (including through any contractual arrangement with terms different than those applicable to the general public)or any property acquired, constructed or improved with such Gross Proceeds in any activity carried on by any person or entity(including the United States or any agency, department and instrumentality thereof) other than a state or local government, unless such use is solely as a member of the general public;and y (ii) does not directly or indirectly impose or accept any charge or other _ payment by or for the benefit of any person or entity (other than a state or local government) who is treated as using any Gross Proceeds of the Certificates or any r" property the acquisition, construction or improvement of which is to be financed or refinanced directly or indirectly with such Gross Proceeds. V (d) No Private Loan. Except as would not cause any Certificate to become a "private activity bond" within the meaning of section 141 of the Code and the Tax Regulations and rulings thereunder, the District shall not use or permit the use of Gross Proceeds of the Certificates to make or finance loans to any person or entity other than a state or local government. For purposes of the foregoing covenant, such Gross Proceeds are considered to be � "loaned"to a person or entity if: (i) property acquired, constructed or improved with such Gross Proceeds is sold or leased to such person or entity in a transaction that creates a debt for federal I l+ 80340085.3 26 V Book Page 66 ,. income tax purposes; (ii) capacity in or service from such property is committed to such person or entity under a take-or-pay, output or similar contract or arrangement; or (iii) indirect benefits of such Gross Proceeds, or burdens and benefits of ownership of any property acquired, r constructed or improved with such Gross Proceeds,are otherwise transferred in a transaction that is the economic equivalent of a loan. (e) Not to Invest at Higher Yield. Except as would not cause any Certificate to become an "arbitrage bond" within the meaning of section 148 of the Code and the Tax Regulations and rulings thereunder, the District will not, at any time prior to the final r cancellation of the last Certificate to be retired,directly or indirectly invest Gross Proceeds of the Certificates in any Investment, if as a result of that investment the yield of any Investment acquired with Gross Proceeds of the Certificates, whether then held or previously disposed of, r would materially exceed the yield of the Certificates within the meaning of said section 148. (f) Not Federally Guaranteed. Except to the extent such action or failure to act would not pursuant to section 149(b) of the Code and the Tax Regulations and rulings thereunder, adversely affect the exclusion pursuant to section 103(a) of interest on the Certificates from the gross income of the owners thereof for federal income tax purposes, the r District will not take or omit to take any action that would cause any Certificate to be "federally guaranteed" within the meaning of section 149(b) of the Code and the Tax Regulations and rulings thereunder. r (g) Information Report. The District will timely file any information necessary to the exclusion pursuant to section 103(a) of the Code of interest on the Certificates required by •r section 149(e) of the Code with the Secretary of the Treasury on Form 8038-G or such other form and in such place as the Secretary of the Treasury may prescribe. r (h) Rebate of Arbitrage Profits. Except to the extent otherwise provided in section 148(f)of the Code and the Tax Regulations: (i) The District shall account for all Gross Proceeds (including all receipts, expenditures and investments thereof) on its books of account separately and apart from all other funds (and receipts, expenditures and investments thereof) and shall retain all r records of accounting for at least six years after the day on which the last Certificate is discharged. However, to the extent permitted by law, the District may commingle Gross Proceeds of Certificates with its other monies, provided that it separately accounts for each receipt and expenditure of Gross Proceeds and the obligations acquired therewith. (ii) Not less frequently than each Computation Date (and so long as amounts .. remain on deposit in the Acquisition Fund,not less frequently than annually),the District shall calculate the Rebate Amount in accordance with rules set forth in section 148(f) of the Code and the Tax Regulations and rulings thereunder. The District shall maintain a ,. copy of the calculation with its official transcript of proceedings relating to the execution and delivery of the Certificates until six years after the final Computation Date. r (iii) In order to assure the excludability pursuant to section 103(a) of the Code of the interest with respect to the Certificates from the gross income of the owners thereof r 80340485.3 27 r Book Page 67 u for federal income tax purposes, within 60 days of each Computation Date the District L shall pay to the United States the amount that when added to the future value of previous rebate payments made for the Certificates equals (i) in the case of the final Computation Date as defined in section 1.148-3(e)(2) of the Tax Regulations, one hundred percent (100%)of the Rebate Amount on such date; and(ii) in the case of any other Computation Date, ninety percent (90%) of the Rebate Amount on such date. In all cases, such rebate payments shall be made by the District at the times and in the amounts as are or may be required by section 148(f) of the Code and the Tax Regulations and rulings thereunder, _ and shall be accompanied by Form 8038-T or such other forms and information as is or may be required by section 148(f) of the Code and the Tax Regulations and rulings thereunder for execution and filing by the District. (i) Not to Divert Arbitrage Profits. Except to the extent permitted by section 148 of 61 the Code and the Tax Regulations and rulings thereunder, the District shall not and shall not - pemtit any person to,at any time prior to the final cancellation of the last of the Certificates to be retired,enter into any transaction that reduces the amount required to be paid to the United States pursuant to paragraph (H)of this Section because such transaction results in a smaller profit or a larger loss than would have resulted if the transaction had been at arm's length and had the Yield on the Certificates not been relevant to either party. Ld 0) Certificates Not Hedge Bonds. V (i) The District represents that none of the Certificates is or will become a "hedge bond"within the meaning of section 149(g)of the Code. (ii) Without limitation of paragraph (i) above: (A)the District will not execute _ and deliver the Certificates unless as of the date of execution and delivery of the Certificates the District reasonably expects that at least 85%of the spendable proceeds of v the Certificates will be expended within the three-year period commencing on such date _ of execution and delivery, and (B) no more than 50% of the proceeds of the Certificates will be invested in Nonpurpose Investments having a substantially guaranteed yield for a period of four years or more. i (k) Elections. The District hereby directs and authorizes any Authorized Representative to make elections permitted or required pursuant to the provisions of the Code or _ the Tax Regulations, as such Authorized Representative (after consultation with Special Counsel) deems necessary or appropriate in connection with the Certificates, in the Tax Certificate or similar or other appropriate certificate, form or document. (1) Tax Certificate. The District agrees to execute and deliver in connection with the execution and delivery of the Certificates a Tax Certificate as to Arbitrage and the Provisions of Sections 141-150 of the Internal Revenue Code of 1986, or similar document containing additional representations and covenants pertaining to the exclusion of interest with respect to the Certificates from the gross income of the owners thereof for federal income tax purposes (the "Tax Certificate"),which representations and covenants are incorporated as though expressly set forth herein. U 803404115.3 28 u Book Page 68 r r Section 6.09. Continuing Disclosure. Each of the District and the Trustee will comply with and carry out all of the provisions of the Continuing Disclosure Agreement applicable to it. Notwithstanding any other provision of this Trust Agreement, failure of the District or the .. Trustee to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default; provided, however, the Trustee may (and, at the request of any Participating Underwriter or the Owners of at least 25% aggregate principal amount of Outstanding Certificates and upon being indemnified to its reasonable satisfaction, shall) or any Owner or Beneficial Owner of Certificates may take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order. r Section 6.10. Further Assurances. The District will promptly execute and deliver or cause to be executed and delivered all such other and further assurances, documents or r instruments and promptly do or cause to be done all such other and further things as may be necessary or reasonably required in order to carry out the purposes and intentions of this Trust Agreement and for preserving and protecting the rights and interests of the Owners. ARTICLE VII .. DEFAULT AND LIMITATIONS OF LIABILITY Section 7.01. Action upon Event of Default. An Event of Default under the Installment Purchase Agreement shall constitute an Event of Default hereunder and an Event of Default under the Master Agreement shall constitute an Event of Default hereunder. The Trustee may give notice, as assignee of the Corporation, of an Event of Default under the Installment .r Purchase Agreement to the District,and shall do so if directed to do so by the Owners of not less than 5% of the aggregate principal evidenced by Certificates then Outstanding. In each and every case during the continuance of an Event of Default, the Trustee may and, at the direction r of the Owners of not less than a majority of the aggregate principal evidenced by Certificates then Outstanding, shall, upon notice in writing to the District and the Corporation (a)exercise any of the remedies granted to the Corporation under the Installment Purchase Agreement, �+ (b)exercise any of the remedies granted to the Trustee under the Master Agreement,and (c)take whatever action at law or in equity may appear necessary or desirable to enforce its rights pursuant to this Trust Agreement, the Installment Purchase Agreement or the Master Agreement r or to protect and enforce any of the rights vested in the Trustee or the Owners by this Trust Agreement, the Certificates, the Installment Purchase Agreement or the Master Agreement, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of r any covenant or agreement or for the enforcement of any other legal or equitable right, including any one or more of the remedies set forth in Section 9.02 hereof. Section 7.02. Other Remedies of the Trustee. Subject to the provisions of Section 7.01 hereof,the Trustee shall have the right: r (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the Corporation or the District or any member, director, officer or employee thereof, and to compel the Corporation or the District or any such member, director, officer or r employee to perform or carry out its or his or her duties under law and the agreements and covenants required to be performed by it or him or her contained herein; r 803404953 29 r Book Page 69 V (b) by suit in equity to enjoin any acts or things which are unlawful or violate the 6+ rights of the Trustee;or (c) by suit in equity upon the happening of any Event of Default hereunder to require v the Corporation and the District to account as the trustee of an express trust. Section 7.03. Non-Waiver. A waiver of any default or breach of duty or contract by then Trustee or the Owners shall not affect any subsequent default or breach of duty or contract or _ impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Trustee or the Owners to exercise any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Trustee or the Owners by law or by this V Article may be enforced and exercised from time to time and as often the Trustee shall deem expedient. v If any action, proceeding or suit to enforce any right or to exercise any remedy is abandoned or determined adversely to the Trustee or any Owner, then subject to any adverse determination,the Trustee,such Owner,the Corporation and the District shall be restored to their v former positions, rights and remedies as if such action, proceeding or suit had not been brought ortaken. u Section 7.04. Remedies Not Exclusive. Subject to the provisions of Section 7.01 hereof, no remedy herein conferred upon or reserved to the Trustee is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by any law. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent or subsequent assertion or employment of any other appropriate right or remedy. U Section 7.05. Application of Amounts After Default. All damages or other payments _ received by the Trustee for the enforcement of any rights and powers of the Trustee under this Article shall be deposited into the Installment Payment Fund and as soon as practicable thereafter applied: (a) to the payment of all amounts due the Trustee under Section 8.03 hereof; �+ (b) unless the unpaid Installment Payments, and the interest thereon, shall have become,and shall remain, immediately due and payable pursuant to the Master Agreement: V (i) to the payment of all amounts then due for interest evidenced by the Certificates, in respect of which, or for the benefit of which, money has been collected it (other than Certificates which have become payable prior to such Event of Default and money for the payment of which is held by the Trustee), ratably without preference or priority of any kind, according to the amounts of interest evidenced by such Certificates L+ due and payable; and V aox0495.3 30 y Book Page 70 r ,r (ii) to the payment of all amounts then due for principal evidenced by the Certificates, in respect of which, or for the benefit of which, money has been collected (other than Certificates which have become payable prior to such Event of Default and r money for the payment of which is held by the Trustee), ratably without preference or priority of any kind, according to the amounts of principal evidenced by such Certificates due and payable. (c) if the unpaid Installment Payments, and the interest thereon, shall have become, and shall remain, immediately due and payable pursuant to the Master Agreement, to the r payment of all amounts then due for principal and interest evidenced by the Certificates and, if the amount available therefor shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority of principal over ..i interest, or of interest over principal, or of any installment of interest over any other installment of interest, or of any Certificate over any other Certificate,to the persons entitled thereto without any discrimination or preference. r Section 7.06. Trustee May Enforce Claims Without Possession of Certificates. All rights of action and claims under this Trust Agreement or the Certificates may be prosecuted and .. enforced by the Trustee without the possession of any of the Certificates or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment r shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Owners of the Certificates in respect of which such judgment has been recovered. Section 7.07. Limitation on Suits. No Owner shall have any right to institute any proceeding,judicial or otherwise, with respect to this Trust Agreement,or for the appointment of r a receiver or trustee, or for any other remedy hereunder, unless (a) such Owner shall have previously given written notice to the Trustee of a continuing Event of Default hereunder,(b)the Owners of not less than a majority of the aggregate principal evidenced by Certificates then r Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder, (c) such Owner or Owners shall have afforded to the Trustee indemnity reasonably satisfactory to the Trustee against the costs, r expenses and liabilities to be incurred in compliance with such request, (d)the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such proceedings, and (e)no direction inconsistent with such written request shall have been given to the Trustee during such 60-day period by the Owners of a majority of the aggregate principal evidenced by Certificates then Outstanding; it being understood and intended that no one or more Owners of Certificates shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Trust Agreement to affect, disturb or prejudice the rights of any other Owner of Certificates, or to obtain or seek to obtain priority or preference over any other Owner or to enforce any right under this Trust Agreement, except in the manner herein r provided and for the equal and ratable benefit of all the Owners of Certificates. Section 7.08. No Liability by the Corporation to the Owner. Except as expressly provided herein, the Corporation shall not have any obligation or liability to the Owners with respect to the payment when due of the Installment Payments, and the interest thereon, by the r 80340485.3 31 r Book Page 71 6W District,or with respect to the performance by the District of the other agreements and covenants required to be performed by it contained in the Installment Purchase Agreement, the Master Agreement or herein,or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained herein. Section 7.09. No Liability by the District to the Owners. Except for the payment when due of the Installment Payments, and the interest thereon, and the performance of the other `+ agreements and covenants required to be performed by it contained in the Installment Purchase Agreement,the Master Agreement or herein,the District shall not have any obligation or liability to the Owners with respect to this Trust Agreement or the preparation, execution, delivery or transfer of the Certificates or the disbursement of the Installment Payments, and the interest thereon, by the Trustee to the Owners, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained herein. 6' Section 7.10. No Liability of the Trustee to the Owners. Except as expressly provided L herein, the Trustee shall not have any obligation or liability to the Owners with respect to the payment when due of the Installment Payments, and the interest thereon, by the District, or with respect to the performance by the Corporation or the District of the other agreements and covenants required to be performed by them, respectively contained in the Installment Purchase Agreement or herein. _ ARTICLE VIII THE TRUSTEE 60 Section 8.01. Employment of the Trustee: Duties. The Corporation and the District hereby appoint and employ the Trustee to receive, deposit and disburse the Installment Payments, and the interest thereon, to prepare, execute, deliver and transfer the Certificates and to perform the other functions contained herein, all in the manner provided herein and subject to the conditions and terms hereof. By executing and delivering this Trust Agreement,the Trustee accepts the appointment and employment hereinabove referred to and accepts the rights and V obligations of the Trustee provided herein, subject to the conditions and terms hereof. Other than when an Event of Default hereunder has occurred and is continuing, the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Trust Agreement, V and no implied covenants or obligations shall be read into this Trust Agreement against the Trustee. In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Trust Agreement, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. Section 8.02. Removal and Resignation of the Trustee. The Corporation and the District may, by an instrument in writing, remove the Trustee initially a party hereto and any successor thereto unless an Event of Default shall have occurred and then be continuing, and shall remove the Trustee initially a party hereto and any successor thereto if at any time (a)requested to do so by an instrument or concurrent instruments in writing signed by the Owners of a majority of the aggregate principal evidenced by the Certificates at the time Outstanding (or their attorneys duly authorized in writing), or (b)the Trustee shall cease to be V 80340a85.3 32 Y.� Book Page 72 r eligible in accordance with the following sentence, and shall appoint a successor Trustee. The Trustee shall be a bank having trust powers or a trust company in good standing in or incorporated under the laws of the United States or any state thereof, having (or if such bank or r trust company is a member of a bank holding company system, its parent bank holding company shall have) a combined capital and surplus of at least $75,000,000, and be subject to supervision or examination by federal or state banking authorities. If such bank or trust company publishes a r report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to,then for the purposes of this Section the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and r surplus as set forth in its most recent report of condition so published. The Trustee may at any time resign by giving written notice of such resignation to the r Corporation and the District and by giving notice, by first class mail, postage prepaid, of such resignation to the Owners at their addresses appearing on the registration books maintained by the Trustee. Upon receiving such notice of resignation, the Corporation and the District shall `+ promptly appoint a successor Trustee by an instrument in writing; provided, however,that in the event the District and the Corporation do not appoint a successor Trustee within 30 days following receipt of such notice of resignation, the resigning Trustee may, at the expense of the r District, petition the appropriate court having jurisdiction to appoint a successor Trustee. Any resignation or removal of a Trustee and appointment of a successor Trustee shall become effective only upon acceptance of appointment by the successor Trustee. Any successor Trustee .. appointed under this Trust Agreement shall signify its acceptance of such appointment by executing and delivering to the District and the Corporation and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee, with like effect as if originally named Trustee herein;but,nevertheless, at the written request of the District or of the successor Trustee, 'r such predecessor Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under this Trust Agreement and shall pay over, transfer, assign and deliver to the successor Trustee any money or other property _ subject to the trusts and conditions herein set forth. Any corporation, association or agency into which the Trustee may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation or transfer to which it is a party, provided that such entity meets the combined capital and surplus requirements of this Section, r ipso facto, shall be and become successor trustee under this Trust Agreement and vested with all the trusts, powers, discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any instrument or any further act, deed or r conveyance on the part of any of the parties hereto, anything herein to the contrary notwithstanding. 'tl Section 8.03. Compensation and Indemnification of the Trustee. The District shall from time to time, subject to any written agreement then in effect with the Trustee, pay the r 8034N85.3 33 Book Page 73 Trustee reasonable compensation for all its services rendered hereunder and reimburse the i.i Trustee for all its reasonable advances and expenditures (which shall not include "overhead , expenses" except as such expenses are included as a component of the Trustee's stated annual fees or disclosed transaction fees) hereunder, including but not limited to advances to and u reasonable fees and reasonable expenses of accountants, agents, appraisers, consultants or other _ experts, and counsel not directly employed by the Trustee but an attorney or firm of attorneys retained by the Trustee, employed by it in the exercise and performance of its rights and obligations hereunder; provided, however, that the Trustee shall not have any lien for such _. compensation or reimbursement against any moneys held by it in any of the funds or accounts established hereunder. The Trustee may take whatever legal actions are lawfully available to it directly against the Corporation or the District. Except as otherwise expressly provided herein, no provision of this Trust Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability _ in the performance of any of its duties hereunder or in the exercise of any of its rights or powers hereunder. The District,to the extent permitted by law, agrees to indemnify and save the Trustee, its directors, officers, employees and agents harmless against any liabilities which it may incur in the exercise and performance of its powers and duties hereunder, including but not limited to costs and expenses incurred in defending against any claim or liability, which are not due to its 1 negligence or willful misconduct. Section 8.04. Protection of the Trustee. The Trustee shall be protected and shall incur no liability in acting or proceeding in good faith upon any affidavit, bond, certificate, consent, notice, request, requisition, resolution, statement, waiver or other paper or document which it shall in good faith believe to be genuine and to have been adopted, executed or delivered by the proper party or pursuant to any of the provisions hereof, and the Trustee shall be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument, but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements. The Trustee shall be under no obligation to exercise any of the 6" rights or powers vested in it by this Trust Agreement at the request or direction of any of the Owners of the Certificates pursuant to this Trust Agreement, unless such Owners shall have offered to the Trustee security or indemnity, reasonably satisfactory to the Trustee, against the reasonable costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. The Trustee may consult with counsel, who may be counsel to the Corporation or the District, with regard to legal questions, and the opinion of such counsel shall y be full and complete authorization and protection in respect to any action taken or suffered by it hereunder in good faith in accordance therewith. The Trustee shall not be responsible for the sufficiency of the Certificates or the Installment Purchase Agreement, or of the assignment made to it hereunder, or for statements made in the preliminary or final official statement relating to the Certificates. The Trustee shall not be required to take notice or be deemed to have notice of any default or Event of Default hereunder, except failure of any of the payments to be made to the Trustee required to be made hereunder or under the Installment Purchase Agreement, unless the V $0340485.3 34 Book Page 74 r r Trustee shall be specifically notified in writing of such default or Event of Default by the District,the Corporation or the Owners of not less than 5% of the aggregate principal evidenced by the Certificates then Outstanding. Whenever in the administration of its rights and obligations hereunder the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter(unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a Written Certificate of the District or a Written Certificate of the Corporation, and such certificate shall be full warrant to the Trustee for any action taken or suffered under the provisions hereof upon the faith thereof, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as it deems reasonable. r The Trustee may buy, sell, own, hold and deal in any of the Certificates and may join in any action which any Owner may be entitled to take with like effect as if the Trustee were not a r party hereto. The Trustee,either as principal or agent, may also engage in or be interested in any financial or other transaction with the Corporation or the District, and may act as agent, depository or trustee for any committee or body of Owners or of owners of obligations of the r Corporation or the District as freely as if it were not the Trustee hereunder. The Trustee may, to the extent reasonably necessary, execute any of the trusts or powers r hereof and perform any rights and obligations required of it hereunder by or through agents, attorneys or receivers, and shall be entitled to advice of counsel concerning all matters of trust and its rights and obligations hereunder, and the Trustee shall not be answerable for the .. negligence or misconduct of any such agent, attorney or receiver selected by it with reasonable care; provided, however, that in the event of any negligence or misconduct of any such attorney, agent or receiver, the Trustee shall diligently pursue all remedies of the Trustee against such r agent, attorney or receiver. The Trustee shall not be liable for any error of judgment made by it in good faith unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts. r The Trustee shall not he answerable for the exercise of any trusts or powers hereunder or for anything whatsoever in connection with the funds established hereunder, except only for its r own willful misconduct, negligence or breach of an obligation hereunder. The Trustee may,on behalf of the Owners, intervene in any judicial proceeding to which r the Corporation or the District is a party and which, in the opinion of the Trustee and its counsel, affects the Certificates or the security therefor, and shall do so if requested in writing by the Owners of at least 5% of the aggregate principal evidenced by Certificates then Outstanding, r provided the Trustee shall have no duty to take such action unless it has been indemnified to its reasonable satisfaction against all risk or liability arising from such action. r r r 90340485.3 35 r Book Page 75 LW ARTICLE IX L AMENDMENT OF OR SUPPLEMENT TO TRUST AGREEMENT L Section 9.01. Amendment or Supplement. (a)This Trust Agreement and the rights , and obligations of the Corporation, the District, the Owners and the Trustee hereunder may be amended or supplemented at any time by an amendment hereof or supplement hereto which shall �+ become binding when the prior written consents of the Owners of a majority of the aggregate principal evidenced by the Certificates then Outstanding, exclusive of Certificates disqualified as provided in Section 9.02 hereof, are filed with the Trustee. No such amendment or supplement shall (i)extend the stated Principal Payment Date of any Certificate or reduce the rate of interest - evidenced thereby or extend the time of payment of such interest or reduce the amount of principal evidenced thereby or change the prepayment terms and provisions or the provisions 6. regarding delivery of notice of prepayment without the prior written consent of the Owner of each Certificate so affected, (ii)reduce the percentage of Owners whose consent is required for L the execution of any amendment hereof or supplement hereto without the prior written consent of the Owners of all Certificates then Outstanding, (iii)modify any of the rights or obligations of the Trustee without the prior written consent of the Trustee, or (iv)amend this Section without L the prior written consent of the Owners of all Certificates then Outstanding. (b) This Trust Agreement and the rights and obligations of the Corporation, the District, the Owners and the Trustee hereunder may also be amended or supplemented at any time by an amendment hereof or supplement hereto which shall become binding upon execution, - without the written consents of any Owners,but only to the extent permitted by law and only for I any one or more of the following purposes: (i) to add to the agreements, conditions, covenants and terms required by the Corporation or the District to be observed or performed herein other agreements, conditions, covenants and terms thereafter to be observed or performed by the - Corporation or the District, or to surrender any right or power reserved herein to or L conferred herein on the Corporation or the District; (b) to make such provisions for the purpose of curing any ambiguity or of L correcting, curing or supplementing any defective provision contained herein or in regard to questions arising hereunder which the Corporation or the District may deem desirable or necessary and not inconsistent herewith; (iii) to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of V interest evidenced by the Certificates;or (iv) for any other reason, provided such amendment or supplement does not L adversely affect the rights or interests of the Owners. Section 9.02. Disqualified Certificates. Certificates owned or held by or for the account of the District (but excluding Certificates held in any pension or retirement fund of the District) shall not be deemed Outstanding for the purpose of any consent or other action or any f L 90340485.3 36 - L Book Page 76 r r calculation of Outstanding Certificates provided in this Article, and shall not be entitled to consent to or take any other action provided in this Article, and the Trustee may adopt appropriate regulations to require each Owner, before his consent provided for herein shall be ., deemed effective, to reveal if the Certificates as to which such consent is given are disqualified as provided in this Section. ,., Section 9.03. Endorsement or Replacement of Certificates After Amendment or Supplement. After the effective date of any action taken as hereinabove provided in this Article, the Trustee may determine that the Certificates may bear a notation by endorsement in r faun approved by the Trustee as to such action, and in that case upon demand of the Owner of any Outstanding Certificate and presentation of such Certificate for such purpose at the Principal Office a suitable notation as to such action shall be made on such Certificate. If the Trustee shall r receive an Opinion of Counsel advising that new Certificates modified to conform to such action are necessary, modified Certificates shall be prepared, and in that case upon demand of the Owner of any Outstanding Certificates such new Certificates shall be exchanged at the Principal r Office without cost to each Owner for Certificates then Outstanding upon surrender of such Outstanding Certificates. r Section 9.04. Amendment by Mutual Consent. The provisions of this Article shall not prevent any Owner from accepting any amendment as to the particular Certificates owned by such Owner,provided that due notation thereof is made on such Certificates. r ARTICLE X r DEFEASANCE Section 10.01. Discharge of Certificates and Trust Agreement. (a)If the Trustee shall pay or cause to be paid or there shall otherwise be paid(i)to the Owners of all Outstanding Certificates the interest and principal evidenced thereby at the times and in the manner stipulated herein and therein, and (ii)all other amounts due hereunder and under the Installment Purchase r Agreement,then such Owners shall cease to be entitled to the pledge of and lien on the amounts on deposit in the foods and accounts established hereunder, as provided herein, and all agreements and covenants of the Corporation, the District, and the Trustee to such Owners r hereunder shall thereupon cease, terminate and become void and shall be discharged and satisfied. r (b) Any Outstanding Certificate shall be deemed to have been paid within the meaning and with the effect expressed in this Section when the whole amount of the principal, premium, if any, and interest evidenced by such Certificate shall have been paid or when (i) in r case said Certificate or portion thereof has been selected for prepayment in accordance with Section 4.02 hereof prior to its stated Principal Payment Date,the District shall have given to the Trustee irrevocable instructions to give,in accordance with the provisions of Section 4.03 hereof, r notice of prepayment of such Certificate,or portion thereof,(ii)there shall be on deposit with the Trustee, moneys, or Government Obligations, or any combination thereof, the principal of and the interest on which when due, and without any reinvestment thereof, will provide moneys r+ which shall be sufficient to pay when due the principal, premium, if any, and interest evidenced by such Certificate and due and to become due on or prior to the prepayment date or its stated r 80340085.3 37 r Book Page 77 6w Principal Payment Date, as the case may be, and (iii)in the event the stated Principal Payment Lr Date of such Certificate will not occur, and said Certificate is not to be prepaid, within the next succeeding 60 days, the District shall have given the Trustee irrevocable instructions to give notice, as soon as practicable in the same manner as a notice of prepayment given pursuant to Section 4.03 hereof, to the Owner of such Certificate, or portion thereof, stating that the deposit _ of moneys or Government Obligations required by clause(ii) of this subsection has been made with the Trustee and that said Certificate, or portion thereof, is deemed to have been paid in accordance with this Section and stating such Principal Payment Date or prepayment date upon which moneys are to be available for the payment of the principal, premium, if any, and interest evidenced by said Certificate,or portion thereof. Neither the moneys nor the Government Obligations deposited with the Trustee pursuant to this Section nor principal or interest payments on any such Government Obligations shall be 6' withdrawn or used for any purpose other than, and shall be held in trust for and pledged to, the _ payment of the principal, premium, if any, and interest evidenced by said Certificate, or portions thereof. If payment of less than all of the Certificates is to be provided for in the manner and with the effect expressed in this Section, the Trustee or the District, as applicable, shall select - such Certificates, or portions thereof, in the manner specified in Section 4.02 hereof for selection L for prepayment of less than all of the Certificates, in the principal amounts designated to the Trustee by the District. _. (c) After the payment of all the interest, prepayment premium, if any, and principal evidenced by all Outstanding Certificates and all other amounts due hereunder and under the Installment Purchase Agreement as provided in this Section, the Trustee shall execute and deliver to the Corporation and the District all such instruments as may be necessary or desirable to evidence the discharge and satisfaction of this Trust Agreement, the Trustee shall pay over or deliver to the District all moneys or securities held by it pursuant hereto which are not required for the payment of the interest, prepayment premium, if any, and principal evidenced by such Certificates and all other amounts due hereunder and under the Installment Purchase Agreement. - (d) Prior to any defeasance becoming effective under this Article, the District shall cause to be delivered (i) an executed copy of a report, addressed to the Trustee and the District, in form and in substance acceptable to the Trustee and the District, of a nationally recognized certified public accountant, or firm of such accountants, verifying that the Government u Obligations and cash, if any, satisfy the requirements of clause(ii) of subsection (b) of this Section (a"Verification'), (ii)a copy of the escrow deposit agreement entered into in connection L with such defeasance, which escrow deposit agreement shall provide that no substitution of Government Obligations shall be permitted except with other Government Obligations and upon - delivery of a new Verification and no reinvestment of Government Obligations shall be V permitted except as contemplated by the original Verification or upon delivery of a new Verification, and (iii)a copy of an Opinion of Counsel, dated the date of such defeasance and addressed to the Trustee and the District, in form and in substance acceptable to the Trustee and `, the District, to the effect that such Certificates have been paid within the meaning and with the effect expressed in this Trust Agreement, all agreements and covenants of the Corporation, the District and the Trustee to the Owners of such Certificates under this Tmst Agreement have y ceased, terminated and become void and have been discharged and satisfied. L 80340485.3 38 V Book Page 78 r I I Section 10.02. Unclaimed Moneys. Any moneys held by the Trustee in trust for the payment and discharge of the interest or principal evidenced by any of the Certificates which remain unclaimed for two years after the date when such interest or principal evidenced by such r Certificates have become payable, if such moneys were held by the Trustee at such date, or for two years after the date of deposit of such moneys if deposited with the Trustee after the date when the interest and principal evidenced by such Certificates have become payable, shall be r repaid by the Trustee to the District as its absolute property free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Owners shall look only to the District for the payment of the interest and principal evidenced by such Certificates. ARTICLE XI r MISCELLANEOUS Section 11.01. Benefits of Trust Agreement. Nothing contained herein, expressed or implied, is intended to give to any Person other than the Corporation, the District, the Trustee and the Owners any claim, remedy or right under or pursuant hereto, and any agreement, condition, covenant or term required herein to be observed or performed by or on behalf of the r Corporation or the District shall be for the sole and exclusive benefit of the Trustee and the Owners. r Section 11.02. Successor Deemed Included in all References to Predecessor. Whenever the Corporation, the District or the Trustee, or any officer thereof, is named or referred to herein, such reference shall be deemed to include the successor to the powers, duties r and functions that are presently vested in the Corporation, the District or the Trustee, or such officer, and all agreements, conditions, covenants and terms required hereby to be observed or performed by or on behalf of the Corporation, the District or the Trustee, or any officer thereof, r shall bind and inure to the benefit of the respective successors thereof whether so expressed or not. r Section 11.03. Execution of Documents by Owners. Any declaration, request or other instrument which is permitted or required herein to be executed by Owners may be in one or more instruments of similar tenor and may be executed by Owners in person or by their attorneys r appointed in writing. The fact and date of the execution by any Owner or his attorney of any declaration, request or other instrument or of any writing appointing such attorney may be proved by the certificate of any notary public or other officer authorized to take r acknowledgments of deeds to be recorded in the state or territory in which he purports to act that the Person signing such declaration, request or other instrument or writing acknowledged to him the execution thereof, or by an affidavit of a witness of such execution duly swom to before such notary public or other officer, or by such other proof as the Trustee may accept which it may deem sufficient. The ownership of any Certificates and the amount, payment date, number and date of owning the same may be proved by the registration books maintained by the Trustee pursuant to the provisions of Section 2.07 hereof r r 80340485.3 39 r Book Page 79 Ir Any declaration, request or other instrument in writing of the Owner of any Certificate u shall bind all future Owners of such Certificate with respect to anything done or suffered to be done by the Corporation,the District or the Trustee in good faith and in accordance therewith. V Section 11.04. Waiver of Personal Liability. Notwithstanding anything contained herein to the contrary, no member,officer or employee of the District or the Corporation shall be individually or personally liable for the payment of any moneys,including without limitation,the �+ interest or principal evidenced by the Certificates, but nothing contained herein shall relieve any member, officer or employee of the District or the Corporation from the performance of any official duty provided by any applicable provisions of law, by the Installment Purchase Agreement or hereby. Section 11.05. Acquisition of Certificates by District. All Certificates acquired by the V District, whether by purchase or gift or otherwise, shall be surrendered to the Tntstee for cancellation. u Section 11.06. Content of Certificates. Every Written Certificate of the District and every Written Certificate of the Corporation with respect to compliance with any agreement, - condition,covenant or term contained herein shall include(a)a statement that the Person making V or giving such certificate has read such agreement, condition, covenant or tens and the _ definitions herein relating thereto, (b)a brief statement as to the nature and scope of the examination or investigation upon which the statements contained in such certificate are based, Lr (c)a statement that, in the opinion of the signer, the signer has made or caused to be made such examination or investigation as is necessary to enable the signer to express an informed opinion as to whether or not such agreement, condition, covenant or term has been complied with, and (d)a statement as to whether, in the opinion of the signer, such agreement, condition, covenant or teem has been complied with. ' V Any Written Certificate of the District and any Written Certificate of the Corporation may be based, insofar as it relates to legal matters, upon an Opinion of Counsel, unless the Person making or giving such certificate knows that the Opinion of Counsel with respect to the u matters upon which each Person's certificate may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. Any Opinion of I Counsel may be based, insofar as it relates to factual matters, upon information which is in the possession of the District or the Corporation upon a representation by an officer or officers of the District or the Corporation, as the case may be, unless the counsel executing such Opinion of Counsel knows that the representation with respect to the matters upon which such counsel's opinion may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. 1..1 Section 11.07. Funds and Accounts. Any fund or account required to be established and maintained herein by the Trustee may be established and maintained in the accounting I 6.1 records of the Trustee either as an account or a fund, and may, for the purposes of such accounting records, any audits thereof and any reports or statements with respect thereto, be treated either as an account or a fund, but all such records with respect to all such funds and accounts shall at all times be maintained in accordance with sound accounting practice and with due regard for the protection of the security of the Certificates and the rights of the Owners. The V 9034 s5.s 40 V Book Page 80 r Trustee may establish such funds and accounts as it deems necessary to perform its obligations hereunder. Trustee may commingle any of the moneys held by it hereunder for investment purposes only; provided, however,that the Trustee shall account separately for the moneys in each fund or account established pursuant to this Trust Agreement. Section 11.08. Article and Section Headings. Gender and References. The singular form of any word used herein, including the terms defined in Section 1.01 hereof, shall include the plural, and vice versa, unless the context otherwise requires. The use herein of a pronoun of any gender shall include correlative words of the other genders. The headings or titles of the several Articles and Sections hereof and the table of contents appended hereto shall be solely for convenience of reference and shall not affect the meaning, construction or effect hereof. All references herein to "Articles," "Sections," subsections or clauses are to the corresponding Articles, Sections, subsections or clauses hereof, and the words "hereby," "herein," "hereof," r "hereto," "herewith," "hereunder" and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section, subsection or clause thereof. r Section 11.09. Partial Invalidity. If any one or more of the agreements, conditions, covenants or terms required herein to be observed or performed by or on the part of the Corporation, the District or the Trustee shall be contrary to law, then such agreement or r agreements, such condition or conditions, such covenant or covenants or such term or terms shall be null and void to the extent contrary to law and shall be deemed separable from the remaining agreements, conditions, covenants and terms hereof and shall in no way affect the validity hereof ., or of the Certificates, and the Owners shall retain all the benefit, protection and security afforded to them under any applicable provisions of law. The Corporation, the District and the Trustee hereby declare that they would have executed this Trust Agreement, and each and every Article, .. Section, paragraph, subsection, sentence, clause and phrase hereof and would have authorized the execution and delivery of the Certificates pursuant hereto irrespective of the fact that any one or more Articles, Sections, paragraphs, subsections, sentences, clauses or phrases hereof or the �+ application thereof to any Person or circumstance may be held to be unconstitutional, unenforceable or invalid. Section 11.10. California Law. This Trust Agreement shall be governed by and construed in accordance with the laws of the State. r Section 11.11. Notices. Any written notice, statement, demand, consent, approval, authorization, offer, designation, request or other communication to be given hereunder shall be given to the party entitled thereto at its address set forth below, or at such other address as such party may provide to the other parties in writing from time to time, namely: If to the District: Orange County Sanitation District r 10844 Ellis Avenue Fountain Valley, California 92708 Attention: Director of Finance and Administrative Services r r 80340485.3 41 r Book Page 81 I V If to the Corporation: Orange County Sanitation District Financing Corporation IV c/o Orange County Sanitation District 10844 Ellis Avenue Fountain Valley,California 92708 V Attention: Treasurer If to the Trustee: Union Bank of California,N.A. �+ 120 South San Pedro Street, Suite 400 Los Angeles, California 90012 Attention: Corporate Trust Department L' Each such notice, statement,demand,consent,approval, authorization,offer,designation, request or other communication hereunder shall be deemed delivered to the party to whom it is �+ addressed (a) if personally served or delivered, upon delivery, (b) if given by electronic communication, whether by telex, telegram or telecopier, upon the sender's receipt of an appropriate answerback or other written acknowledgment, (c) if given by registered or certified mail, return receipt requested, deposited with the United States mail postage prepaid, 72 hours after such notice is deposited with the United States mail, (d) if given by overnight courier, with courier charges prepaid. 24 hours after delivery to said overnight courier, or (a) if given by any 6' other means, upon delivery at the address specified in this Section. Section 11.12. Effective Date. This Trust Agreement shall become effective upon its execution and delivery. Section 11.13. Execution in Counterparts. This Trust Agreement may be simultaneously executed in several counterparts, each of which shall be deemed an original, and all of which shall constitute but one and the same instrument. V u V u u V 1r V 80340485.3 42 1 La Book Page 82 r r IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be executed by their respective officers thereunto duly authorized, all as of the day and year first written above. r ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION r By: .. Treasurer r ORANGE COUNTY SANITATION DISTRICT r By: r Chair of the Board of Directors (SEAL) r Attest: r By: „i Clerk of the Board of Directors r UNION BANK OF CALIFORNIA,N.A., as Trustee r r By: Authorized Officer r r r 8034M85.3 43 r Book Page 83 r r EXHIBIT A FORM OF CERTIFICATE r No. R— ***$*** r Unless this Certificate is presented by an authorized representative of The Depository Trust Company to the Trustee for registration of transfer, exchange or payment, and any �+ Certificate executed and delivered is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the Registered Owner hereof,Cede& Co.,has an interest herein. r ORANGE COUNTY SANITATION DISTRICT CERTIFICATE OF PARTICIPATION SERIES 2008C r PRINCIPAL PAYMENT DATE INTEREST RATE DATED DATE CUSIP — December. 2008 REGISTERED OWNER: Cede&Co. r PRINCIPAL AMOUNT: DOLLARS r THIS IS TO CERTIFY that the Registered Owner of this Certificate of Participation (this "Certificate"), as identified above, is the owner of a direct, fractional undivided interest in r certain installment payments (`Installment Payments"), and the interest thereon, payable under and pursuant to the Installment Purchase Agreement, dated as of December 1, 2008 (the `Installment Purchase Agreement'), by and between the Orange County Sanitation District (the r "District'), a county sanitation district organized and existing under the laws of the State of California, and the Orange County Sanitation District Financing Corporation (the "Corporation'), a nonprofit public benefit corporation organized and existing under the laws of the State of California. Certain of the rights of the Corporation under the Installment Purchase Agreement, including the right to receive the Installment Payments, and the interest thereon, have been assigned without recourse by the Corporation to Union Bank of California, N.A., a national banking association duly organized and existing under the laws of the United States of America, as trustee (the "Trustee") under the Trust Agreement, dated as of December 1, 2008 (the "Trust Agreement'), by and among the Trustee, the District and the Corporation. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Trust Agreement. r r 80340485.3 A_1 r Book Page 84 IV LThe District has executed and delivered the Master Agreement for District Obligations, dated as of August 1, 2000 (the "Master Agreement'), by and between the District and the Corporation, pursuant to which the District establishes and declares the conditions and terms I upon which obligations such as the Installment Purchase Agreement, and the Installment LI Payments and the interest thereon,will be incurred and secured. This Certificate is one of the duly authorized Orange County Sanitation District L Certificates of Participation, Series 2008C (the "Certificates") evidence principal in the _ aggregate amount of$_,000,000, executed pursuant to the terms of the Trust Agreement. The Certificates evidence direct, fractional undivided interests in the Installment Payments, and the interest thereon, payable under the Installment Purchase Agreement. The Certificates are executed and delivered to refinance certain improvements to the wastewater collection,treatment j and disposal facilities of the District(the"Wastewater System"),to finance a reserve fund for the 6' Certificates,to pay the costs of issuance incurred in connection therewith and to pay certain other - related costs. r The Installment Payments,and the interest thereon,are to be paid by the District pursuant to the Installment Purchase Agreement in consideration for the purchase of certain improvements to the Wastewater System and for the other agreements and obligations undertaken by the Corporation under the Installment Purchase Agreement and the Trust Agreement. _ I The income and revenue received by the District from the operation of the Wastewater System remaining after the payment of maintenance and operation or ownership costs of the Wastewater System (as more fully described in the Installment Purchase Agreement, the "Net Revenues") are, pursuant to the Master Agreement, pledged to the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations (as such terms are defined in the Master Agreement). V The Installment Purchase Agreement constitutes a Senior Obligation and, as such, shall be subject to the provisions of the Master Agreement,and shall be afforded all of the advantages, i benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. N The Installment Purchase Agreement is payable on a parity with the other existing Senior Obligation. The District may at any time incur Senior Obligations in addition to existing Senior j Obligations and the Installment Purchase Agreement payable from Net Revenues as provided in the Master Agreement on a parity with all other Senior Obligations theretofore incurred, but only subject to the conditions and upon compliance with the procedures set forth in the Master L Agreement. The District is not required to advance any moneys derived from any source of income L other than Net Revenues and the other funds provided in the Installment Purchase Agreement for the payment of the Installment Payments, and the interest thereon, and other payments required to be made by it under the Installment Purchase Agreement, or for the performance of any agreements or covenants required to be performed by it contained therein. The obligation of the b District to pay the Installment Payments, and the interest thereon,and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable, in the manner provided in the Installment Purchase Agreement, solely from such Net Revenues and other funds provided for therein,and does not constitute a debt of the District or of L 90340affi3 A-2 L Book Page 85 the State of California, or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. ,r Reference is hereby made to the Master Agreement, the Installment Purchase Agreement and to the Trust Agreement and any and all amendments thereof and supplements thereto for a description of the terms under which the District's obligation to pay the Installment Payments, ,r and the interest thereon, is incurred, the Certificates are executed and delivered, the provisions with regard to the nature and extent of the Net Revenues, and the rights of the Owners of the Certificates. All of the terms of the Master Agreement,the Installment Purchase Agreement and .� the Trust Agreement are hereby incorporated herein. The Trust Agreement constitutes a contract among the District, the Corporation and the Trustee for the benefit of the Owners of the Certificates, to all the provisions of which the Owner of this Certificate, by acceptance hereof, r agrees and consents. The Registered Owner of this Certificate is entitled to receive, subject to the terms of the Trust Agreement and any right of prepayment as provided herein or therein, on the Principal Payment Date set forth above, upon presentation and surrender of this Certificate at the principal corporate trust office of the Trustee in Los Angeles, California (the "Principal Office"), the Principal Amount specified above, evidencing the Owner's interest in the Installment Payments coming due on the Principal Payment Date, and to receive on February I and August 1 of each year, commencing on February 1, 2009 (the "Interest Payment Dates"), interest accrued thereon at the Interest Rate specified above, computed on the basis of a 360-day year consisting of twelve 30-day months, until said Principal Amount is paid in full, evidencing the Registered Owner's interest in the interest evidenced by the Installment Payments coming due on each of said dates. This Certificate shall evidence interest from the Interest Payment Date next preceding its date of execution to which interest has been paid in full, unless such date of execution shall be after the 15th day of the month next preceding an Interest Payment Date,whether or not such day is a business day (each such date, a "Record Date"), and on or prior to the following Interest r+ Payment Date, in which case this Certificate shall evidence interest from such Interest Payment Date, or unless such date of execution shall be on or prior to the first Record Date, in which case this Certificate shall evidence interest from the Dated Date specified above. Notwithstanding the .y foregoing, if, as shown by the records of the Trustee, interest evidenced by the Certificates shall be in default,this Certificate shall evidence interest from the last Interest Payment Date to which interest has been paid in full or duly provided for. r Payments of interest evidenced by the Certificates shall be made to the Owners thereof (as determined at the close of business on the Record Date next preceding the related Interest —' Payment Date) by check or draft of the Trustee mailed to the address of each such Owner as it appears on the registration books maintained by the Trustee pursuant to the Trust Agreement, or to such other address as may be furnished in writing to the Trustee by such Owner. Payment of principal and prepayment premium, if any, evidenced by the Certificates,on their stated principal payment dates or on prepayment in whole or in part prior thereto, shall be made only upon presentation and surrender of the Certificates at the Principal Office. All such amounts are payable in lawful money of the United States of America. 80340485.3 A_3 r Book Page 86 V The Certificates are authorized to be executed and delivered in the form of fully U registered certificates in denominations of$5,000 or any integral multiple thereof("Authorized Denominations"). u This Certificate may be transferred or exchanged by the Registered Owner hereof, in person or by his attorney duly authorized in writing, at the Principal Office, but only in the manner, subject to the limitations and upon payment of the charges provided in the Trust `+ Agreement. i The Trustee shall not be required to transfer or exchange any Certificate during the period u commencing on the date five days before the date of selection of Certificates for prepayment and ending on the date of mailing of notice of such prepayment, nor shall the Trustee be required to transfer or exchange any Certificate or portion thereof selected for prepayment from and after the �+ date of mailing the notice of prepayment thereof. The Trustee may treat the Registered Owner hereof as the absolute owner hereof for all L purposes, whether or not the principal or interest evidenced by this Certificate shall be overdue, and the Trustee shall not be affected by any knowledge or notice to the contrary; and payment of the principal and interest evidenced by this Certificate shall be made only to such Registered L� Owner, which payments shall be valid and effectual to satisfy and discharge the liability evidenced by this Certificate to the extent of the sum or sums so paid. u The Certificates are subject to prepayment prior to their stated Principal Payment Dates in accordance with the Trust Agreement. u To the extent and in the manner permitted by the terns of the Trust Agreement, the Trust Agreement and the rights and obligations of the Corporation, the District, the Owners and the i Trustee under the Trust Agreement may be amended or supplemented at any time by an amendment or supplement thereto which shall become binding when the prior written consents of the Owners of a majority of the aggregate principal evidenced by the Certificates then outstanding, exclusive of Certificates disqualified as provided under the Trust Agreement, are �+ filed with the Trustee. No such supplement or amendment shall (a)extend the stated Principal Payment Date of any Certificate or reduce the rate of interest evidenced thereby or extend the time of payment of such interest or reduce the amount of principal evidenced thereby or change �+ the prepayment terms and provisions or the provisions regarding delivery of notice of prepayment without the prior written consent of the Owner of each Certificate so affected, (b) reduce the percentage of Owners whose consent is required for the execution of any 6' amendment of or supplement to the Trust Agreement without the prior written consent of the Owners of all Certificates then outstanding, (c) modify any of the rights or obligations of the L Trustee without the prior written consent of the Trustee, or(d)amend the amendment provisions of the Trust Agreement without the prior written consent of the Owners of all Certificates then outstanding. To the extent and in the manner permitted by the terms of the Trust Agreement, the Trust Agreement and the rights and obligations of the Corporation, the District, the Owners and the i Trustee under the Trust Agreement may also be amended or supplemented at any time by an amendment or supplement thereto which shall become binding upon execution, without the w 90340485.3 A4 L Book Page 87 r r written consents of any Owners,but only to the extent permitted by law and only(a)to add to the agreements, conditions, covenants and terms required by the Corporation or the District to be observed or performed under the Trust Agreement other agreements, conditions, covenants and terms thereafter to be observed or performed by the Corporation or the District, or to surrender any right or power reserved therein to or conferred therein on the Corporation or the District,and which in either case shall not adversely affect the rights or interests of the Owners, (b)to make .. such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained in the Trust Agreement or in regard to questions arising thereunder which the Corporation or the District may deem desirable or r necessary and not inconsistent therewith, (c)to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of interest evidenced by the Certificates, or(d)for any other reason, provided such �+ amendment or supplement does not adversely affect the rights or interests of the Owners. THE DISTRICT HAS CERTIFIED that all acts, conditions and things required by the statutes of the State of California and by the Trust Agreement to exist, to have happened and to have been performed precedent to and in connection with the execution and delivery of this Certificate do exist, have happened and have been performed in regular and due time, form and �+ manner as required by law, and that the Trustee is duly authorized to execute and deliver this Certificate. r r r r r r r 80310485.3 A-$ Book Page 88 V IN WITNESS WHEREOF, this Certificate has been executed by the manual signature L of an authorized signatory of the Trustee as of the date set forth below. Date: L UNION BANK OF CALIFORNIA,N.A., as Trustee L By: L Authorized Officer i V L L L L r V V WJ L L V L M404953 A-6 L Book Page 89 r r ASSIGNMENT For value received, the undersigned do(es) hereby sell, assign and transfer unto the within-mentioned Certificate and hereby irrevocably constitute(s) and appoint(s) attorney, to transfer the same on the books of the Trustee with full power of substitution in the premises. Dated: r r Note: The signature(s) on this Assignment must correspond with the name(s) as written on the face of the within registered Certificate in every particular, without alteration or r enlargement or any change whatsoever. Tax I.D. #: r Signature Guaranteed: r Note: Si slur s must be uarameed b an eligible Note: The si a @t N ) g Y PJ gn nrs wrioo this Assignment must correspond guarantor. with the names)as written on the face of the within Certificate in every particular without alteration or enlargement or any change whatsoever, r r r r r r r r 80]40485.] A-] r Book Page 90 Fulbright&Jaworski L.L.P.—Draft 10/31/09 r I INSTALLMENT PURCHASE AGREEMENT by and between r ORANGE COUNTY SANITATION DISTRICT r and r r ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION r r Dated as of December 1,2008 r Relating to r $_,000,000 Orange County Sanitation District r Certificates of Participation Series2008C r r 90340482.3 Book Page 91 r TABLE OF CONTENTS r Page r ARTICLE I DEFINITIONS.................................................................................................2 Section 1.01. Definitions............................................................................................2 r Section 1.02. Definitions in Master Agreement and Trust Agreement......................3 ARTICLE II PURCHASE OF PROJECT BY,AND SALE THEREOF TO,THE CORPORATION;PAYMENT OF PURCHASE PRICE...............................3 Section 2.01. Acquisition,Construction and Installation of the Project....................3 Section2.02. Changes to the Project.........................................................................4 Section2.03. Payment of Purchase Price...................................................................4 r ARTICLE III PURCHASE OF PROJECT BY,AND SALE THEREOF TO,THE DISTRICT; INSTALLMENT PAYMENTS...................................................4 r Section 3.01. Purchase and Sale of Project................................................................4 Section3.02. Installment Payments...........................................................................4 Section3.03. Reserve Fund Payments.......................................................................6 r Section 3.04. Obligation Absolute.............................................................................6 Section3.05. Nature of Agreement............................................................................6 ARTICLE IV PREPAYMENT OF INSTALLMENT PAYMENTS;DISCHARGE............6 Section 4.01. Prepayment of Installment Payments...................................................6 Section4.02. Notice...................................................................................................7 Section 4.03. Discharge of Obligations.....................................................................7 ARTICLE V COVENANTS.................................................................................................7 Section 5.01. Compliance with Master Agreement...................................................7 Section 5.02. Compliance with Installment Purchase Agreement.............................7 Section 5.03. Protection of Security and Rights........................................................8 Section 5.04. Indemnification of Corporation...........................................................8 .+ Section 5.05. Further Assurances...............................................................................8 ARTICLE VI EVENTS OF DEFAULT AND REMEDIES OF THE WCORPORATION.............................................................................................8 Section6.01. Events of Default.................................................................................8 Section 6.02. Remedies on Default............................................................................9 .r Section 6.03. Non-Waiver..........................................................................................9 Section 6.04. Remedies Not Exclusive...........:........................................................ 10 ARTICLEVII AMENDMENTS........................................................................................... 10 Section7.01. Amendments...................................................................................... 10 ARTICLE Vlll MISCELLANEOUS...................................................................................... I I Section 8.01. Liability of District Limited............................................................... I I Section8.02. Limitation of Rights........................................................................... I 1 Section8.03. Assignment........................................................................................ II r Section 8.04. Notices............................................................................................... I I Section 8.05. Successor Is Deemed Included in all References to Predecessor...... 12 Section 8.06. Waiver of Personal Liability.............................................................. 12 r 803404823 Book Page 92 L TABLE OF CONTENTS (continued) y Page Section 8.07. Article and Section Headings,Gender and References..................... 12 L Section8.08. Partial Invalidity................................................................................. 13 Section8.09. Governing Law.................................................................................. 13 L Section 8.10. Execution in Counterparts.................................................................. 13 EXHIBIT A DESCRIPTION OF PROJECT........................................................A-1 L; V Lr L 1.1 L' L L L L L L L 90340482.3 -ii- L Book Page 93 r r INSTALLMENT PURCHASE AGREEMENT THIS INSTALLMENT PURCHASE AGREEMENT (this `Installment Purchase Agreement'), dated as of December I, 2008, is by and between the ORANGE COUNTY SANITATION DISTRICT, a county sanitation district organized and existing under the laws of the State of California (the "District'), and the ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION, a nonprofit public benefit corporation organized and existing under the laws of the State of California(the"Corporation'). WITNESSETH: r WHEREAS, the District desires to finance the acquisition, construction and installation of certain improvements to its wastewater system(the"Project'); r WHEREAS, in order to finance the Project, the District desires to purchase the Project from the Corporation, and the Corporation desires to sell the Project to the District, for the installment payments (the "Installment Payments") to be made by the District pursuant to the r Installment Purchase Agreement, dated as of December 1, 2008 (the `Installment Purchase Agreement'),by and between the District and the Corporation; r WHEREAS, pursuant to the Master Agreement for District Obligations, dated as of August I,2000, by and between the District and the Corporation, the District has established and w declared the conditions and terms upon which obligations such as this Installment Purchase Agreement, and the Installment Payments, and the interest thereon, are to be incurred and secured; r WHEREAS, the Corporation proposes to assign without recourse certain of its rights under and pursuant to this Installment Purchase Agreement to Union Bank of California,N.A.,as r trustee(the"Trustee"); WHEREAS, in consideration of such assignment and the execution and delivery of the _ Trust Agreement, dated as of the date hereof, by and among the Trustee,the Corporation and the District, the Trustee has agreed to execute and deliver the Orange County Sanitation District Certificates of Participation. Series 2008C (the "Certificates"), evidencing direct, undivided r fractional interests in the Installment Payments,and the interest thereon,payable hereunder; WHEREAS, all acts, conditions and things required by law to exist, to have happened r and to have been performed precedent to and in connection with the execution and delivery of this Installment Purchase Agreement do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the parties hereto are now duly r authorized to execute and enter into this Installment Purchase Agreement; NOW, THEREFORE, in consideration of the covenants and provisions herein set forth and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged,the parties hereto do hereby agree as follows: r 8D340/82.7 Book Page 94 W ARTICLE 1 �+ DEFINITIONS as Section 1.01. Definitions. Except as provided in Section 1.02 hereof or unless the ms context otherwise requires, the ter defined in this Section shall for all purposes hereof and of any amendment hereof or supplement hereto and of any report or other document mentioned b' herein or therein have the meanings defined herein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined herein: "Acquisition Fund" means the fund by that name established in accordance with the Trust Agreement. L. "Business Day" means a day other than (a) Saturday or Sunday, (b) a day on which banking institutions in the city in which the Principal Office is located are authorized or required by law to be closed, and (c) a day on which the New York Stock Exchange is authorized or e-+ obligated by law or executive order to be closed. "Certificates" means the Orange County Sanitation District Certificates of Participation, L. Series 2008C,executed and delivered under and pursuant to the Trust Agreement. "Closing Date"means December_,2008. V.I "Corporation" means the Orange County Sanitation District Financing Corporation, a nonprofit public benefit corporation organized and existing under the laws of the State, and any successor thereto. "District" means the Orange County Sanitation District, a county sanitation district organized and existing under and by virtue of the laws of the State,and any successor thereto. "Event of Default"means an event described in Section 6.01 hereof. `„ "Installment Payments" means the Installment Payments required to be made by the District pursuant to Section 3.02 hereof. ,,, "Installment Payment Date"means each February 1,commencing February 1,2010. "Installment Purchase Agreement" means this Installment Purchase Agreement, dated ` as of December 1, 2008, by and between the District and the Corporation, as originally executed and as it may from time to time be amended or supplemented in accordance with the teens r hereof. "Interest Payment Date" means February I and August 1 of each year, commencing L February I,2009. "Master Agreement" means the Master Agreement for District Obligations, dated as of August 1, 2000, by and between the District and the Corporation, as originally executed and as it may from time to time be amended or supplemented in accordance with the terms thereof. 90340482.3 2 V Book Page 95 ,r "Person" means an individual, corporation, limited liability company, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof. "Principal Office" means the Trustee's principal corporate trust office in Los Angeles, California. "Project" means the improvements to the Wastewater System to be acquired, constructed and installed pursuant to this Installment Purchase Agreement, as described in ,y Exhibit A hereto. "Trust Agreement" means the Trust Agreement, dated as of December 1, 2008, by and ,r among the Trustee, the Corporation and the District, as originally executed and as it may from time to time be amended or supplemented in accordance with its terms. "Trustee" means Union Bank of California, N.A., a national banking association duly organized and existing under the laws of the United States of America, or any other bank or trust company which may at any time be substituted in its place as provided in the Trust Agreement. Section 1.02. Definitions in Master Agreement and Trust Agreement. Except as otherwise herein defined and unless the context otherwise requires, the terms defined in the r Master Agreement or the Trust Agreement shall for all purposes hereof and of any amendment hereof or supplement hereto and of any report or other document mentioned herein have the meanings defined therein, such definitions to be equally applicable to both the singular and plural forms of any of the terms defined therein. With respect to any defined term which is given a different meaning under this Installment Purchase Agreement than under the Master Agreement or the Trust Agreement, as used herein it shall have the meaning given herein. r ARTICLE H PURCHASE OF PROJECT BY,AND SALE THEREOF TO,THE CORPORATION; PAYMENT OF PURCHASE PRICE Section 2.01. Acquisition, Construction and Installation of the Project. The Corporation hereby agrees to cause the Project to be acquired, constructed and installed by the District, as agent of the Corporation. The District shall enter into contracts and provide for, as ,r agent of the Corporation, the complete acquisition, construction and installation of the Project. The District hereby agrees that it will cause the acquisition, construction and installation of the Project to be diligently performed. It is hereby expressly understood and agreed that, except to the extent of proceeds of the Certificates which are deposited in the Acquisition Fund, the Corporation shall be under no liability of any kind or character whatsoever for the payment of any Acquisition Costs. In the event the proceeds of the Certificates deposited in the Acquisition ,. Fund are insufficient to complete the acquisition, construction and installation of the Project, the District shall cause to be applied from and to the extent of other available District funds, an amount equal to that necessary to complete the acquisition, construction and installation of the Project. r 80340482.3 3 r Book Page 96 Section 2.02. Chanties to the Project. The District may make any changes in the composition and description of the Project or any component thereof whenever the District deems such changes to be necessary and appropriate; provided, however, that no such change shall impair the ability of the District to make the Installment Payments or cause to be included in the Project any property not constituting property useful in the performance of the District's powers, projects and purposes. Any such change shall be implemented by the District's filing with the Corporation and the Trustee a description of such change and, upon such filing, the description of the Project contained in Exhibit A shall be deemed to have been modified in accordance therewith. No such change shall constitute an amendment, change, modification or alteration of this Installment Purchase Agreement. Section 2.03. Payment of Purchase Price. On the Closing Date, the Corporation shall pay to the District, as the purchase price of the Project, the amount of $_,000,000, which "' amount shall be paid from the proceeds of the Certificates. ARTICLE III PURCHASE OF PROJECT BY,AND SALE THEREOF TO,THE DISTRICT; INSTALLMENT PAYMENTS - Section 3.01. Purchase and Sale of Project. The District hereby purchases from the Corporation, and the Corporation hereby sells to the District, the Project in accordance with the provisions of this Installment Purchase Agreement. All right, title and interest in and to the _ Project shall immediately vest in the District on the Closing Date without further action on the part of the District or the Corporation. Section 3.02. Installment Payments. The District shall, subject to any rights of prepayment provided in Article IV hereof,pay to the Corporation, solely from Net Revenues and from no other sources, the purchase price of the Project in Installment Payments, with interest _ thereon, as provided herein. The Installment Payments shall be in the aggregate principal amount of$ ,000,000, and shall be payable on the Business Day immediately preceding each of the Installment Payment Dates in the principal amounts and shall accrue interest at the rates per annum set forth in the following schedule: L V L L i V 80340483.3 4 L+ Book Page 97 r r Installment Payment Date (February I) Installment Payment Interest Rate r r r w r r The Installment Payments shall accrue interest from the Closing Date, at the rates set forth above, payable on the Interest Payment Dates in each year. Such interest shall accrue on the basis of a 360-day year consisting of twelve 30-day months. Each Installment Payment,and each payment of interest thereon, shall be deposited with the Trustee, as assignee of the Corporation, no later than the Business Day next preceding the Installment Payment Date or Interest Payment Date on which such Installment Payment or payment of interest is due, in lawful money of the United States of America, in immediately available funds. If and to the extent that, on any such date, there are amounts on deposit in the Installment Payment Fund established under the Trust Agreement, or in any of the accounts therein, which amounts are not being held for the payment of specific Certificates, such amounts shall be credited against the Installment Payment,or payment of interest thereon,as applicable,due on such date. r 803404823 5 r Book Page 98 i N Section 3.03. Reserve Fund Payments. The District shall maintain or cause to be maintained in the Reserve Fund established under the Trust Agreement an amount equal to the Reserve Requirement; provided, however, that any replenishment thereof shall be payable solely from Net Revenues. On or before the last Business Day of each month, commencing on or Wa before the last Business Day of each month during which an event occurs that causes the amount on deposit in the Reserve Fund to be reduced below, or further below,the Reserve Requirement, ! the District shall transfer, from Net Revenues, to the Trustee for deposit in the Reserve Fund, 1/12 of the amount of such reduction, except that no such transfer to the Trustee and deposit in the Reserve Fund need be made if the amount available and contained therein is at least equal to the Reserve Requirement. " Section 3.04. Obligation Absolute. The obligation of the District to make the Installment Payments, and payments of interest thereon,and other payments required to be made by it under this Article, solely from Net Revenues, is absolute and unconditional, and until such time as the Installment Payments, payments of interest thereon, and such other payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to Article IV), the District shall not discontinue or suspend any Installment Payments, or payments of interest thereon, or other payments required to be made by it hereunder when due, whether or not the Project or any part thereof is operating or operable or has been completed, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such Installment Payments, payments of interest thereon, and other payments shall not be subject to V reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. - Section 3.05. Nature of Agreement. This Installment Purchase Agreement constitutes a Senior Obligation and, as such, shall be subject to the provisions of the Master Agreement and shall be afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. ARTICLE IV V PREPAYMENT OF INSTALLMENT PAYMENTS; DISCHARGE - Section 4.01. Prepayment of Installment Payments. (a) Installment Payments shall be subject to prepayment prior to their respective Installment Payment Dates, at the option of, and in the amounts directed by, the District, from any source of available funds, in whole or in part (in an amount equal to $5,000 or an integral multiple thereof) on any date on or after August I, 2018, at the principal amount thereof and accrued interest thereon to the date fixed for prepayment,without premium. (b) The District may prepay, from any source of available funds, all or any portion of the Installment Payments by depositing with the Trustee moneys or securities as provided, and subject to the tems and conditions set forth, in Article X of the Trust Agreement sufficient to pay ` such Installment Payments, and the interest thereon, when due or to pay such Installment Payments, and the interest thereon, through a specified date on which the District has a right to 16� prepay such Installment Payments pursuant to subsection(a) of this Section, and to prepay such 80340482.3 6 La Book Page 99 r Installment Payments on such prepayment date, at a prepayment price determined in accordance with subsection(a)of this Section. ,y (c) If less than all of the Installment Payments are prepaid pursuant to this Section then,as of the date of such prepayment pursuant to subsection (a) of this Section, or the date of a deposit pursuant to subsection (b) of this Section, the schedule of Installment Payments shall be recalculated in order to take such prepayment into account. (d) Prepayments of Installment Payments made pursuant to this Section shall be applied to the prepayment of Certificates as provided in Section 4.01 of the Trust Agreement. Section 4.02. Notice. The District shall give written notice to the Trustee specifying the ,r date on which the prepayment will be made prior to making any prepayment pursuant to this Article, which date shall be not less than 30 nor more than 60 days from the date such notice is given to the Trustee, unless such time period shall be waived by the Trustee. r Section 4.03. Discharge of Obligations. If all Installment Payments, and the interest thereon, shall be paid as and when due in accordance with the terms hereof, or prepaid in accordance with Section 4.01 hereof, and if all Certificates shall be fully paid, or provision therefor made in accordance with Article X of the Trust Agreement, and the Trust Agreement shall be discharged by its terms, then all agreements, covenants and other obligations of the District hereunder shall thereupon cease, terminate and become void and be discharged and satisfied. ,r ARTICLE V COVENANTS r Section 5.01. Compliance with Master Agreement. The District will faithfully observe and perform all the agreements, conditions,covenants and terms contained in the Master „y Agreement required to be observed and performed by it and will not cause, suffer or permit any default to occur thereunder. Section 5.02. Compliance with Installment Purchase Agreement. The District will punctually pay the Installment Payments,and interest thereon, and other payments required to be made by it hereunder in strict conformity with the terms hereof, and will faithfully observe and ,y perform all the agreements, conditions, covenants and terms contained herein required to be observed and performed by it, will not cause, suffer or permit any default to occur hereunder and will not terminate this Installment Purchase Agreement for any cause including, without limiting r the generality of the foregoing, any acts or circumstances that may constitute failure of consideration, destruction of or damage to the Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State or any political r subdivision of either or any failure of the Corporation to observe or perform any agreement, condition, covenant or term contained herein required to be observed and performed by it, whether express or implied, or any duty, liability or obligation arising out of or connected �. herewith or the insolvency, or deemed insolvency, or bankruptcy or liquidation of the Corporation or any force majeure, including acts of God, tempest, storm, earthquake, war, r 80340482.3 7 r Book Page 100 i V rebellion, riot, civil disorder, acts of public enemies, blockade or embargo, strikes, industrial disputes, lock outs, lack of transportation facilities, fire, explosion, or acts or regulations of governmental authorities. Section 5.03. Protection of Security and Rights. The District will preserve and protect the security hereof and the rights of the Trustee, as assignee of the Corporation, to the Installment Payments, and interest thereon, and other payments required to be made by the W District hereunder and will warrant and defend such rights against all claims and demands of all Persons. u Section 5.04. Indemnification of Corporation. To the extent permitted by law, the _ District hereby agrees to indemnify and hold the Corporation and its members and officers L harmless against any and all liabilities which might arise out of or are related to the Project, this Installment Purchase Agreement or the Certificates, and the District further agrees to defend the Corporation and its members and officers in any action arising out of or related to the Project, this Installment Purchase Agreement or the Certificates. Section 5.05. Further Assurances. The District will adopt, deliver, execute and make any and all further assurances, instruments and resolutions as may be reasonably necessary or LW proper to carry out the intention or to facilitate the performance hereof and for the better assuring _ and confirming unto the Corporation, or unto the Trustee, as assignee of the Corporation, the rights and benefits provided herein to the Corporation, or to the Trustee, as assignee of the 6W Corporation. ARTICLE VI 6. EVENTS OF DEFAULT AND REMEDIES OF THE CORPORATION Section 6.01. Events of Default. The following shall be Events of Default under this Installment Purchase Agreement, and "Event of Default" shall mean any one or more of the following events: (a) if default shall be made by the District in the due and punctual payment of or on account of any Senior Obligation as the same shall become due and payable; (b) if default shall be made by the District in the performance of any of the agreements or covenants required herein, in the Trust Agreement or in the Master Agreement to L. be performed by it (other than as specified in (a) above), and such default shall have continued _ for a period of 30 days after the District shall have been given notice in writing of such default by the Corporation or the Trustee; provided, however,that the party or parties giving such notice �+ may agree in writing to a reasonable extension of such period prior to the expiration of such 30 _ day period and, provided further, that if the District shall proceed to take curative action which, if begun and prosecuted with due diligence, cannot be completed within such a period of 30 days, then such period shall be increased without such written extension to such extent as shall be necessary to enable the District to diligently complete such curative action and such default shall not become an Event of Default for so long as shall be necessary to diligently complete I•� such curative action;or i Yr 80340483.3 g v Book Page 101 ,r (c) if the District shall file a petition or answer seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction shall approve a petition filed with or .. without the consent of the District seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the provisions of any other law for the relief or aid of debtors any court of competent jurisdiction shall assume custody or control of the District or of the whole or any substantial part of its property. Section 6.02. Remedies on Default. Upon the occurrence of an Event of Default, the Trustee,as assignee of the Corporation,shall have the right: (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the District and to compel the District to perform and carry out its duties under applicable law and the agreements and covenants required to be performed herein; ww (b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Trustee,as assignee of the Corporation; r (c) by suit in equity require the District to account as the trustee of an express trust; and to have a receiver or receivers appointed for the Wastewater System and of the issues, earnings, income, products and profits thereof, pending such proceedings, with such powers as the court making such appointment shall confer. Section 6.03. Non-Waiver. Nothing in this Article or in any other provision hereof shall affect or impair the obligation of the District, which is absolute and unconditional, to pay the Installment Payments, and the interest thereon, to the Trustee,as assignee of the Corporation, at the respective due dates from the Net Revenues and the other funds herein committed for such payment, or shall affect or impair the right of the Trustee, as assignee of the Corporation, which is also absolute and unconditional, to institute suit to enforce such payment by virtue of the „+ contract embodied herein. A waiver of any default or breach of duty or contract by the Trustee, as assignee of the Corporation, shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Trustee, as assignee of the Corporation,to exercise any right or remedy accruing ,. upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein,and every right or remedy conferred upon the Trustee,as assignee of the Corporation,by r applicable law or by this Article may be enforced and exercised from time to time and as often as shall be deemed expedient by the Trustee,as assignee of the Corporation. If any action,proceeding or suit to enforce any right or exercise any remedy is abandoned or determined adversely to the Trustee, as assignee of the Corporation, the District and the Trustee, as assignee of the Corporation, shall be restored to their former positions, rights and ., remedies as if such action,proceeding or suit had not been brought or taken. r 80340482.3 9 r Book Page 102 L Section 6.04. Remedies Not Exclusive. No remedy herein conferred upon or reserved �+ to the Trustee, as assignee of the Corporation, is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity or by statute or otherwise and may be u exercised without exhausting and without regard to any other remedy conferred by law. ARTICLE VII V` AMENDMENTS r Section 7.01. Amendments. (a) This Installment Purchase Agreement and the rights and obligations of the District, the Corporation and the Trustee, as assignee of the Corporation, may be amended or modified from time to time and at any time by a written amendment hereto executed by the District, the Corporation and the Trustee, as assignee of the Corporation, with _ the written consent of the Owners of a majority of the aggregate principal evidenced by Certificates then Outstanding. No such amendment shall (i) extend the payment date of any Installment Payment or reduce the amount of any Installment Payment, or the interest rate applicable thereto,without the prior written consent of the Owner of each affected Certificate,or (ii) reduce the percentage of Owners of the Certificates whose consent is required to effect any �u such amendment or modification, without the prior written consent of the Owners of all _ Certificates then Outstanding. V (b) This Installment Purchase Agreement and the rights and obligations of the District, the Corporation and the Trustee, as assignee of the Corporation, may be amended or modified from time to time and at any time by a written amendment hereto executed by the District, the Corporation and the Trustee, as assignee of the Corporation, without the written consents of any Owners of the Certificates, but only to the extent permitted by law and only for any one or more of the following purposes: (i) to add to the agreements, conditions, covenants and terms required by the District, the Corporation or the Trustee, as assignee of the Corporation, to be observed or performed herein other agreements, conditions, covenants and terms thereafter to be observed or performed by the District,the Corporation or the Trustee,as assignee of the Corporation, or to surrender any right or power reserved herein to or conferred herein on the District, the Corporation or the Trustee,as assignee of the Corporation; (ii) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained herein or in - regard to questions arising hereunder which the District,the Corporation or the Trustee, as assignee of the Corporation, may deem desirable or necessary and not inconsistent it herewith; - (iii) to make such additions, deletions or modifications as may be necessary or k' appropriate to assure the exclusion from gross income for federal income tax purposes of interest on the Installment Payments;and V 80340482.3 10 u Book Page 103 r r (iv) to make such other changes herein or modifications hereto as the District, the Corporation or the Trustee, as assignee of the Corporation, may deem desirable or necessary, and which shall not materially adversely affect the interests of the Owners of the Certificates. ARTICLE VIII MISCELLANEOUS Section 8.01. Liability of District Limited. Notwithstanding anything contained herein to the contrary,the District shall not be required to advance any moneys derived from any source of income other than Net Revenues and the other funds provided herein for the payment of the Installment Payments, and the interest thereon, and other payments required to be made by it hereunder,or for the performance of any agreements or covenants required to be performed by it contained herein. The District may, however, but in no event shall be obligated to, advance ,. moneys for any such purpose so long as such moneys are derived from a source legally available for such purpose and may be legally used by the District for such purpose. ,. The obligation of the District to pay the Installment Payments, and the interest thereon, and other payments required to be made by it hereunder is a special obligation of the District payable, in the manner provided herein, solely from Net Revenues and other funds provided for r herein, and does not constitute a debt of the District or of the State, or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. Neither the faith and credit nor the taxing power of the District or the State, or any r political subdivision thereof, is pledged to the payment of the Installment Payments, or the interest thereon,or other payments required to be made hereunder. r Section 8.02. Limitation of Rights. Nothing in this Installment Purchase Agreement expressed or implied is intended or shall be construed to give to any Person other than the District, the Corporation and the Trustee, as assignee of the Corporation, any legal or equitable r right, remedy or claim under or in respect of this Installment Purchase Agreement or any covenant, condition or provision therein or herein contained, and all such covenants, conditions and provisions are and shall be held to be for the sole and exclusive benefit of the District, the r Corporation and the Trustee,as assignee of the Corporation. Section 8.03. Assignment. The District and the Corporation hereby acknowledge the ,. transfer, conveyance and assignment by the Corporation to the Trustee of all of the Corporation's rights, title and interest in and to this Installment Purchase Agreement (excepting its rights to indemnification hereunder), including the right to receive Installment Payments, and the interest r thereon, from the District,pursuant to the Trust Agreement. Section 8.04. Notices. Any written notice, statement, demand, consent, approval, . authorization, offer, designation, request or other communication to be given hereunder shall be given to the party entitled thereto at its address set forth below, or at such other address as such party may provide to the other parties in writing from time to time,namely: r 80340482.3 (I r Book Page 104 If to the District: Orange County Sanitation District u 10844 Ellis Avenue Fountain Valley,California 92708 Attention: Director of Finance and Administrative Services u If to the Corporation: Orange County Sanitation District Financing Corporation c/o Orange County Sanitation District 10844 Ellis Avenue Fountain Valley, California 92708 Attention: Treasurer If to the Trustee: Union Bank of California,N.A. �. 120 South San Pedro Street, Suite 400 _ Los Angeles,California 90012 Attention: Corporate Trust Department Each such notice, statement,demand, consent, approval,authorization,offer, designation, request or other communication hereunder shall be deemed delivered to the party to whom it is addressed (a) if personally served or delivered, upon delivery, (b) if given by electronic communication, whether by telex, telegram or telecopier, upon the sender's receipt of an appropriate answerback or other written acknowledgment, (c) if given by registered or certified W mail, return receipt requested, deposited with the United States mail postage prepaid, 72 hours _ after such notice is deposited with the United States mail, (d) if given by overnight courier, with courier charges prepaid, 24 hours after delivery to said overnight courier, or (e) if given by any other means, upon delivery at the address specified in this Section. Section 8.05. Successor Is Deemed Included in all References to Predecessor. �+ Whenever the District or the Corporation is named or referred to herein, such reference shall be _ deemed to include the successor to the powers, duties and functions that are presently vested in the District or the Corporation, and all agreements and covenants required hereby to be r' performed by or on behalf of the District or the Corporation shall bind and inure to the benefit of the respective successors thereof whether so expressed or not. 1� Section 8.06. Waiver of Personal Liability. No official, officer or employee of the _ District shall be individually or personally liable for the payment of the Installment Payments,or the interest thereon, or other payments required to be made by the District hereunder, but nothing contained herein shall relieve any official, officer or employee of the District from the performance of any official duty provided by any applicable provisions of law or hereby. u Section 8.07. Article and Section Headings. Gender and References. The headings or titles of the several Articles and Sections hereof and the table of contents appended hereto shall be solely for convenience of reference and shall not affect the meaning, construction or effect hereof, and words of any gender shall be deemed and construed to include all genders. All . . references herein to "Articles;' "Sections" and other subsections or clauses are to the corresponding articles, sections, subsections or clauses hereof, and the words"hereby,""herein," "hereof," "hereto," "herewith" and other words of similar import refer to this Installment _ Purchase Agreement as a whole and not to any particular Article, Section, subdivision or clause L hereof. 80340482.3 12 V Book Page 105 r r Section 8.08. Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required hereby to be performed by or on the part of the District or the Corporation shall be contrary to law, then such agreement or agreements, such covenant or r covenants or such portions thereof shall be null and void and shall be deemed separable from the remaining agreements and covenants and portions thereof and shall in no way affect the validity hereof. r Section 8.09. Governing Law. This Installment Purchase Agreement shall be construed and governed and construed in accordance with the laws of the State. Section 8.10. Execution in Counterparts. This Installment Purchase Agreement may be executed in several counterparts, each of which shall be deemed an original, and all of which shall constitute but one and the same instrument. r r r r r r r 803404923 13 Book Page 106 i v IN WITNESS WHEREOF, the parties hereto have executed this Installment Purchase Agreement by their officers thereunto duly authorized as of the day and year first written above. ORANGE COUNTY SANITATION DISTRICT y By: Chair of the Board of Directors (SEAL) i Attest: 6. By: Clerk of the Board of Directors W ORANGE COUNTY SANITATION - DISTRICT FINANCING CORPORATION By: Treasurer Y� 61 V u 4 y iW 80340482.3 14 v Book Page 107 r r EXHIBIT A DESCRIPTION OF PROJECT r The Project is consists of the acquisition, construction and installation of certain improvements to the Wastewater System, including the following Project components: r r r r r r r r r r ROMD4623 A-1 Book Page 108 r r Fulbright&Jaworski L.L.P.—Draft 10/31/08 r CONTINUING DISCLOSURE AGREEMENT r by and between r ORANGE COUNTY SANITATION DISTRICT r r and r DIGITAL ASSURANCE CERTIFICATION LLC, as Dissemination Agent r Dated as of December 1, 2008 r Relating to S .000,000 ,+ Orange County Sanitation District Certificates of Participation Series 2008C r r 8034N973 Book Page 109 r I r CONTINUING DISCLOSURE AGREEMENT THIS CONTINUING DISCLOSURE AGREEMENT (this "Disclosure Agreement"), dated as of December 1, 2008, is by and between the ORANGE COUNTY SANITATION DISTRICT, a county sanitation district organized and existing under the laws of the State of California (the "District"), and DIGITAL ASSURANCE CERTIFICATION LLC, as Dissemination Agent(the "Dissemination Agent"). WITNESSETH: r WHEREAS, the District has caused to be executed and delivered Orange County Sanitation District Certificates of Participation, Series 2008C (the "Certificates"), evidencing r principal in the aggregate amount of$ ,000,000, pursuant to a Trust Agreement, dated as of the date hereof (the "Trust Agreement"), by and among Union Bank of California, N.A., as trustee (the "Trustee"), the Orange County Sanitation District Financing Corporation (the "Corporation") and the District;and WHEREAS, this Disclosure Agreement is being executed and delivered by the District r and the Dissemination Agent for the benefit of the owners and beneficial owners of the Certificates and in order to assist the underwriters of the Certificates in complying with the Rule (as defined herein); r NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained,the parties hereto agree as follows: r Section 1. Definitions. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Trust Agreement or, if not defined therein, in the Master r Agreement, dated as of August 1, 2000, by and between the District and the Corporation. In addition,the following capitalized terms shall have the following meanings: r "Annual Report" means any Annual Report provided by the District pursuant to, and as described in, Sections 2 and 3 hereof. r "Annual Report Date" means the date in each year that is eight months after the end of the District's fiscal year, which date, as of the date of this Disclosure Certificate, is March 1. r "Disclosure Representative" means the Director of Finance and Administrative Services of the District, or such other officer or employee of the District as the District shall designate in writing to the Dissemination Agent and the Trustee from time to time. r "Dissemination Agent" means an entity selected and retained by the District, or any successor thereto selected by the District. The initial Dissemination Agent shall be Digital r Assurance Certification LLC. "Listed Events"means any of the events listed in subsection(a)of Section 4 hereof r r 80340497.3 1 Book Page 110 L "National Repository" means any Nationally Recognized Municipal Securities L+ Information Repository for purposes of the Rule. As of the date hereof, the National Repositories approved by the Securities and Exchange Commission are identified at http://www.sec.gov/info/municipal/nrmsir.htm. "Official Statement" means the Official Statement, dated December _, 2008, relating to the Certificates. �+ "Participating Underwriter" means any of the original underwriters of the Certificates required to comply with the Rule in connection with the offering of the Certificates. "Repository" means each National Repository and each State Repository. Y. "Rule" means Rule 15c2-12 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934,as the same may he amended from time to time. L "State Repository" means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized by the Securities and Exchange Commission. As of the date of this Disclosure Agreement, there is no W State Repository. Section 2. Provision of Annual Reports. (a) The District shall provide, annually, L an electronic copy of the Annual Report to the Dissemination Agent,together with a copy for the Trustee, not later than 15 days prior to the Annual Report Date. Promptly upon receipt of an electronic copy of the Annual Report, the Dissemination Agent shall provide an Annual Report �6„ to each National Repository and the State Depository(if any)not later than March 1 after the end of each fiscal year of the District, commencing with the fiscal year ending June 30, 2009. The Annual Report may be submitted as a single document or as separate documents comprising a L package, and may cross reference other information as provided in Section 3 of this Disclosure Agreement. If the District's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under subsection(t)of Section 4 hereof. �+ (b) If on the fifteenth (15th) day prior to the Annual Report Date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the 6. Disclosure Representative by telephone and in writing (which may be by e-mail) to remind the District of its undertaking to provide the Annual Report pursuant to Section 2(a). y (c) If the Dissemination Agent has not received an Annual Report by 12:00 noon on the first business day following the Annual Report Date for the Annual Report, the District irrevocably directs the Dissemination Agent to immediately send a notice to each National it Repository or the MSRB and the State Depository (if any) in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall: (i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and each State Repository, if any; and u 80340497.3 2 i✓ Book Page I I I r (ii) file a report with the District and (if the Dissemination Agent is not the Trustee) the Trustee certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided. Section 3. Content of Annual Reports. The District's Annual Report shall contain or incorporate by reference the following: (a) Audited financial statements prepared in accordance with generally accepted r accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the District's audited financial statements are not available by the time the Annual Report is required to be filed pursuant to subsection (a) of r Section 2 hereof, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. r (b) The following information with respect to the Certificates: r (i) The principal evidenced by the Certificates Outstanding as of the January 1 next preceding the Annual Report Date and the principal amount of other Senior Obligations outstanding as of the January 1 next preceding the Annual Report Date. r (ii) The balance in the Reserve Fund, and a statement of the Reserve Requirement,as of the January I next preceding the Annual Report Date. (c) A summary report showing in reasonable detail Revenues, Operating Revenues, Maintenance and Operation Costs,Net Revenues,Net Operating Revenues and debt service with r respect to the Senior Obligations for the fiscal year ended the June 30 next preceding the Annual Report Date. r (d) An update, for the fiscal year ended the June 30 next preceding the Annual Report Date, of the information contained in the Official Statement in Table Nos. 2, 4, 6 (only with respect to information on Table No. 6 under the headings Fiscal Year and Sewer Service r Charge), 8 (not to include projections), 9, 10, 11, 12, 13, 14 and 16. (a) In addition to any of the information expressly required to be provided under subsections (a), (b), (c) and (d) of this Section, the District shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading. r Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities, r which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The District shall clearly identify r each such other document so included by reference. r 80340497.3 3 r Book Page 112 u Section 4. Reporting of Significant Events. (a) Pursuant to the provisions of this Section, the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates,if material: V (1) Principal and interest payment delinquencies. (2) Non-payment related defaults. L (3) Unscheduled draws on debt service reserves reflecting financial difficulties. (4) Unscheduled draws on credit enhancements reflecting financial difficulties. r (5) Substitution of credit or liquidity providers, or their failure to perform. (6) Adverse tax opinions or events affecting the tax-exempt status of the security. w (7) Modifications to rights of security holders. - (8) Contingent or unscheduled Certificate calls. y (9) Defeasances. V (10) Release, substitution,or sale of property securing repayment of the - securities. L+ (11) Rating changes. (b) The District shall, within one business day of obtaining actual knowledge of the u occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and request that the District promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to subsection(f)of this Section. (c) Whenever the District obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Dissemination Agent pursuant to subsection (b) of this ice' Section or otherwise, the District shall as soon as possible determine if such event would be material under applicable Federal securities law. v (d) If the District has determined that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the District shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection(f)of this Section. (e) If in response to a request under subsection (b) of this Section, the District 4. determines that the Listed Event would not be material under applicable Federal securities law, _ 80340497.3 4 Yr Book Page 113 r r the District shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection(f)of this Section. (f) If the Dissemination Agent has been instructed by the District to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the Municipal Securities Rulemaking Board and each Repository. Notwithstanding the r foregoing, notice of Listed Events described in paragraphs (8) and (9) of subsection (a) of this Section need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Certificates pursuant to the Trust Agreement. Section 5. Electronic Filing. Submission of Annual Reports and notices of Listed Events to DisclosureUSA.org or another "Central Post Office" designated and accepted by the Securities and Exchange Commission shall constitute compliance with the requirement of filing such reports and notices with each Repository hereunder, and the District may satisfy its obligations hereunder to file any notice,document or information with a Repository by filing the r same with any dissemination agent or conduit, including DisclosureUSA.org or another"Central Post Office" or similar entity, assuming or charged with responsibility for accepting notices, documents or information for transmission to such Repository, to the extent permitted by the r Securities and Exchange Commission or Securities and Exchange Commission staff or required by the Securities and Exchange Commission. For this purpose, permission shall be deemed to have been granted by the Securities and Exchange Commission staff if and to the extent the r agent or conduit has received an interpretive letter, which has not been revoked, from the Securities and Exchange Commission staff to the effect that using the agent or conduit to transmit information to the Repository will be treated for purposes of the Rule as if such r information were transmitted directly to the Repository. Section 6. Termination of Reporting Obligation. The District's obligations under -� this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates, the District shall give notice of such termination in the same manner as for a �+ Listed Event under subsection(0 of Section 4 hereof. Section 7. Dissemination Agent. The District may, from time to time, appoint or r engage another Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. If at any time there is not any other designated r Dissemination Agent, the Trustee shall be the Dissemination Agent; provided it shall receive written notice of such designation at the time of such designation. Section 8. Amendment, Waiver. Notwithstanding any other provision of this Disclosure Agreement, the District and the Dissemination Agent may amend this Disclosure Agreement (and the Dissemination Agent shall agree to any amendment so requested by the r District), and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied: r (a) if the amendment or waiver relates to the provisions of subsection (a)of Section 2 hereof, Section 3 hereof or subsection(a)of Section 4 hereof, it may only be made in connection r 9e34M97.3 5 r Book Page 114 with a change in circumstances that arises from a change in legal requirements,change in law,or change in the identity, nature or status of an obligated person with respect to the Certificates, or type of business conducted; V (b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Certificates, after taking into account any amendments �+ or interpretations of the Rule,as well as any change in circumstances;and _ (c) the proposed amendment or waiver (i) is approved by holders of the Certificates r in the manner provided in the Trust Agreement for amendments to the Trust Agreement with the consent of holders, or (ii) does not, in the opinion of the Trustee and nationally recognized bond counsel,materially impair the interests of holders. �+ If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the annual financial information containing the .+ amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. w If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements,the annual financial information for the year in which Lr the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the i former accounting principles. The comparison shall include a qualitative discussion of the W differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to investors to enable them to evaluate the ability of the District to meet its obligations. To the extent �+ reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories. w Section 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, _ in addition to that which is required by this Disclosure Agreement. If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in 6W addition to that which is specifically required by this Disclosure Agreement, the District shall _. have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 10. Default. In the event of a failure of the District or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Trustee may (and, at the written direction of any Participating Underwriter or the holders of at least 25%of the aggregate amount of principal evidenced by Outstanding Certificates and upon being indemnified to its reasonable satisfaction, shall), or any holder or beneficial owner of the Certificates may, take such actions as may be necessary and appropriate, including seeking mandate or specific W 80340497.3 6 I V Book Page 115 r r performance by court order,to cause the District,Trustee or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Trust Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of the District, the Trustee or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. Section 11. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. Article VIII of the Trust Agreement is hereby made applicable to this Disclosure r Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Trust Agreement. Neither the Trustee nor the Dissemination Agent shall be responsible for the form or content of any Annual Report or notice of Listed Event. The Dissemination Agent shall receive ++ reasonable compensation for its services provided under this Disclosure Agreement. The Dissemination Agent (if other than the Trustee or the Trustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and r the District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the r costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates. Section 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit �+ of the District, the Trustee, the Dissemination Agent, the Participating Underwriter and holders and beneficial owners from time to time of the Certificates,and shall create no rights in any other person or entity. r Section 13. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the �+ same instrument. r r r 803404973 Book Page 116 IN WITNESS WHEREOF,the parties hereto have executed this Disclosure Agreement v as of the date first above written. ORANGE COUNTY SANITATION DISTRICT �+ ti By: Lorenzo Tyner Director of Finance and Administrative Services DIGITAL ASSURANCE CERTIFICATION LLC, as Dissemination Agent r By: y Authorized Representative Acknowledged and Accepted: UNION BANK OF CALIFORNIA, N.A., as Trustee W By: Authorized Officer y W v V V1 Lry 80404973 8 V Book Page 117 r EXHIBIT A NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT _ Name of Issuer: Orange County Sanitation District Name of Issue: Orange County Sanitation District Certificates of Participation, Series 2008C r Date of Issuance: ,2008 NOTICE IS HEREBY GIVEN that the Orange County Sanitation District(the"District') has not provided an Annual Report with respect to the above-named Certificates as required by Section 6.09 of the Trust Agreement, dated as of December 1, 2008, by and among Union Bank of California,N.A.,as Trustee,the Orange County Sanitation District Financing Corporation and the District. [The District anticipates that the Annual Report will be filed by .] r Dated: ORANGE COUNTY SANITATION DISTRICT r By: cc: Trustee Dissemination Agent r r r r r SOM0497.3 Book Page 1 18 Fulbright& Jaworski L.L.P.-Draft 11/5/08 r PRELIMINARY OFFICIAL STATEMENT DATED NOVEMBER ,2008 g5 r w� NEW ISSUE—BOOK-ENTRY-ONLY RATINGS: S&P: _ u 9 Pireh. 4 0 0 (See"RATINGS"herein.) In the opinion of Fulbright& Jaworski L.L.P., Los Angeles, California, Special Co msel, under existing S Imp the Interest Component of each Installment Payment, and the allocable portion thereof distributable in respect c of any Certificate, is exempt from personal income tares of the State of California and, amaming compliance with the tar covenants described herein, Me Interest Component of each Installment Payment and the allocable portion thereof distributable in respect of any Certificate, is excluded pursuant to section 103(a) of the Internal Revenue g Code of 1986 (the "Code")from the gross income of the owners thereoffor federal income tax purposes and is nm r ..tc an item of tar preference under section 57(a)of the Cade for purposes of the federal ahernmtve minimum tax. See go "TAXMATTERS"herein. (District Logo( $_,000,000- JDAC Logo( r 2, ORANGE COUNTY SANITATION DISTRICT 8.5 CERTIFICATES OF PARTICIPATION,SERIES 2008C b: € r :g Dated: Date of Delivery Due: February 1,as shown below £ The $ ,000,000- Orange County Sanitation District Certificates of Participation, Series 2008C (the v` 6 "Certificates")evidence direct,fractional undivided interests of the Owners thereof in the instillment payments(the r ` 5 -Installment Payments"), and the interest thereon, to be made by the Orange County Sanitation District (the h.= "District") pursuant to the Installment Purchase Agreement, dated w of December I, 2008 (the 'Installment "O Purchase Agreement"), by and between the District and the Orange Cowry Sanitation District Financing . 5 ,r $ Corporation(the"Corporation"). Pursuant to the Master Agreement for District Obligations,dated as of August 1, cv 2000 (the "Master Agreement"), by and between the District and the Corporation, the District has established o= conditions and terms upon which obligations such as the Installment Payments and the interest thereon, will be a incurred and secured. Installment Payments under the Installment Purchase Agreement are payable solely from Net Revenues (as more fully described in the Master Agreement, the "Net Revenues")as provided in the Installment Purchase Agreement, consisting primarily of all income and revenue received by the District from the operation or ownership of the wastewater System of the District (the "Wastewater System") remaining after payment of Maintenance and Operation Costs,as further described in"SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES"herein. The Installment Purchase Agreement provides that the obligation of the District to pay c a the Installment Payments, and payments of interest thereon, and certain other payments required to be made in L accordance with the Installment Purchase Agreement.solely from Net Revenues,is absolute and unconditional. See r � 3 "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES"herein €'o The proceeds of the Certificates will be used to(i)finance certain improvements to the Wastewater System, r a (it)fund a reserve fund for the Certificates and (III)pay the costs incurred in connection with the execution and o delivery of the Certificates. See"PLAN OF FINANCE"herein. en `o`o Interest evidenced by the Certificates will be payable semiannually on Febmary 1 and August 1 of each 4;o- year, commencing on February 1, 2009. See "TIE CERTIFICATES" herein. The Certificates initially will be 9.9 delivered only in book-entry form and will be registered in the name of Cede&Co.,w nominee of The Depository e Trust Company, New York, New York: ("DTC"), which will act as securities depository for the Certificates. r E Individual purchases of the Certificates will be made in book-entry form only. Purchasers of Certificates will not j? receive physical certificates representing their ownership interests in the Certificates purchased. The Certificates ° will be delivered in denominations of$5.000 and any integral multiple thereof. Payments of principal and interest E o evidenced by the Certificates are payable directly to OTC by Union Bank of California, N.A., as trustee (the r 02 "Trostee"). Upon receipt of payments of such principal and interest, OTC will in turn distribute such payments to C the beneficial owners of the Certificates. See APPENDIX E—"BOOK-ENTRY SYSTEM"herein. � o r �c 6.� Preliminary,subject to change. r 80336611.6 r Book Page 1 19 L THE OBLIGATION OF THE DISTRICT TO PAY THE INSTALLMENT PAYMENTS, AND THE INTEREST THEREON, AND OTHER PAYMENTS REQUIRED TO BE MADE BY IT TINDER THE tt INSTALLMENT PURCHASE AGREEMENT IS A SPECIAL OBLIGATION OF THE DISTRICT PAYABLE, IN THE MANNER PROVIDED IN THE INSTALLMENT PURCHASE AGREEMENT, SOLELY FROM NET REVENUES AND OTHER FUNDS PROVIDED FOR IN THE INSTALLMENT PURCHASE AGREEMENT,AND DOES NOT CONSTITUTE A DEBT OF THE DISTRICT OR OF THE L STATE OF CALIFORNIA,OR OF ANY POLITICAL SUBDIVISION THEREOF,IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF CALIFORNIA, OR ANY jr POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE INSTALLMENT PAYMENTS, OR THE INTEREST THEREON, OR OTHER PAYMENTS REQUIRED TO BE MADE UNDER THE INSTALLMENT PURCHASE AGREEMENT. SEE 'SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES"HEREIN. Tltis cover page contains infomtaton intended for quick reference only. It is not a summary of this issue. Investors most read the entire Official Statement to obtain information essential to making an informed investment decision. BIDS FOR THE PURCHASE OF THE CERTIFICATES WILL BE RECEIVED BY THE DISTRICT UNTIL L+ 10:30 A.M.NEW YORK TIME ON DECEMBER 3,2008 UNLESS POSTPONED OR CANCELLED AS SET FORTH IN THE OFFICIAL NOTICE INVITING BIDS The Ceraficatea are offered when, as and if executed and delivered and received by y as the Initial Purchaser, subject to the approval of Fulbright& Jmvorski L.LP., Las Angeles, Calijomia, Special Counsel to the District,and certain other conditions Certain legal minters will be passed upon jor the District and the Corporation by Woodruff,' Spradlin & Smart, a Professional Corporation, Costa Mesa, California Public Resources Advisory Group,Los Angeles, California has served as financial advisor to the District in connection with the execution and delivery ofthe Certificates. It is anticipated that the Cert fcates in defndivejorm will be avadablejor delivery through the book-entry facilities afDTC an or about December 2008. y Dated: December ,2008 L. v r v u Y+ L B0336611.6 he Book Page 120 r r r MATURITY SCHEDULE Maturity Principal Interest Price or CUSIP (February 1) Amount Rate Yield (68A281t) r r r r r r r r r r t CUSIP numbers herein are provided by Standard & Poor's CUSIP Service Bureau and are for convenience of `a reference only. The District does not assume any responsibility for the accuracy of such numbers. CUSIP® is a registered trademark of the American Bankers Association. Copyright® 1999-2008 Standard&Poor's, a Division of The McGraw-Hill Companies,Inc. All rights reserved. r 90336611.6 Book Page 121 u u u u u u u u u u u u u u u u SM6611.6 Book Page 122 r ORANGE COUNTY SANITATION DISTRICT Board of Directors r Doug Davert(Chair)— Tustin Larry Crandall—(Vice Chair)—Fountain Va/fey Harry Sidhu—Anaheim Jon Dumitru—Orange Roy Moore—Brew Constance Underhill—Placentia Patsy Marshall—Buena Park Sal Tinajero—Santa Ana r Phil Luebben—Cypress Charles Antos—Seal Beach Don Bankhead—Fullerton David Shawver—Stanton Bill Dalton—Garden Grove Brad Reese— Vi/la Park r Don Hansen—Huntington Beach Jim Winder— Yorba Linda Christina Shea—Irvine James Ferryman—Costa Mesa Sanitary District Rose Espinoza—La Habra Darryl Miller—Irvine Ranch Water District Mark Waldman—La Palma Joy L.Neugebsuer—Midway Ciry Sanitary District Ken Parker—Los Alamitos Chris Norby—Member of the Orange Count' Don Webb—Newport Beach Board of Supervisors Executive Manneement of the District r James D. Ruth,General Manager Robert P.Ghirelli, Ph.D.,Assistant General Manager r Lorenzo Tyner,Director of Finance and Administrative Services James Herberg,Director of Engineering Ed Torres,Director of Technical Services Nick Arhontes,Director of Operations& Maintenance r Special Services Special Counsel and Disclosure Counsel Fulbright&Jaworski L.L.P. Los Angeles,California r District General Counsel Bradley R. Hogin Woodruff,Spradlin&Smart,a Professional Corporation Costa Mesa,California r Financial Advisor Public Resources Advisory Group ,r Los Angeles,California Trustee Union Bank of California,N.A. r Los Angeles,California r 90336611.6 Book Page 123 V L This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Certificates by any person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. The information set forth herein has been provided by L the District and other sources that are believed by the District to be reliable. No dealer, broker, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Official Statement. If given or made, such other information or representations must not be relied upon as having been authorized by the District, the Corporation or the Initial Purchaser in connection with any reoffering. This Official Statement is not to be construed as a contract with the purchasers of the Certificates. `+ Statements contained in this Official Statement which involve estimates, projections, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts. The information and expressions of opinion herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, .. create any implication that there has been no change in the affairs of the District or the Corporation since the date hereof. This Official Statement is submitted with respect to the sale of the Certificates referred to herein and may not be reproduced or used,in whole or in pert,for any other purpose,unless authorized in writing by the District. All summaries of the documents and laws are made subject to the provisions thereof and do not purport to be complete statements of any or all such provisions. Preparation of this Official Statement and its distribution have been duly authorized and approved by the District and the Corporation. In connection with the offering of the Certificates, the Initial Purchaser in connection with any reoffering may over-allot or effect transactions which stabilize or maintain the market price of the nr Certificates at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Initial Purchaser in connection with any reoffering may offer and sell the Certificates to certain dealers,institutional investors and others at prices lower than the public offering prices stated on the inside cover page hereof and such public offering prices may be changed from time to time by the Initial Purchaser. Certain statements included or incorporated by reference in this Official Statement constitute y forward-looking statements. Such statements are generally identifiable by the terminology used such as 'plan,""expect,""estimate,""budget"or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. `+ 1�1 b1 v 1 80336611.6 V L Book Page 124 r TABLE OF CONTENTS r EM r INTRODUCTION......................................................................................................................... I General............................................................................................................................... 1 TheDistrict........................................................................................................................2 Security and Sources of Payment for the Certificates.......................................................2 Continuing Disclosure.......................................................................................................3 Miscellaneous....................................................................................................................3 PLANOF FINANCE.....................................................................................................................4 ESTIMATED SOURCES AND USES OF FUNDS.....................................................................4 THECERTIFICATES...................................................................................................................4 General................................................................................................................_.............4 r Prepayment Provisions.......................................................................................................5 SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES...............................7 r Installment Payments.........................................................................................................7 NetRevenues.....................................................................................................................8 RateStabilization Account................................................................................................9 Allocation of Revenues......................................................................................................9 RateCovenant.................................................................................................................. 10 ReserveFund................................................................................................................... 11 Limitations on Issuance of Additional Obligations......................................................... 12 Insurance.......................................................................................................................... 14 Allocation of Installment Payments................................................................................. 15 THEDISTRICT.........................................._..................................................................._.......... 16 Background.........................................................................................................._.......... 16 ,r Organization and Administration..................................................................................... 17 Services............................................................................................................................ 18 ServiceArea..................................................................................................................... 18 Employees........................................................................................................................ 19 RetirementPlan................................................................................................................20 Other Post-Employment Benefits....................................................................................21 .. Risk Management............................................................................................................22 ExistingFacilities.............................................................................................................22 Permits, Licenses and Other Regulations........................................................................23 r Capital Improvement Program.........................................................................................24 GroundwaterReplenishment System...............................................................................27 Preferred Level of Treatment................................................................................_.........28 r Biosolids Management.....................................................................................................29 UrbanRunoff...................................................................................................................29 IntegratedEmergency Response Program..........................................._..........................30 r L 90336611.6 i Book Page 125 TABLE OF CONTENTS (continued) 60 Page DISTRICT REVENUES..............................................................................................................31 L. Sewer Service Charges....................................................................................................31 AdditionalRevenues........................................................................................................33 6d Wastewater Treatment History........................................................................................35 Customers........................................................................................................................35 AssessedValuation..........................................................................................................37 V TaxLevies and Delinquencies............................................_...........................................38 BudgetaryProcess....................:.......................................................................................39 Reserves...........................................................................................................................40 .+ Summaryof Operating Data............................................................................................41 ProjectedOperating Data.................................................................................................41 Management's Discussion and Analysis of Operating Data...........................................43 Investment of District Funds............................................................................................44 FINANCIAL OBLIGATIONS....................................................................................................45 L ExistingIndebtedness......................................................................................................45 Variable Rate Obligations................................................................................................46 AnticipatedFinancings....................................................................................................46 �+ Direct and Overlapping Bonded Debt..............................................................................46 THE CORPORATION................................................................................................................48 ., LIMITATIONS ON TAXES AND REVENUES........................................................................49 Article XIIIA of the California Constitution...................................................................49 Legislation Implementing Article XIIIA.........................................................................49 Article XIIIB of the California Constitution....................................................................49 PropositionI.................................................................................................................50 Proposition62..................................................................................................................51 Article XIIIC and Article XHID of the California Constitution......................................51 OtherInitiative Measures......................................................................................_.........53 L LEGALMATTERS.....................................................................................................................53 FINANCIALADVISOR.............................................................................................................54 ABSENCEOF LITIGATION.....................................................................................................54 FINANCIALSTATEMENTS.....................................................................................................54 TAXMATTERS..........................................................................................................................54 CONTINUING DISCLOSURE...................................................................................................57 RATINGS.................................................................................................................................... 57 PURCHASE AND REOFFERING.............................................................................................57 y MISCELLANEOUS.................................................................................................................... 58 80336611.6 tl Book Page 126 r TABLE OF CONTENTS r (continued) Page r APPENDIX A - COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30.2008....................................................................................A-1 r APPENDIX B — THE COUNTY OF ORANGE—ECONOMIC AND DEMOGRAPHIC INFORMATION................................................................................................B-1 APPENDIX C — SUMMARY OF PRINCIPAL LEGAL DOCUMENTS....................................CA APPENDIX D — FORM OF CONTINUING DISCLOSURE AGREEMENT.............................D-1 r APPENDIX E — BOOK-ENTRY SYSTEM.................................................................................E-I �r APPENDIX F — FORM OF APPROVING OPINION OF SPECIAL COUNSEL......................F-I r r r r' r r r r 80336611.6 iij Book Page 127 r OFFICIAL STATEMENT $_,000,000- ,. ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION,SERIES 2008C INTRODUCTION This introduction contains only a brief summary of certain of the terms of the Cert fcates being offered and a brfefdescription ofthe Official Statement. All statements contained in this introduction are qualified in their entirety by reference to the entire Official Statement. References to, and summaries of, �+ provisions of the Constitution and laws of the State of California (the "State') and any documents referred to herein do not purport to be complete and such references are qualified in their entirety by reference to the complete provisions. All capitalized terms used in this Official Statement and not �r otherwise defined herein have the meanings set forth in the Trust Agreement, the Installment Purchase Agreement and the Master Agreement(each, as hereinafter defined). See APPENDIX C— "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Definitions"herein. r General This Official Statement, including the cover page and all appendices hereto, provides certain information concerning the sale and delivery of$_,000,000*aggregate principal amount of the Orange County Sanitation District Certificates of Participation, Series 2008C (the "Certificates") evidencing direct, fractional undivided interests in the Installment Payments (the `Installment Payments") and the interest thereon, to be made by the Orange County Sanitation District (the "District") pursuant to the Installment Purchase Agreement,dated as of December 1,2008 (the"Installment Purchase Agreement"), by and between the District and the Orange County Sanitation District Financing Corporation (the r "Corporation"). Pursuant to the Master Agreement for District Obligations, dated as of August 1, 2000 (the "Master Agreement"), by and between the District and the Corporation,the District has established and declared the conditions and terms upon which obligations such as the Installment Purchase Agreement, and the Installment Payments and the interest thereon, will be incurred and secured. Installment Payments under the Installment Purchase Agreement are payable solely from Net Revenues (as defined hereinafter) as provided in the Installment Purchase Agreement, consisting primarily of all r income and revenue received by the District from the operation or ownership of the Wastewater System of the District(the"Wastewater System")remaining after payment of Maintenance and Operation Costs, as further described in "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES" herein. r The Certificates we to be executed and delivered pursuant to a Trust Agreement, dated as of December 1, 2008(the"Trust Agreement"),by and among the District,the Corporation and Union Bank r of California,N.A., sit trustee(the "Trustee"). Proceeds from the sale of the Certificates will be used to (i)finance certain improvements to the Wastewater System, (ii)fund a reserve fund for the Certificates and (iii)pay the costs incurred in connection with the execution and delivery of the Certificates. See r "PLAN OF FINANCE"herein. r Preliminary,subject to change. r 90336611.6 r Book Page 128 V i The Certificates will be executed and delivered in the form of fully registered certificates, dated Lr as of the date of initial delivery thereof and will mature on February I in each year as set forth on the inside cover page hereof. Interest evidenced by the Certificates will be payable semiannually on February 1 and August 1 of each year, commencing on February 1, 2009. See "THE CERTIFICATES" y herein. The Certificates initially will be delivered only in book-entry form and will be registered in the name of Cede & Co., as nominee of The Depository Tnut Company, New York, New York ("DTC"), which will act as securities depository for the Certificates. The Certificates will be delivered in denominations of$5,000 and any integral multiple thereof. So long as the Certificates are in the DTC book-entry system, the interest, principal, purchase price and prepayment premiums, if any, due with respect to the Certificates will be payable by the Trustee, or its agent, to DTC or its nominee. DTC, in L turn, will make payments pursuant to its procedures as described under APPENDIX E — "BOOK— ENTRY SYSTEM"herein. The District �+ The District is a public agency responsible for regional wastewater collection, treatment and disposal. The District is the sixth largest wastewater discharger in the United States. The District LI provides service to an area with a population of more than 2.5 million people in the northern and central portion of the County of Orange (the "County"), in a service area of approximately 471 square miles, treating 221 million gallons per day ("mg/if) of wastewater in Fiscal Year 2007-08. See "THE L DISTRICT,""DISTRICT REVENUES"and"FINANCIAL OBLIGATIONS"herein. Security and Sources of Payment for the Certificates r The Certificates evidence direct, fractional undivided interests in the Installment Payments, and the interest thereon,paid by the District pursuant to the Installment Purchase Agreement. The obligation of the District to pay the Installment Payments and the interest thereon and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable,in the manner provided under the Installment Purchase Agreement, solely from Net Revenues, and other funds as provided in the Installment Purchase Agreement. Net Revenues generally consist of all income and :. revenue received by the District from the operation or ownership of the Wastewater System remaining after payment of Maintenance and Operation Costs,all as further provided in the Master Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. The District currently has Outstanding Senior Obligations payable from Net Revenues on a parity r with the Installment Payments under the Installment Purchase Agreement. See "PLAN OF FINANCE," ESTIMATED SOURCES AND USES OF FUNDS,' "FINANCIAL OBLIGATIONS — Existing y Indebtedness" and "THE DISTRICT" herein and APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Master Agreement" attached hereto. The District has no Subordinate Obligations currently outstanding. v Iy 80336611.6 2 1 L Book Page 129 r ,r Pursuant to the Master Agreement,the District will,to the extent permitted by law,fix,prescribe and collect fees and charges for the services and facilities of the Wastewater System which will be at least sufficient to yield during each Fiscal Year(a)Net Revenues equal to 125% of Debt Service on Senior r Obligations for such Fiscal Year and (b)Net Operating Revenues equal to 100% of Debt Service on all Obligations for such Fiscal Year. The District may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but shall not reduce the fees and charges then in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to meet the requirements of the Master Agreement. See "SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES—Rate Covenant"herein. r The obligation of the District to pay the Installment Payments and the interest thereon,and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable, in the manner provided in the Installment Purchase Agreement, r solely from Net Revenues and other funds provided for in the Installment Purchase Agreement,and does not constitute a debt of the District or of the State, or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. Neither the faith and r credit nor the taxing power of the District or the State or any political subdivision thereof, is pledged to the payment of the Installment Payments, or the interest thereon, or other payments required to be made under the Installment Purchase Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master r Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. See"SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES" herein. r Continuing Disclosure r The District has covenanted for the benefit of holders and beneficial owners of the Certificates (a)to provide certain financial information and operating data (the "Annual Report") relating to the District and the property in the District not later than eight months after the end of the District's Fiscal ,r Year(which currently would be March 1). commencing with the report for the 2008-09 Fiscal Year,and (b)to provide notices of the occurrence of certain enumerated events, if material. The specific nature of the information to be contained in the Annual Report or the notices of material events is set forth in the r Continuing Disclosure Agreement. See "CONTINUING DISCLOSURE" herein and APPENDIX D — "FORM OF CONTINUING DISCLOSURE AGREEMENT." Miscellaneous r The descriptions herein of the Trust Agreement, the Master Agreement,the Installment Purchase Agreement and any other agreements relating to the Certificates are qualified in their entirety by reference �+ to such documents. Copies of the documents are on file and available for inspection at the corporate trust office of the Trustee at Union Bank of California, N.A., 120 South San Pedro Street, Suite 400, Los Angeles,California 90012,Attention: Corporate Trust. r r r r 80336611.6 3 r Book Page 130 i W PLAN OF FINANCE �+ Proceeds from the sale of the Certificates will be used to (i) finance the acquisition, construction and installation of certain improvements to the wastewater collection,treatment and disposal facilities of L the District(the"Wastewater System"), (ii)fund a reserve fund for the Certificates, and(iii)pay costs of issuance of the Certificates. In particular, the Project is expected to include the financing of improvements to the Wastewater System including particularly, but without limitation, the District's collection system, two wastewater treatment plants, and Ocean Outfall, and further as follows: the acquisition,construction, installation, rehabilitation,replacement, or repair of the Westside Pump Station, Ellis Avenue Pump Station, Bitter Point Pump Station, Bitter Point Foree Main Rehabilitation, College Ave. Pump Station,Coast Trunk Sewer,Headworks at Plant 2, Primary Treatment System Rehabilitation at Plant 2, New Secondary Treatment System at Plant 1, Trickling Filters at Plant 2, North County Collections Yard, Sludge Dewatering&Odor Control at Plant 1, Primary Sludge Feed System Project at Plant 2,Central Generation Automation,and 66KV Substation at Plant 1. From time to time projects which are undertaken are delayed, redesigned or deferred by the District for various reasons and no assurance can be given that a project summarized above or designated rr in the District's current Capital Improvement Program will be completed in accordance with its original schedule or that any project will be completed as currently planned. See `THE DISTRICT - Capital Improvement Plan"herein. ESTIMATED SOURCES AND USES OF FUNDS The estimated sounc"and uses of funds and other amounts in connection with the delivery of the ~ Certificates are presented below. - Sources Certificate Proceeds $ Net Original Issue Premium/Discount it Total Sources $ Uses 4 Reserve Fund $ Initial Purchaser's Discount Costs of IssuancePl Total Uses $ - Costs pfIssuance 'include,among other things, fees of rating agencies. Special Counsel fees and expenses and the initial fees of the Trustee. b THE CERTIFICATES _ General Lr The Certificates will be prepared in the form of fully registered certificates in denominations of $5,000 and any integral multiple thereof. The Certificates will be dated as of the date of initial delivery V thereof and will mature on February I in each year as set forth on the inside cover page hereof Interest evidenced by the Certificates will be payable semiannually on February 1 and August I of each year, commencing on February 1,2009. See"THE CERTIFICATES"herein. The Certificates initially will be delivered only in book-entry form and will be registered in the name of Cede &Co.,as nominee of The 80316611.6 4 V Book Page 131 r r Depository Trust Company, New York, New York ("DTC"), which will act as securities depository for the Certificates. Individual purchases of the Certificates will be made in book-entry form only. Purchasers of Certificates will not receive physical certificates representing their ownership interests in r the Certificates purchased. The interest evidenced by the Certificates shall be payable on each Interest Payment Date to and including their respective Principal Payment Dates or prepayment prior thereto, and shall represent the r sum of the interest on the Installment Payments coming due on the Interest Payment Dates in each year. The principal evidenced by the Certificates shall be payable on their respective Principal Payment Dates in each year and shall represent the Installment Payments coming due on the Principal Payment Dates in r each year. Each Certificate shall evidence interest from the Interest Payment Date next preceding its date of execution to which interest has been paid in full, unless such date of execution shall be after a Record Date and on or prior to the following Interest Payment Date, in which case such Certificate shall evidence r interest from such Interest Payment Date, or unless such date of execution shall be on or prior to January 15, 2009, in which case such Certificate shall represent interest from its date of initial delivery. Notwithstanding, the foregoing, if, as shown by the records of the Trustee, interest evidenced by the Certificates shall be in default,each Certificate shall evidence interest from the lest Interest Payment Date to which such interest has been paid in full or duly provided for. Interest evidenced by the Certificates shall be computed on the basis of a 360-day year consisting of twelve 30day months. See APPENDIX C r —"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Trust Agreement." Payments of principal and interest evidenced by the Certificates are payable directly to DTC by Union Bank of California,N.A.,as trustee. Upon receipt of payments of such principal and interest, DTC will in turn distribute such payments to the beneficial owners of the Certificates. So long as the Certificates are held in the DTC bookentry system,the interest,principal,purchase price and prepayment premiums, if any,due with respect to the Certificates will be payable by the Trustee,or its agent,to DTC r or its nominee. DTC, in turn, will make payments pursuant to its procedures as described under APPENDIX E—"BOOK-ENTRY SYSTEM"herein. r Prepayment Provisions' Optional Prepayment. The Certificates are subject to optional prepayment prior to their stated Principal Payment Dates, on any date on or after August 1, 2018, in whole or in part, in Authorized Denominations, from and to the extent of prepaid Installment Payments paid pursuant to the Installment Purchase Agreement or from any other source of available funds, any such prepayment to be at a price equal to the principal evidenced by the Certificates to be prepaid, plus accrued interest evidenced thereby r to the date fixed for prepayment. Mandatory Sinking Account Prepayment. The Term Certificates maturing on February 1, 20_ r are subject to prepayment prior to their stated maturity, in part, by lot, on any February 1 on and after February 1, 20—, at the principal amount thereof, plus accrued interest to the date fixed for prepayment, without premium, from Mandatory Sinking Account Payments deposited in the Principal Account. The r Term Certificates maturing on February 1, 20—shall be prepaid(or paid at maturity,as the case may be) by application of Mandatory Sinking Account Payments in the amounts and upon the dates set forth below: r r Preliminary;subject to change. r 80336611.6 5 >r Book Page 132 4r Term Certificates Maturing February 1,_ J Mandatory Sinking Account Mandatory I Payment Dates Sinking Account v (February 1) Payments $ W s Maturity. 6. Selection of Cerllfcates for Prepayment. Whenever less than all the Outstanding Certificates are to be prepaid on any one date pursuant to provisions of the Trust Agreement with respect to optional of Certificates, the Trustee shall select the Certificates to be prepayment prepaid among Certificates with different Principal Payment Dates as directed in a Written Request of the District. Whenever less than all the Outstanding Certificates with the same stated Principal Payment Date are to be prepaid on any one L date in accordance with the Trust Agreement, the Trustee shall select the Certificates with such Principal Payment Date to be prepaid as directed in a Written Request of the District, or at the discretion of the District by lot in any manner that the Trustee deems fair and appropriate, which decision shall be final and binding upon the District and the Owners. The Trustee shall promptly notify the District in writing of v the numbers of the Certificates so selected for prepayment on such date. For purposes of such selection, any Certificate may be prepaid in part in Authorized Denominations. r Notice of Prepayment When prepayment of Certificates is authorized pursuant to the Trust Agreement, the Trustee shall give notice, at the expense of the District, of the prepayment of the Certificates. The notice of prepayment shall specify(a)the Certificates or designated portions thereof(in the case of prepayment of the Certificates in part but not in whole)which are to be prepaid(b)the date of prepayment, (c)the place or places where the prepayment will be made, including the time and address of any paying agent, (d)the prepayment price, (e)the CUSIP numbers assigned to the Certificates to be prepaid, (f)the numbers of the Certificates to be prepaid in whole or in part and in the case of any " Certificate to be prepaid in part only,the principal evidenced by such Certificate to be prepaid and(g)the interest rate and stated Principal Payment Date of each Certificate to be prepaid in whole or in part. Such notice of prepayment shall further state that on the specified date there shall become due and payable upon each Certificate or portion thereof being prepaid the prepayment price and that from and after such date interest evidenced thereby shall cease to accrue and be payable. With respect to any notice of optional prepayment of Certificates, unless at the time such notice is given the Certificates to be prepaid r: shall be deemed to have been paid within the meaning of the Trust Agreement,such notice shall state that such prepayment is conditional upon receipt by the Trustee, on or prior to the date fixed for such prepayment, of moneys sufficient to pay for the prepayment price of the Certificates to be prepaid and that if such moneys shall not have been so received said notice shall be of no fame and effect and the District shall not be required to prepay such Certificates. In the event a notice of prepayment of Certificates contains such a condition and such moneys are not so received,the prepayment of Certificates as described in the conditional notice of prepayment shall not be made and the Trustee shall, within a reasonable time after the date on which such prepayment was to occur, give notice to the persons and in the manner in which the notice of prepayment was given,that such moneys were not so received and that V them shall be no prepayment of Certificates pursuant to such notice of prepayment. The Trustee shall,at least 20 but not more than 60 days prior to any prepayment date,give notice of prepayment to the respective Owners of Certificates designated for prepayment by first-class mail, 6+ 90336611.6 6 u Book Page 133 Y4 ,r postage prepaid,at their addresses appearing on the registration books maintained by the Trustee as of the close of business on the day before such notice of prepayment is given. The actual receipt by the Owner of any notice of such prepayment shall not be a condition precedent to prepayment, and neither failure to receive such notice nor any defect therein shall affect the validity of the proceedings for the prepayment of such Certificates or the cessation of interest evidenced _ thereby on the date fixed for prepayment. Effect of Preptryment. If notice of prepayment has been duly given as aforesaid and moneys for the payment of the prepayment price of the Certificates to be prepaid are held by the Trustee,then on the �+ prepayment date designated in such notice, the Certificates so called for prepayment shall become payable at the prepayment price specified in such notice; and from and after the date so designated interest evidenced by the Certificates so called for prepayment shall cease to accrue, such Certificates ,w shall cease to be entitled to any benefit or security hereunder and the Owners of such Certificates shall have no rights in respect thereof except to receive payment of the prepayment price thereof. The Trustee shall, upon surrender for payment of any of the Certificates to be prepaid pay such Certificates at the prepayment price thereof,and such moneys shall be pledged to such payment. All Certificates prepaid pursuant to the provisions of the Trust Agreement shall be canceled by the Trustee and shall not be redelivered. r SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES Installment Payments Pursuant to the Installment Purchase Agreement,the Project will be acquired by the District from r the Corporation.The District has covenanted to,subject to any rights of prepayment under the Installment Purchase Agreement, pay to the Corporation, solely from Net Revenues and from no other sources, the Purchase Price in Installment Payments, with interest thereon, as provided in the Installment Purchase r Agreement. Pursuant to the Master Agreement, the District has established and declared the conditions and terms upon which obligations such as the Installment Purchase Agreement, and the Installment Payments and the interest thereon payable under the Installment Purchase Agreement, will be incurred and secured The obligation of the District to make the Installment Payments, and payments of interest '+ thereon, and other payments required to be made by it under the Installment Purchase Agreement, solely from Net Revenues, is absolute and unconditional, and until such time as the Installment Payments, payments of interest thereon, and such other payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to the Installment Purchase Agreement), the District has covenanted that it will not discontinue or suspend any Installment Payments when due,whether or not the Project or any part thereof is operating or operable or has been completed or its use is suspended, r interfered with, reduced or curtailed or terminated in whole or in part, and such Installment Payments, payments of interest thereon, and other payments shall not be subject to reduction whether offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any ,r agreement or any cause whatsoever. The District's obligation to make Installment Payments from Net Revenues is on a parity with the District's obligation to make payments with respect to its Outstanding Senior Obligations. See'—Net Revenues"below. Pursuant to the Trust Agreement,the Corporation has assigned to the Trustee for the benefit of the Owners of the Certificates substantially all of its rights,title and interest in the Installment Purchase Agreement, including its right to receive Installment Payments and the interest thereon. The District has certain Existing Senior Obligations Outstanding payable from Net Revenues on a parity with the Installment Payments under the Installment Purchase Agreement. The tern "Existing Senior Obligations"as used in this Official Statement refers to the 2000 Installment Purchase Agreement, the 2003 Installment Purchase Agreement, the 2006 Installment Purchase Agreement, the 90336611.6 7 r Book Page 134 w 2007A Installment Purchase Agreement, the 2007B Installment Purchase Agreement, the 2008A r Installment Purchase Agreement, the 2008B Installment Purchase Agreement and the term "Senior , Obligations" as used in this Official Statement refers to the Existing Senior Obligations and any additional Senior Obligations,such as the Installment Purchase Agreement,that may be made payable on 61 a parity basis to the Installment Payments as provided in the Master Agreement Senior Obligations, together with any Subordinate Obligations payable on a subordinate basis to the Installment Payments executed and delivered as provided in the Master Agreement, are referred to collectively as the 'V "Obligations." The District has no Subordinate Obligations currently outstanding. See "FINANCIAL OBLIGATIONS—Existing Indebtedness"herein and APPENDIX C—"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Master Agreement"attached hereto. iu The obligation of the District to pay the Installment Payments,and the interest thereon,and other payments required to be made by it under the Installment Purchase Agreement and Master Agreement,is a special obligation of the District payable, in the manner provided in the Installment Purchase kv Agreement, solely from Net Revenues and other funds provided for in the Installment Purchase Agreement,and does not constitute a debt of the District,Ore State or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. Neither the faith and 1r credit nor the taxing power of the District,the State or any political subdivision thereof, is pledged to the _ payment of the Installment Payments, or the interest thereon, or other payments required to be made under the Installment Purchase Agreement The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. Sea"SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES"herein. Net Revenues The District is obligated to make Installment Payments solely from Net Revenues as provided in 6' the Master Agreement, which consist of Revenues remaining after payment of costs paid by the District , for maintaining and operating the Wastewater System ("Maintenance and Operation Costs"). Revenues are defined in the Master Agreement to mean, for any period, all income and revenue received by the W District during such period from the operation or ownership of the Wastewater System, determined in accordance with generally accepted accounting principles, including all fees and charges received during such period for the services of the Wastewater System, investment income received during such period �. (but only to the extent that such investment income is generally available to pay costs with respect to the Wastewater System, including Maintenance and Operation Costs),Net Proceeds of business interruption insurance received during such period, ad valorem taxes received during such period,payments under the Agreement Acquiring Ownership Interests, Assigning Rights and Establishing Obligations, entered into on February 13, 1986, and amendment No. 1 thereto dated December 10, 1986, by and between predecessor County Sanitation District No. 14 of Orange County and the Irvine Ranch Water District(the 4 "IRWD Agreement") received during such period and all other money received during such period howsoever derived by the District from the operation or ownership of the Wastewater System or arising from the Wastewater System (including any standby or availability charges), but excluding (a)Capital Facilities Capacity Charges,(b)payments received under Financial Contracts, and(c)refundable deposits made to establish credit and advances or contributions in aid of construction (which, for purposes of the Master Agreement, shall not include payments under the IRWD Agreement); provided, however, that (i)Revenues shall be increased by the amounts, if any, transferred during such period from the Rate �+ Stabilization Account to the Revenue Account and shall be decreased by the amounts, if any,transferred during such period from the Revenue Account to the Rate Stabilization Account,and(ii)Revenues shall include Capital Facilities Capacity Charges collected during such period to the extent that such Capital it Facilities Capacity Charges could be properly expended on a Capital Facilities Capacity Charge Eligible Project for which the proceeds of Subject Obligations were used or are available to be used. Sea "DISTRICT REVENUES—Additional Revenues"herein. 69 8m36611.6 8 1 tw Book Page 135 r The District's obligation to make the Installment Payments from its Net Revenues is on a parity with the District's obligation to make payments with respect to its other outstanding obligations described as Senior Obligations and all Reimbursement Obligations with respect to Senior Obligations, as provided in the Master Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages,benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. Pursuant to the Master Agreement, the District pledges all Net Revenues to the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations,and the Net Revenues will not be used for any other purpose while any of the Senior Obligations or Reimbursement Obligations with respect to Senior Obligations remain unpaid; provided, however, that out of the Net Revenues there may be apportioned such sums for such purposes as are expressly permitted by the Master Agreement. This pledge constitutm a first lien on the Net Revenues for the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations. The term Senior Obligations, generally r means all revenue bonds or notes(including bond anticipation notes and commercial paper)of the District authorized,executed, issued and delivered under and pursuant to applicable law,the Installment Purchase Agreement and all other contracts (including financial contracts)or leases of the District authorized and ,r executed by the District under and pursuant to applicable law, the installment, lease or other payments under which are, in accordance with the provisions of the Master Agreement,payable from Net Revenues on a parity with the payments under the Master Agreement. r The District may at any time incur Subordinate Obligations payable on a subordinate basis to the Installment Payments executed and delivered as provided in the Master Agreement; provided, however, that prior to incurring such Subordinate Obligations,the District will have determined that the incurrence r thereof will not materially adversely affect the District's ability to comply with the requirements of the Master Agreement. The District may at any time incur Reimbursement Obligations with respect to Subordinate Obligations. For a description of the District's Outstanding Senior Obligations and r Subordinate Obligations, see "FINANCIAL OBLIGATIONS — Existing Indebtedness" herein. There are currently no Subordinate Obligations or Reimbursement Obligations with respect to Subordinate Obligations outstanding. The District may, in connection with the incurrence of Subordinate Obligations, pledge Net Revenues to the payment of Subordinate Obligations and Reimbursement Obligations with respect to Subordinate Obligations; provided, however, that such pledge, and any lien created thereby, shall be junior and subordinate to the pledge of, and lien on,Net Revenues for the payment of Senior Obligations and Reimbursement Obligations with respect to Senior Obligations. Rate Stabilization Account To avoid fluctuations in its fees and charges of the Wastewater System, from time to time the r District may deposit in the Rate Stabilization Account from Net Revenues such amounts as the District deems necessary or appropriate. From time to time,the District may also transfer moneys from the Rate Stabilization Account to the Revenue Account to be used by the District, first to pay all Maintenance and r Operations Costs as and when the same shall be due and payable. In addition, any such amount transferred from the Rate Stabilization Account to the Revenue Account by the District is included as Revenues for any period, but such transferred amount is excluded from determining Operating Revenues for any period. Revenues will be decreased by the amounts,if any,transferred from the Revenue Account to the Rate Stabilization Account There are presently no funds in the Rate Stabilization Account. r Allocation of Revenues To carry out and effectuate the pledge of Net Revenues under the Master Agreement as described above, the District agrees and covenants that all Operating Revenues received by the District will be deposited when and as received in the Revenue Account. Additionally, amounts may, from time to time 90336611.6 9 Book Page 136 I W as the District deems necessary or appropriate, be tmnsfetred from the Rate Stabilization Account and U deposited in the Revenue Account, as described above under "— Rate Stabilization Account." The _ District will pay from the Revenue Account all Maintenance and Operations Costs (including amounts reasonably required to be set aside in contingency reserves for Maintenance and Operations Costs, the L payment of which is not immediately required)as and when the same shall be due and payable. After having paid, or having made provisions for the payment of, Maintenance and Operations Costs, the District shall set aside and deposit or transfer, as the case may be, from the Revenue Account such amounts at such times as provided in the Master Agreement in the following order of priority: i (1) Senior Obligation Payment Account; (2) Senior Obligation Reserve Funds; 4 (3) Subordinate Obligation Payment Account; (4) Subordinate Obligation Reserve Funds;and IL (5) Rate Stabilization Account. - Amounts required or permitted to be deposited or transferred as described in items 2, 3, 4 and 5 L` above,shall not be so deposited or transferred unless the District shall have determined that there will be — sufficient Net Revenues available to make the required deposits or trsnsfers on the dates on which such deposits or transfers are required to be made as described above. So long as the District bas determined that Net Revenues will be sufficient to make all of the deposits or transfers required to be made pursuant _ to items 1, 2, 3,4 and 5 above, on the dates on which such deposits or transfers are required to be made, Net Revenues on deposit in the Revenue Account may from time to time be used for any purpose for W which the District fonds may be legally applied. For additional information, see APPENDIX C "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Master Agreement." I�+ Rate Covenant Pursuant to the Master Agreement,the District will,to the extent permitted by law, fix,prescribe and collect fees and charges for the services of the Wastewater System which will be at least sufficient to yield during each Fiscal Year(a)Net Revenues equal to 12 %of Debt Service on Senior Obligations for such Fiscal Year and (b)Net Operating Revenues equal to 1009/6 of Debt Service on all Obligations for such Fiscal Year. The District may make adjustments from time to time in such fees and charges and may Lr make such classification thereof as it deems necessary, but will not reduce the fees and charges then in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to meet the requirements of the Master Agreement. In addition, the District has covenanted in the Master Agreement to prepare and adopt an annual budget for the Wastewater System for each Fiscal Year. Such budget will set forth in reasonable detail 1.. the Revenues anticipated to be derived in such Fiscal Year and the expenditures anticipated to be paid or provided for therefrom in such Fiscal Yew, including,without limitation,the amounts required to pay or provide for the payment of the Obligations during such Fiscal Year, the amounts required to pay or provide for the payment of Maintenance and Operations Costs during such Fiscal Year and the amounts required to pay or provide for the payment of all other claims or obligations required to be paid from Revenues in such Fiscal Year,and will show that Revenues and Net Revenues will be at least sufficient to satisfy the requirements of the Master Agreement. On or before September 1 of each Fiscal Year, the District will file with the Trustee a copy of the adopted budget for such Fiscal Year. See APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Master Agreement" for additional information. Ld 80336611.6 10 V Book Page 137 r Reserve Fund The Trust Agreement provides for the funding of the Reserve Fund in an amount equal to the "Reserve Requirement,"which is defined as an amount, as of any date of calculation, equal to the least of (a) 10% of the original aggregate amount of principal evidenced by the Certificates (or if the amount of original issue discount or premium applicable to the Certificates exceeds 2%,than 10%of the issue price of the Certificates), (b)the maximum amount of remaining Installment Payments, and the interest thereon, coming due in any one Certificate Year, and (c) 125% of the average amount of remaining Installment Payments, and the interest thereon, coming due in each Certificate Year. Amounts in the Reserve Fond may be used to pay principal and interest evidenced by the Certificates to the extent that r amounts in the Principal Account and Interest Account are insufficient therefor. The Trustee shall establish and maintain the Reserve Fond until all required Installment Payments, and the interest thereon, are paid in full pursuant to the Installment Purchase Agreement and until the first date upon which no r Certificates are Outstanding. The Reserve Fund will be funded with a portion of the net proceeds of the Certificates in the amount of S which amount is sufficient to satisfy the Reserve Requirement. See`ESTIMATED SOURCES AND USES OF FUNDS." r The District may substitute a Reserve Facility for all or a part of the moneys on deposit in the Reserve Fund by depositing such Reserve Facility with the Trustee so long as, at the time of such substitution, the amount on deposit in the Reserve Fund together with the amount available under such Reserve Facility and any previously substituted Reserve Facilities, shall be at least equal to the Reserve Requirement. Moneys for which a Reserve Facility has been substituted as provided in the Trust Agreement shall be transferred, at the election of the District, to the Installment Payment Fond, or upon r receipt of an Opinion of Counsel to the effect that such transfer, in and of itself, will not adversely affect the exclusion of interest evidenced by the Certificates from gross income for federal income tax purposes, to a special account to be held by the Trustee and applied to the payment of capital costs of the District,as .�' directed in a Written Request of the District. Any amounts paid pursuant to any Reserve Facility shall be deposited in the Reserve Fond. If a Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement,the Trustee shall make a claim for payment under such Reserve Facility, in accordance with the provisions thereof, in an amount which, together with other available moneys in the Reserve Fund, will be sufficient to make said deposit in the Interest Account or Principal Account. The moneys in the Reserve Fund and any Reserve Facility, shall be held in trust by the Trustee for the benefit of the Owners and shall be used and disbursed only for the purposes and uses authorized in the Trust Agreement. Moneys, if any,on deposit in the Reserve Fund shall be withdrawn and applied by the Trustee for the final payment of principal and interest evidenced by the Certificates. r Amounts on deposit in the Reserve Fund which were not derived from payments under any Reserve Facility credited to the Reserve Fond to satisfy a portion of the Reserve Requirement shall be used and withdrawn by the Trustee prior to using and withdrawing any amounts derived from payments under any such Reserve Facility. In order to accomplish such use and withdrawal of such amounts not derived from payments under any such Reserve Facility,the Trustee shall, as and to the extent necessary, liquidate any investments purchased with such amounts. If and to the extent that more than one Reserve ,r Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, drawings thereunder, and repayment of expenses with respect thereto,shall be made on a pro-rate basis(calculated by reference to the policy limits available thereunder). r The Trustee shall, from amounts received from the District pursuant to the Installment Purchase Agreement,deposit in the Reserve Fond an amount of money which,together with the amount already on deposit therein and the amounts available under all Reserve Facilities, will be equal to the Reserve Requirement. No deposit need be made in the Reserve Fund so long as there shall be on deposit therein a 80336611.6 11 Book Page 138 W sum equal to the amount which, together with the amounts available under all Reserve Facilities, is at V least the Reserve Requirement The Trustee shall promptly notify the District in writing if the amount on deposit is less than the Reserve Requirement. L+ If, as a result of the scheduled payment of principal or interest evidenced by the Certificates, the Reserve Requirement is reduced, the Trustee shall transfer an amount equal to the amount of such reduction to the Installment Payment Fund. See APPENDIX C—"SUMMARY OF PRINCIPAL LEGAL V DOCUMENTS—Trust Agreement" Limitations on Issuance of Additional Obligations r Senior Obligations. The District may at any time incur Senior Obligations in addition to the Existing Senior Obligations payable from Net Revenues as provided in the Master Agreement on a parity with all other Senior Obligations theretofore incurred but only subject to the following conditions under 60 the Master Agreement: (1) Upon the incurrence of such Senior Obligations, no Event of Default will be continuing r under the Master Agreement;and (2) Subject to the provisions of the Master Agreement, the District will have received either V one of the following: (i) A Written Certificate of the District certifying that,for a 12 consecutive calendar month period during the 24 consecutive calendar month period ending in the calendar month prior to the incurrence of such Senior Obligations (which 12 consecutive calendar month period will be specified in such certificate or certificates): 6. (A) Net Revenues,as shown by the books of the District,will have amounted to at least 125% of Maximum Annual Debt Service on all Senior r Obligations to be outstanding immediately after the incurrence of such Senior Obligations,and k (B) Net Operating Revenues,as shown by the books of the District,will have amounted to at least 100% of Maximum Annual Debt Service on all Obligations to be outstanding immediately after the incurrence of such Senior Obligations. For purposes of demonstrating compliance with the foregoing,Net Revenues and Net Operating Revenues may be adjusted for(x)any changes in fees and charges for the services of the Wastewater System which have been adopted and are in effect on the date such Senior Obligations are incurred, but which, during all or any part of such 12 consecutive calendar month period were not in effect, (y)customers added to the Wastewater System subsequent to such 12 consecutive calendar month period but prior to the date such Senior Obligations are incurred, and (z) the estimated change in available Net Revenues and Net Operating Revenues which will result from the connection of existing residences or businesses to the Wastewater System within one year following completion of any project to be funded or any system to be acquired from the proceeds of such Senior Obligations;or b 8a336611.6 12 Ir Book Page 139 r Reserve Fund The Trust Agreement provides for the funding of the Reserve Fund in an amount equal to the "Reserve Requirement,'which is defined as an amount, as of any date of calculation,equal to the least of (a) 10% of the original aggregate amount of principal evidenced by the Certificates (or if the amount of original issue discount or premium applicable to the Certificates exceeds 2%,then 10%of the issue price of the Certificates), (b)the maximum amount of remaining Installment Payments, and the interest thereon, coming due in any one Certificate Year, and (c) 125% of the average amount of remaining Installment Payments, and the interest thereon, coming due in each Certificate Year. Amounts in the Reserve Fund may be used to pay principal and interest evidenced by the Certificates to the extent that �r amounts in the Principal Account and Interest Account are insufficient therefor. The Trustee shall establish and maintain the Reserve Fund until all required Installment Payments, and the interest thereon, are paid in full pursuant to the Installment Purchase Agreement and until the fast date upon which no r Certificates are Outstanding. The Reserve Fund will be funded with a portion of the net proceeds of the Certificates in the amount of $ which amount is sufficient to satisfy the Reserve Requirement. See"ESTIMATED SOURCES AND USES OF FUNDS." r The District may substitute a Reserve Facility for all or a part of the moneys on deposit in the Reserve Fond by depositing such Reserve Facility with the Trustee so long as, at the time of such substitution,the amount on deposit in the Reserve Fund, together with the amount available under such Reserve Facility and any previously substituted Reserve Facilities, shall be at least equal to the Reserve Requirement. Moneys for which a Reserve Facility has been substituted as provided in the Trust Agreement shall be transferred, at the election of the District, to the Installment Payment Fond, or upon receipt of an Opinion of Counsel to the effect that such transfer, in and of itself,will not adversely affect the exclusion of interest evidenced by the Certificates from gross income for federal income tax purposes, to a special account to be held by the Trustee and applied to the payment of capital costs of the District,as r directed in a Written Request of the District. Any amounts paid pursuant to any Reserve Facility shall be deposited in the Reserve Fund. r, If a Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement,the Trustee shall make a claim for payment under such Reserve Facility, in accordance with the provisions thereof, in an amount which, together with other available moneys in the Reserve Fund W will be sufficient to make said deposit in the Interest Account or Principal Account. The moneys in the Reserve Fond, and any Reserve Facility, shall be held in trust by the Trustee for the benefit of the Owners and shall be used and disbursed only for the purposes and uses authorized in the Trust Agreement Moneys, if any, on deposit in the Reserve Fund shall be withdrawn and applied by the Trustee for the final payment of principal and interest evidenced by the Certificates. r Amounts on deposit in the Reserve Fund which were not derived from payments under any Reserve Facility credited to the Reserve Fond to satisfy a portion of the Reserve Requirement shall be used and withdrawn by the Trustee prior to using and withdrawing any amounts derived from payments r under any such Reserve Facility. In order to accomplish such use and withdrawal of such amounts not derived from payments under any such Reserve Facility,the Trustee shall, as and to the extent necessary, liquidate any investments purchased with such amounts. If and to the extent that more than one Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, drawings thereunder,and repayment of expenses with respect thereto, shall be made on a pro-rata basis(calculated by reference to the policy limits available thereunder). The Trustee shall, from amounts received from the District pursuant to the Installment Purchase Agreement, deposit in the Reserve Fund an amount of money which,together with the amount already on deposit therein and the amounts available under all Reserve Facilities, will be equal to the Reserve Requirement. No deposit need be made in the Reserve Fund so long as there shall be on deposit therein a 80336611.6 11 r Book Page 138 i W i sum equal to the amount which, together with the amounts available under all Reserve Facilities, is at 4 least the Reserve Requirement. The Trustee shall promptly notify the District in writing if the amount on deposit is less than the Reserve Requirement. Ir If, as a result of the scheduled payment of principal or interest evidenced by the Certificates,the Reserve Requirement is reduced, the Trustee shall transfer an amount equal to the amount of such reduction to the Installment Payment Fund. See APPENDIX C—"SUMMARY OF PRINCIPAL LEGAL L DOCUMENTS—Trust Agreement:' Limitations on Is u mee of Additional Obligations V Senior Obligations. The District may at any time incur Senior Obligations in addition to the Existing Senior Obligations payable from Net Revenues as provided in the Master Agreement on a parity j with all other Senior Obligations theretofore incurred but only subject to the following conditions under 6+ the Master Agreement: (1) Upon the incurrence of such Senior Obligations, no Event of Default will be continuing u under the Master Agreement;and (2) Subject to the provisions of the Master Agreement, the District will have received either L one of the following: (i) A Written Certificate of the District certifying that, for a 12 consecutive calendar L month period during the 24 consecutive calendar month period ending in the calendar month prior to the incurrence of such Senior Obligations (which 12 _ consecutive calendar month period will be specified in such certificate or certificates): 6' (A) Net Revenues,as shown by the books of the District,will have amounted to at at least 125% of Maximum Annual Debt Service on all Senior Obligations to be outstanding immediately after the incurrence of such Senior Obligations,and (B) Net Operating Revenues,as shown by the books of the District,will have Ld amounted to at least 100% of Maximum Annual Debt Service on all Obligations to be outstanding immediately after the incurrence of such 1W Senior Obligations. For purposes of demonstrating compliance with the foregoing,Net Revenues and I Net Operating Revenues may be adjusted for(x)any changes in fees and charges L for the services of the Wastewater System which have been adopted and are in effect on the date such Senior Obligations are incurred, but which, during all or any part of such 12 consecutive calendar month period, were not in effect, V (y)customers added to the Wastewater System subsequent to such 12 consecutive calendar month period but prior to the date such Senior Obligations are incurred, and (z) the estimated change in available Net Revenues and Net Operating Revenues which will result from the connection of existing residences or businesses to the Wastewater System within one year following completion of any project to be funded or any system to be acquired from the proceeds of such Senior Obligations;or I u 80336611.6 12 IiY Book Page 139 r (ii) A certificate or certificates from one or more Consultants which, when taken together, project that, for each of the two Fiscal Years next succeeding the incurrence of such Senior Obligations: r (A) Net Revenues will amount to at leas[ 125% of Maximum Annual Debt Service on all Senior Obligations to be outstanding immediately after the incurrence of such Senior Obligations,and r (B) Net Operating Revenues will amount to at least 100% of Maximum Annual Debt Service on all Obligations to be outstanding immediately r after the incurrence of such Senior Obligations. For purposes of demonstrating compliance with the foregoing,Net Revenues and „d Net Operating Revenues may be adjusted for(x)any changes in fees and charges for the services of the Wastewater System which have been adopted and are in effect on the date such Senior Obligations are incurred or will go into effect prior r to the end of such two Fiscal Year period,(y) customers expected to be added to the Wastewater System prior to the end of such two Fiscal Year period, and (z) the estimated change in available Net Revenues and Net Operating Revenues which will result from the connection of existing residences or businesses to the Wastewater System within one year following completion of any project to be funded or any system to be acquired from the proceeds of such Senior Obligations. For purposes of preparing the certificate or certificates described r above,the Consultant may rely upon financial statements prepared by the District that have not been subject to audit by an independent certified public accountant if audited financial statements for the period are not available. See, also "FINANCIAL OBLIGATIONS - Existing Indebtedness" herein. The provisions described above in paragraph (2) need not be complied with if the Senior Obligations being incurred are Short-Term Obligations excluded from the calculation of Assumed Debt Service pursuant to clause(H)of the definition thereof. See APPENDIX C - "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - Definitions"herein. r The determination of Net Revenues for use in the calculation described above is more fully described in APPENDIX C - "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - Master Agreement-Senior Obligations"attached hereto. The provisions described in paragraph (2)above need not be complied with for such portion of such Senior Obligations incurred for the purpose of providing funds to refund or refinance such Obligations if(i)a portion(which may be all)of the Senior Obligations are incurred for the purpose of providing funds to refund or refinance any Obligations, (ii)upon such r refunding or refinancing, debt service on such refunded or refinanced Obligations, or debt service on bonds,notes or other obligations of an entity other than the District,the debt service on which is payable from Obligation Payments for such Obligations (the "Related Bonds"), will no longer be included in the r calculation of Assumed Debt Service either because such Obligations, or the Related Bonds of such Obligations,will have been paid in full or because such debt service is disregarded pursuant to clause(L) of the definition of Assumed Debt Service, and (iii)Assumed Debt Service in each Fiscal Year for the ,r portion of such Senior Obligations incurred for the purpose of providing funds to refund or refinance such Obligations is less than or equal to 105% of Assumed Debt Service in such Fiscal Year for such Obligations being refunded or refinanced(assuming for such purposes that debt service on such refunded or refinanced Obligations, or debt service on the Related Bonds of such Obligations, is not disregarded r pursuant to clause(L)of the definition of Assumed Debt Service). See APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Master Agreement' attached hereto for additional information. r 80336611.6 13 r Book Page 140 The District may at any time incur Reimbursement Obligations with respect to Senior U Obligations. Subordinate Obligations The District may at any time incur Subordinate Obligations upon L satisfaction of the conditions provided in the Master Agreement. See APPENDIX C—"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Master Agreement"herein for a description of such conditions. Insurance L The District will procure and maintain or cause to be procured and maintained casualty insurance L on the Wastewater System with responsible insurers,or provide self insurance(which may be provided in the form of risk-sharing pools), in such amounts and against such risks (including accident to or destruction of the Wastewater System)as are usually covered in connection with facilities similar to the Wastewater System. The District will procure and maintain such other insurance which it will deem r advisable or necessary to protect its interests and the interests of the Corporation. See "THE DISTRICT — Risk Management"and APPENDIX C—"SUMMARY OF PRINCIPAL. LEGAL DOCUMENTS— Master Agreemenf'herein. L II [Remainder of page intentionally left blank.] L� L: L � 1 b 1W I L i L 90336611.6 14 W Book Page 141 r r Allocation of Installment Payments Table 1 below sets forth the estimated Installment Payments with respect to the Certificates. Also set forth are the payments due on Outstanding Senior Obligations. Table 1 Estimated Installment Payments of the District r Installment Payments Outstanding Senior Fiscal Year Relatine to Certificates Oblieation Payments r Ending June 30 Principal Interest Principal Interest(" Total 2009 Wd 2010 2011 2012 r 2013 2014 2013 2016 r 2017 2019 2019 2020 2021 2022 2023 2024 2023 2026 r 2027 2028 2029 2030 r 2031 2032 2033 r 2034 2035 2036 2037 r Total Ass�r antrum interest rate of 3.73% for all variable rate obligations. See "FINANCIAL OBLIGATIONS—Existing Indebtedness"and APPENDIX A—"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30. 2008"herein. r r r 90336611.6 1$ r Book Page 142 i THE DISTRICT Q Background V The Orange County Sanitation District is a public agency responsible for regional wastewater collection, treatment and disposal. The District is the sixth largest wastewater discharger in the United States. The District provides service to an area with a population of more than 2.5 million people in the northern and central portion of the County by treating 221 mg/d of wastewater in Fiscal Year 2007-08. The District serves approximately 81% of the County population in approximately 471 square miles, or - 59"/u of the County. V The service area which comprises the District was originally formed in 1954 pursuant to the County Sanitation District Act, as amended, Section 4700 et seq. of the Health and Safety Code of the State. The District's service area originally consisted of seven independent special districts in the County L which were each responsible for matters relating to their individual districts. These special districts were jointly responsible for the treatment and disposal facilities which they each used. The seven independent districts were successors to the Joint Outfall Sewer Organization, which was formed in 1923 among the Cities of Anaheim, Santa Ana, Fullerton,and Orange, and the sanitary districts of Placentia, Buena Park, La Habra, and Garden Grove. The Joint Outfall Sewer Organization constructed a treatment plant and outfall in the early 1920's to serve its members. It was reorganized in 1947 and 1948 into seven county jr sanitation districts - District Nos. 1, 2, 3, 5, 6, 7 and 11. These prior districts were formed based on engineers' analyses of the gravity flows in the service area. District No. 13 was formed in 1985 and -- District No. 14 was added in 1986. These districts were co-participants in a Joint Agreement which V provided for the joint construction,ownership,and operation of the prior districts'joint facilities. In April 1998, at the request of the District's Board of Directors(the "Board of Directors"), the ' Board of Supervisors of the County of Orange (the "County Board") passed Resolution No. 98-140 U approving the consolidation of the then existing nine special districts into a new,single sanitation district, to be known as the Orange County Sanitation District. This action was designed to simplify governance j structures, reduce the size of the Board of Directors, ease administrative processes, streamline decision- L making and consolidate accounting and auditing processes. The consolidation was effective on July 1, 1998. J Pursuant to the Resolution and Government Code Section 57500, the prior districts transferred and assigned all of their powers, rights, duties, obligations, functions and properties to the District, and the District assumed all obligations of the prior districts which were several and not joint including, without limitation, their obligations to repay the then outstanding certificates of participation. See "FINANCIAL OBLIGATIONS—Existing Indebtedness"herein. The boundaries of the nine predecessor special districts were initially used by the District to delineate separate revenue areas (the "Revenue L Areas") for budgeting and accounting purposes and in order to facilitate the imposition of fees and charges imposed by the District. See"DISTRICT REVENUES—Sewer Service Charges"herein. The District is managed by the Board of Directors,whose members are appointed by twenty-five member cities and agencies which are serviced by the District. The District is responsible for construction and maintenance of a major portion of the wastewater collection, treatment and disposal facilities within its boundaries. Revenue Area No. 7 is responsible for approximately 152 miles of local sewers in its service area, whereas local sanitary districts, water districts and cities are responsible for local sewers in the remainder of the District's service area. 4 L $0336611.6 16 L Book Page 143 r Organization and Administration The District is independent of and overlaps other political jurisdictions. There are many r governmental entities, including the County,that operate within the District's jurisdiction. These entities are exclusively responsible for the administration of their own fiscal affairs,and the District is not entitled to operating surpluses of,or responsible for operating deficits of,any of the other entities. The twenty-five member Board of Directors is comprised of representatives from twenty-one cities,unincorporated areas of the County and three special districts,including mayors of cities,members of city councils, directors of independent special districts and one member from the County Board of r Supervisors. Several board committees, made up of members of the Board of Directors, consider topics for action by the Board of Directors and make recommendations to the Board of Directors. The Chair and the Vice Chair of the Board of Directors are elected every year by a majority of the Board of Directors, ,d and serve at the pleasure of the majority of the Board of Directors. The District has a general manager, general counsel, administrative and operating staff, with offices located at Reclamation Plant No. 1 in Fountain Valley,California. The District currently employs an administrative and operating staff of over 600 under the direction of its General Manager, James D. Ruth. James D. Ruth is the District's General Manager, and has served in that capacity since December 2005. Prior to that time, from January 2003 to October 2004, Mr. Ruth served as Chief Executive Officer for the County of Orange. Mr. Ruth had previously provided 22 years of service to the city of Anaheim as parks and recreation director, deputy city manager, assistant city manager and chief executive officer,a post he held for 1 I years. r Robert P. Ghirelli, Ph.D. is the District's Assistant General Manager, and has served in that capacity since July 2006. Mc Ghirelli previously served as Director of Technical Services for the District since his joining the District in 1998. Prior to joining the District, Mr. Ghirelli served forjust over a year as managing principal of the Los Angeles office of a national environmental consulting firm, served 20 years in supervisory positions with the Stine and Regional Water Boards,with 13 years Executive Officer of the California Regional Water Quality Control Board Los Angeles/Ventura Region. r Lorenzo Tyner is the District's Director of Finance and Administrative Services. In September 2005, Mr. Tyner joined the District with nearly 15 years of public finance and budgeting experience,most recently serving as the Los Angeles Unified School District Budget Director and Deputy Chief Financial Officer. Mr. Tyner previously worked in large government organizations including the City of Los Angeles and the Los Angeles County Metropolitan Transportation Authority and private sector companies IBM Global Services and Northrop. r James Herberg, P.E. is the District's Director of Engineering, and has served in that capacity since November 2006. Prior to becoming Director of Engineering, he was the District's Director of r Operations and Maintenance. Mr. Herberg has over twenty years of experience in water and wastewater including project management, construction management, design, strategic planning, and operations & maintenance. Ed Torres is the District's Director of Technical Services for the District. He has served in this position since November 2006. Prior to joining the District in 1991, Mr. Torres served in a professional capacity for the California State University System and TRW Electronics and Defense Sector. Mr.Torres has twenty-four years of public and private sector experience in protecting public health and the environment. r 80336611.6 17 r Book Page 144 6d 1 , Nick Arhontes, P.E. is the District's Director of Operations and Maintenance and has served the W District since 1988. Mr. Arhontes has over 30 years of experience managing various engineered systems in the private and public sectors regionally,nationally,and intemationally. Services LI The District owns and operates regional wastewater collection,treatment, and disposal facilities for the metropolitan area in the northern and central portion of the County. The District receives wastewater from the collection systems of the cities, sanitary districts and unincorporated areas of the County located within the District. See"THE DISTRICT—Service Arras"herein. Generally, local agency systems collect wastewater from residential and industrial customers and convey the wastewater to District trunk sewer pipelines for conveyance to the District's wastewater i treatment plants. Lr The District's staff is responsible for operating and maintaining the District's infrestiuchue, although some operations are provided by external contractors. u Currently, the District has established supply contracts for all chemicals necessary to the operation and maintenance of the facilities of the District. The District has sufficient standby systems in the event of equipment failures or system outages. Service Area it The map on the inside cover of this Official Statement shows the District's boundaries and selected cities located within the District District boundaries were originally established in 1947 and 1948 based on drainage basins. As the existing cities have grown and new areas have incorporated, city U limits have come to overlap District boundaries. The District currently serves an approximately 471 square-mile area including 23 of the County's 33 cities and unincorporated areas of the County. The I District serves a population of more than 2.5 million residents and owns sanitary sewerage facilities with L a replacement value of approximately$6.26 billion. [Remainder of page intentionally left blank.] 60 1 - V 1 ; W L V L 80336611.E 18 L Book Page 145 r Table 2 below sets forth the estimated populations of cities and unincorporated mass served by the District as of January I,2008. _ Table 2 Estimated Populations of Cities and Unincorporated Areas Served by the Orange County Sanitation District As of January 1,2008 r City Population �+ Anaheim 346,823 Brea 40,001 Buena Park 82,768 .. Costa Mesa 113,955 Cypress 49,541 Fountain Valley 57,925 Fullerton 137,437 Garden Grove 173,067 Huntington Beach 201,993 Irvine 209,806 La Habra 62,635 La Palma 16,176 Los Alamitos 12,191 Newport Beach 84,554 Orange 140,849 Placentia 51,727 r Santa Ana 353,184 Seal Beach 25,986 Stanton 39,276 r Tustin 74,218 Villa Park 6,259 Westminster 93,027 Yorbs Linda 68312 Cities Subtotal 2,441,790 Unincorporated Areas 81,000 (estimated) `1 Total 2522,790 Sources: State of California Department of Finance, Demographic Research Unit for city population data: Orange r County Sanitation District for population of unincorporated areas. Employees As of November 1, 2008, the District had full-time equivalent ("FTE") staff positions. Most of the employees who occupy these positions are represented by recognized employee organizations, ' which include the following: the Orange County Employees Association ("OCEA"), the International Union of Operating Engineers — Local 501 ("Local 501"), the Supervisor Group, and the Professional Group. As of November I,2008,the District had 604 represented and non-represented employees. Total represented employees as of November 1,2008 numbered_,as follows: _were represented by the OCEA, were represented by Local 501 and were represented by the Supervisor and Professional Groups. New agreements with each of these employee organizations took effect on July 1, 2007. The r OCEA and Local 501 agreements are in effect through June 30, 2011; the Supervisor and Professional 8033MI1.6 19 r Book Page 146 V Group agreements are in effect through June 30,2010.The OCFA has represented administrative/clerical, V technical services and engineering employees since 1979. Local 501 has represented operations and maintenance employees since October 1985. The Supervisor and Professional Groups have represented supervisory and professional employees since 1991. The District has historically enjoyed a good working relationship with the employee organizations and has experienced no work stoppages by represented personnel in the past. For a description of the Orange County Employee's Retirement System, in which the District Ly participates, and the District's deferred compensation plan, see "Retirement Plan" below and Note 7 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year i Ended June 30,2008,set forth in Appendix A. r Retirement Plan j The District participates in the Orange County Employee's Retirement System ("OCERS"), a �r cost-sharing multiple-employer, defined benefit pension plan which is governed and administered by a nine-member Board of Retirement. OCERS was established in 1945 under the provisions of the County Lr Employees Retirement Law of 1937,and provides members with retirement,death,disability,and cost of- living benefits. Id All District full-time employees participate in OCERS. The amount of the retirement allowance is based upon the members age at redrement, the members "final compensation" as defined in - Section 31462 of the Retirement Law of 1937, the total years of service under OCERS, and the employee's classification as a Tier I or Tier Il member. As of July 1, 2006, the formula to calculate W retirement benefits was enhanced to 2.5%at age 55,or employees retiring at age 55 or older receive 2.5% of their average salary for every year of service. Average salary is the highest consecutive 12 months of compensation for Tier I employees and the highest consecutive 36 months of compensation divided by 60 three for Tier II employees. Benefits fully vest under the OCERS retirement plan on reaching five years . of service. Employees who retire at or after age 50 with ten or more years of service are entitled to an annual retirement allowance. OCERS also provides death and disability benefits. L: As a condition of participation under the provisions of the County Employees Retirement Law of 1937, members are required to contribute a percentage of their annual compensation to OCERS. The N District is required to make periodic contributions to OCERS in amounts that are estimated to remain a constant percentage of covered employees' compensation such that, when combined with covered employees' contributions,will fully provide for all covered employees'benefits by the time they retire. A current comparison of OCERS costs for Fiscal Years 2003-04 through 2007-08 and projected costs for Fiscal Years 200"through 2009-10 is shown in the following table. u I : s. L U L 80336611.6 20 V Book Page 147 r Table 3 Orange County Sanitation District Comparison of OCERS Costs for Fiscal Years 2003-04 through 2007-M r and Projected Costs for Fiscal Years 2008-09 through 2009-10 Fiscal Year Rater Costr�1 2003-04 9.15% $ 3,668,650 2004-05 12.37 5,524,673 2005-06 15.21 7,416,556 r 2006-07 19.78 9,848,854 2007-08 20.47 10,877,737 2008-09131 21.34 12,392,491 r 2009-10r31 21.34 13,221,264 Requi�ntribution as a percent of covered payroll. Includes amortization of Unfunded Actuarial Accrued Liability. r r�1 Amounts represents employer contributions made by the District. 1'1 Projected. Source: Orange County Sanitation District. r For Fiscal Years 2003-04 through 2007-08, the District's required contribution was equal to the contribution that the District actually made. As noted, the required contribution set forth above includes r amortization of Unfunded Actuarial Accrued Liability ("UAAL"). For the Fiscal Year ended June 30, 2008, total payroll costs of employees covered by OCERS was $53,148,097. As of the December 31, 2007 valuation, OCERS has an aggregate UAAL ratio of 72.9%, for a total UAAL of$2.71 billion. The r District expects the next OCERS valuation to occur on or about December 31,2008. For more information regarding OCERS and the District's retirement plan as of June 30, 2008, see Note 7 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended Jane 30,2008 set forth in Appendix A. The Comprehensive Annual Financial Reports of the Orange County Employees Retirement System are available on the OCERS website at http;llm .ocers.org. The information on such website is not incorporated herein by such reference or r otherwise. Other Post-Employment Benefits r The Governmental Accounting Standards Bond ("GASB") in April 2004 issued Statement No.43, which requires state and local governmental employers to determine, on an actuarial basis, the total liability of post-employment benefits other than pension benefits(known as other post-employment r benefits or "OPEB"), including healthcare and life insurance expenses and related liabilities, and an annual required contribution to fund such liabilities. In Jane 2004, GASB issued Statement No.45, which requires state and local governmental employers to fund the actuarially determined annual required contribution ("ARC'S for its OPEB or record the entire amount of the unfunded liability of its OPEB in its financial statements. The District was required to implement GASB Statement No.43 for the Fiscal Year ended Jane 30, 2007, and was required to implement GASB Statement No.45 for the Fiscal Year r ended June 30,2008. The District's OPEB program currently includes medical and prescription drug benefits and a r program of cash payments, known as Additional Retiree Benefit Account ("ARBA") benefits. Benefits vest upon retirement after qualifying public service of ten years. Most of the District's retirees under the age of 65 are covered under the same medical and prescription drug plans as active employees of the r District,but an additional retiree-only fee for service plan called"Blue Card"is also available. 80336611.6 21 r Book Page 148 1 Iu Accordingto the District's act y actuary, Demsey Filliger Associates (the "Actuary"), the unfunded OPEB liability as of July 1,2007 is approximately$17.4 million. The ARC is$1,764,000 for Fiscal Year 2008-09. Calculation of the ARC is based on the present value of benefits accruing in the current year, a II 1 30-year amortivation of the wfmded OPEB liability and an assumed rate of return on investments in the Li retiree fund of 5% per amum. The District does not believe that its OPEB liability will have a material impact on its operational results. L Risk Management As of the date hereof, the District has in force basic all risk property and casualty insurance, v including theft, fire, flood, terrorism and boiler and machinery losses to the Wastewater System. The District is self-insured for portions of workers' compensation,property damage and general liability. The self-insurance portion of workers' compensation is $500.000 per person per occurrence with outside excess insurance coverage to the statutory limit. The self-insured portion for property damage covering L' fire and other disasters is $25,000 per occurrence with outside excess insurance coverage to $1 billion. The self-insured portion for property damage covering flood is $100,000 per occurrence with outside excess insurance coverage to $300 million. The District is self-insured for all property damage from the it perils of earthquakes. See "DISTRICT REVENUES — Reserves." The District also maintains outside comprehensive boiler and machinery insurance, including business interruption insurance, with a SIM million limit with deductibles ranging from $25,000 to $350,000. The District is self-insured for general liability coverage up to$250,000 per occurrence,with excess general liability coverage up to$25 million. During the past three fiscal years there have been no settlements in excess of covered amounts. Claims against the District are processed by outside insurance administrators. The District believes that there are no unrecorded claims as of June 30, 2008 that would materially affect the financial position of the District. 1 V For more information regarding the District's insurance coverage as of June 30,2008,see Note 1 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year i Ended June 30,2008 set forth in Appendix A. W Existing Facilities L The District's Wastewater System presently consists of two wastewater treatment plants, an influent metering and diversion structure, 16 off-plant pump stations, various interplant pipelines and I �� connections, and the ocean outfall facilities. The District's Wastewater System includes approximately L� 568 miles of sewers within 12 trunk sewer systems, 152 miles of local sewers located within Revenue Area No. 7, two treatment plants, two discharge outfalls and two emergency weir outlets. The existing treatment plants have a rated primary treatment capacity of 372 mg/d,including standby capacity. V Treatment Plant No. I ("Plant No. 1")is located in the City of Fountain Valley, about four miles from the coast, adjacent to the Santa Ana River. Secondary treatment capabilities are provided by a trickling filter plant and a conventional air activated sludge plant. Up to 105 mg/d of secondary treated effluent is conveyed to an Orange County Water District(the"OCWD")plant for tertiary treatment prior to reclamation and ground water recharge. Id Treatment Plant No. 2("Plant No.2")is located in the City of Huntington Beach, 1,500 feet from the ocean,at the mouth of the Santa Ana River. Secondary treatment capabilities are provided by a pure oxygen activated sludge plant. v The District employs several phases in the treatment of wastewater. The first phase, preliminary treatment,removes debris such as eggshells,sand and other non-biodegradable items. See also"Preferred Level of Treatment" and "Biosolids Management" below. In the next phase, primary treatment, 80336611 6 22 1 W Book Page 149 r wastewater is pumped to large settling basins. The liquids are separated from the remaining solids which settle or float as the wastewater passes through large settling basins called clarifiers. The settled solids are sent to solids treatment facilities. Approximately 25 percent of the primary treated wastewater flows into the ocean outfall pumping station where it is blended with secondary treated wastewater before being discharged into the ocean. The other 75 percent is sent to secondary treatment for further processing. During secondary treatment, the wastewater is placed in aeration basins to which naturally occurring bacteria are used to remove most of the remaining dissolved and suspended microscopic organic solids. The treated wastewater from both plants is mixed together at Plant No.2,where it is than pumped through the ocean outfall pipe that extends five miles offshore. `+ Table 4 below sets forth the treatment plants' approximate current and future treatment capacities. Table 4 W Wastewater System Treatment Capacities (mg/d) 2007-08 Existing Primary Total Planned Actual Treatment Existing Secondary Seconda Flows Cavacity Treatment Capacity Caoacitv1, r Plant No. 1 92 204 110 170 Plant No. 2 129 168 90 150 ,r Aggregate Treatment 221 372 200 320 Plant Facilities r The District's "Planned Total Capacity" is based on the Strategic Plan for planned capacity by 2020, which estimated the District's requirements to meet future expected primary and secondary capacity demands. Soume: Orange County Sanitation District. r The District also has the capability to divert a portion of the influent flow from Plant No. 1 to Plant No. 2 through interplant connections. A portion of the flow destined for Plant No. 2 can also be ,. diverted to Plant No. 1. Another interplant facility allows gas generated during solids treatment to be transported between Plant No. I and Plant No. 2 and allows digester gas(which is used as fuel for many of the facilities' engines)from one plant to be used at the other to balance the supply and demand which r results in efficient gas utilization.. Permits,Licenses and Other Regulations ,r The Wastewater System is subject to regulations imposed by the 1972 Clean Water Act, Public Law 92-500 (the "Clean Water Act"), the California Environmental Quality Act of 1970, as amended ("CEQA") and the Federal Clean Air Act. The regulatory requirements are administered by the United r States Environmental Protection Agency(the"EPA")and the California Regional Water Quality Control Board("RWQCB"). Regulations of these agencies deal primarily with the quality of effluent which may be discharged from the treatment plants and the nature of waste material discharged into the collection system. The Clean Water Act directs the EPA to monitor and to regulate the discharge of pollution into navigable waterways and to enforce the requirements that all wastewater treatment plants in the nation provide full secondary treatment for sewage. In 1977, Congress amended the Clean Water Act to allow waivers of secondary treatment standards for certain ocean dischargers if they can demonstrate, to the satisfaction of the EPA, that significant adverse environmental impacts would not occur. The District currently has all applicable permits and licenses necessary to operate its facilities. r 80336611.6 23 Book Page 150 L an The District has discharged treated wastewater into the Pacific Oce under a permit issued by L the EPA and the RWQCB. The discharge permit included a waiver under the 301(h) provisions of the Clean Water Act, allowing for less than full secondary treatment based on an ocean discharge of sufficient depth,distance and dilution. The permit was initially issued in 1985 and was the first modified Section 301(h) permit issued to a major wastewater treatment facility. The District's permit, which included the Section 301(h)waiver of secondary treatment requirements, was issued on May 6, 1998 and expired on June 8,2003. In July 2002, the Board of Directors approved a change from the existing level of treatment, a - blend of 509/o advanced primary and 50% secondary treated wastewater, to full secondary treatment standards. See `Preferred Level of Treatment" and "Urban Runoff' below. As a result, the District established a policy to subject all wastewater discharges into the ocean to secondary treatment standards. See "Preferred Level of Treatment" below. To implement this policy, District staff was directed to i immediately proceed with the planning, design, and implementation of treatment methods with the �+ expressed purposes of eliminating the need for the permit wavier received under Section 301(h). Following determination by the Board of Directors in July 2002 to implement full secondary w standards, staff prepared the Secondary Treatment National Pollutant Discharge Elimination System ("NPDES") Permit Application that was required to be submitted to the regional office of the EPA and the RWQCB in December 2002. The NPDES Permit is separate and apart from the permit waiver received under Section 301(h), and once awarded would negate any necessary waiver. Achieving secondary treatment standards was originally projected to take six years to complete, with completion expected in December 2012. Because ocean discharge permits are issued for only five years, and the ' EPA has no authority to waive the discharge limits requirements or grant a longer permit (except in accordance with Sec.301(h)),the District decided to voluntarily seek a consent decree concurrently with the issuance of the new ocean discharge permit. This negotiated consent decry (the"Consent Decree") approves the schedule and decrees that no penalties will be imposed for discharges that exceed the V secondary treatment limits during the period of construction. The Consent Decree was signed by the District, the EPA and the RWQCB and filed with the U.S. District Court on November 15, 2004. The j District is in compliance with the decree and has successfully completed four of the seven milestones LJ within the specified deadlines required by the decree. The South Coast Air Quality Management District ("AQMD") is the regional governmental u agency charged with implementing the Federal Clean Air Act AQMD permits are required before a sewage treatment improvement project can be constructed. Such permits are project speck and contain construction process requirements, required equipment and standards for predicted air quality. After construction is completed,the AQMD issues an operation permit. These permits are also project specific and contain air quality standards and other appropriate operational guidelines. Most of the District's facilities are enclosed in order to trap emissions,which are cleaned by air scrubbers that remove odors. In V addition,the District has implemented an air quality risk reduction program which includes a 20-year plan to improve treatment plant operations and reduce industrial toxic pollutants. The District currently has all necessary AQMD permits to operate the Wastewater System. I L.r Capital Improvement Program The Mosier Plan. The District's 1989 master plan consisted of a 30-year plan of action for L managing wastewater activities to the year 2020, entitled "2020 Vision, Action Plan for Wastewater Management and Environmental Protection 1990-202W(the"Master Plan"). The Master Plan integrated research facilities planning, environmental analysis, toxic control, water conservation and reclamation, L sludge reuse, other wastewater programs and financial planning into a single unified approach. In connection with the preparation of the Master Plan,an in-depth land use study was performed,resulting in I 1 the creation of a uniform land use classification system and a map of the District's service area. Land use L+ designations and unit flow factors were used to project wastewater flows in the District's trunk sewers for 80336611.E 24 L Book Page 151 ,r than present conditions, through the year 2020. These flows were included in a computer model of the District's Wastewater System which identified future sewer capacity improvements. A thirty-year capital improvement program was developed to implement the required sewer capacity improvements. This land use study included the collection and compilation of the latest available land use plans, reports, maps and studies from the cities within the District and the County, and interviews with the planning directors or key staff within the District. Land use planning within the District's service area is the responsibility of the County for unincorporated areas and cities for areas within their boundaries. The California Coastal Commission has some land use authority within the District's coastal areas. The Strategic Plan. In October 1999, the District updated the Master Plan with a strategic plan (the "Strategic Plan"). The Strategic Plan updated the planning process set forth in the Master Plan through the year 2020 and defined the District's goals, responsibilities, and requirements over the then following twenty years, including projections through the assumed "build-out" of the District's service r area to the year 2050. In addition to updating the population and flow assumptions, the Strategic Plan provided for an operations and financial plan, including a review of the collection,treatment and disposal facilities, and the District's ocean outfalls. Studies on a preferred level of wastewater treatment and in- sourcing of the ocean monitoring program were prepared and incorporated in the Strategic Plan. Water and air regulatory agencies require that all wastewater facilities be designed to meet the needs of anticipated growth and provide a reasonable reserve capacity. With the adoption of the Strategic Plan,the District's planning process met these requirements by shifting its approach for the development of master plans from a"sin and build"approach to a broad-based,multi-agency cooperative evaluation process. Many of the assumptions used to develop the Strategic Plan, such as inflation, the projected service population, the level of building activity, and the volume of wastewater treated, were quite different from what was assumed ten years earlier under the Master Plan. Critical factors such as population growth, new construction, the volume of wastewater delivered to the plants and viable water r conservation and reclamation programs were reevaluated. Interim Strategic Plan. In Jane 2002, an Interim Strategic Plan Update (the "interim Strategic Plan")was completed to further update and revise many of the assumptions used to develop the District's previous planning documents,including population and land-use projections,the level of building activity in the District's service area and the volume of wastewater to be treated. The Interim Strategic Plan also provides for an operations and financial plan including a review of the District's collection,treatment and disposal facilities,and a study of the District's ocean outfall system. In addition,potential changes in the regulatory climate for the beneficial reuse of biosolids were also considered. On July 17, 2002, the Board of Directors approved Resolution No. OCSD 02-14, "Establishing the Policy for Level of Treatment of Wastewater Discharged into the Ocean." This resolution established the District's policy to treat all wastewater discharges into the ocean to secondary treatment standards thereby providing for continued public safety, marine ecosystem protection, and water reclamation opportunities. To implement this policy, the District staff was directed to immediately proceed with the planning, design, and implementation of treatment methods that will allow the agency to meet Clean r Water Act secondary treatment standards. The District currently estimates that it will take approximately four years (through December 2012) and total capital improvement costs of $630.6 million to reach secondary treatment discharge standards. In the interim,the District will operate the plants to maximize available secondary treatment and to reduce effluent biochemical oxygen demand and suspended solid discharges below currently allowed limits. The then current 50% secondary portion would increase incrementally as operations change and new facilities are constructed and placed in service. See "Preferred Level of Treatment"below. The District's planning process for development of the Interim Strategic Plan incorporated an analysis of population growth,dry weather and peak wet weather flows and the maximum use of existing facilities. The population of the District's service area was projected to grow to 2.7 million by the year 80336611.6 25 Book Page 152 I L. 2020. Average flow rates at both treatment plants were projected to increase to 278 mg/d by 2020 (134 L mg/d of treatment at Plant No. I and 144 mg/d at Plant No.2), up 26% from the Fiscal Year 2007-08 flow. i 1 In combination with the Interim Strategic Plan, the District developed its current Capital LI Improvement Program("CIP"). The District expects to meet furore demands on the Wastewater System through the CIP. This program has been developed to satisfy anticipated regulatory requirements, increased population, additional treatment requirements, conservation, energy and other resource savings considerations,odor control improvements,and air quality protection needs. Through 2020,the District's - CIP is scheduled to accomplish: L • Major rehabilitation of the existing headworks, primary treatment, secondary treatment, outfall pumping,and solids handling facilities at both treatment plaids; L • Replace and rehabilitate 16 of the District's outlying pumping stations, and 44 trunk sewer improvement projects; 1 V • Reduce fence line odor to levels that do not generate odor complaints; I • Disinfect ect the District's ocean discharge to reduce bacterial levels below State bathing standards; • Reclaim 70 mg/d of the District's effluent, or nearly one-third of the total daily flow U (Groundwater Replenishment System);and • Achieve full secondary treatment standards. L CIP Validation Study. In preparation of each year's Budget,the District conducts an annual CIP validation study to ensure that all projects are necessary and that most recent cost estimates are accurate. As identified in the Interim Strategic Plan, and verified through the 2008 CIP Validation Study and Secondary Treatment Review, $456.1 million of additional capital improvements over the next four years _ (through December 2012)are needed to reach full secondary standards. b1 The 2008 CIP Validation Study resulted in proposed revisions to the CIP. The proposed CUP now consists of 114 individual capital projects through Fiscal Year 2020-21 at a total cost of$2.48 billion, L approximately $1 billion of which has been spent to date. The bulk of concoction is scheduled during the next six years,with average annual expenditures of$200 million. Implementation of full secondary treatment standards is scheduled to be completed on or before December 31, 2012. A summary of total estimated capital costs for the proposed CIP for Fiscal Years 200" through 2020-21 is set forth in Li Table 5 below. L V L L E0336611.6 26 L Book Page 153 r r Table 5 r Capital Improvement Program—Estimated Costs Fiscal Years 2008-09 through 2020-21 Project Cost r Collection System Capacity $ 142,693,300 Collection System Repair,Rehabilitation,Replacement 194,679,800 r Treatment Plant Capacity 113,537,750 Additional Secondary Treatment 50,561,150 Groundwater Replenishment System,Phase 1 2,766,000 Improved Treatment 506,800,400 Treatment Plant Repair,Rehabilitation,Replacement 415,743,500 Support Facilities 47,904,100 r Total Validated Capital Improvement Program $]A74.686A00 Source: Orange County Sanitation District. r The proposed CIP contemplates expenditures of$373.7 million in Fiscal Year 2008A9. Of this total, the largest cash outlay within the plant facilities category is $100.1 million for a new secondary treatment system at Reclamation Plant No. 1,with a total project cost of$265.9 million. New trickling filters at Treatment Plant No.2 will require$73.7 million in Fiscal Year 2008-09,with a total project cost of$221.2 million. Another $25.8 million is required for Headworks improvements at Treatment Plant No.2,with a total project cost of$254.5 million. The proposed CIP contemplates expenditures of$228.9 million in Fiscal Year 2009-10. Of this total,the largest expenditure within the plant facilities category is $56.9 million for new trickling filters at Treatment Plant No. 2. The new secondary treatment system at Reclamation Plant No. 1 is expected to require $21.5 million in Fiscal Year 2009-10. Another $13.2 million during this period is proposed for Headworks replacement at Treatment Plant No.2. The proposed CIP's largest collection system project for Fiscal Year 2008-09 is$22.4 million for the Bitter Point Force Main Rehabilitation project. For Fiscal Yew 2009-10, the three largest projects include $18.0 million for replacement of the Rocky Point Pump Station, $13.1 million for replacement of the Bitter Point Pump Station and $7.1 million for the Gisler-Redhill System Improvements, Reach B �+ project. The total budgets for these three projects are $31.0 million, $36.5 million and $9.4 million, respectively. r Groundwater Replenishment System The District has taken a multi jurisdictional approach to planning for capital facilities because r many of the methods for reducing or managing Bows involve otherjurisdictions. One such project is the Groundwater Replenishment System ("GWRS"). In March 2001, the District entered into an agreement with the OCWD to design and construct Phase 1 of the GWRS. The cost of this Phase is to be paid equally (50% shares) by each agency. The GWRS is a joint effort by the two agencies to provide 'r reclaimed water for replenishment of the Orange County Groundwater Basin and to augment the seawater intrusion barrier. The GWRS is planned for phased expansions. Phase 1 recently commenced and once it becomes fully operational Phase 1 is expected to produce approximately 72,000 acre-feet per year of recycled water. Future phases will be funded solely by OCWD and could expand capacity up to 145,600 acre-feet per yew. With the completion of Phase 1,the GWRS has the capacity to divert up to 100 mg/d of flow from the District's ocean discharge. r 80336611.6 27 r Book Page 154 i; As of June 30, 2008, the total estimated cost of GWRS Phase I was $496.8 million. Of this 6h amount, approximately $90.0 million has been reimbursed through grants from the U.S. Environmental Protection Agency,the U.S. Bureau of Reclamation,the State Water Resources Control Board and others. I The District's estimated share is $248A million. Costs incurred by the District through June 30, 2008 L total $204.1 million. As noted above, Phase 1 of the GWRS has commenced operations and the GWRS will require a cash outlay of$2.8 million in Fiscal Year 2008-09 to complete construction,commissioning and contract closeout retention payments. Preferred Level of Treatment In July 2002, the Board of Directors approved a change from the existing level of treatment, e blend of 500/a advanced primary and 50% secondary treated wastewater, to full secondary treatment standards. The reasoning behind the decision to move to full secondary standards included (1)the possibility (no matter how remote) that bacteria from the ocean outfall may at times reach the shoreline, L (2)upgraded treatment will aid additional water reclamation with the Orange County Water District, (3)and the public clearly stated preference for upgrading wastewater treatment at the time. L In an effort to eliminate most bacteria from being released from the ocean outfall, in 2002 the District began to use chlorine bleach to disinfect the effluent and than apply sodium bisulfate to remove remaining chlorine prior to releasing the treated wastewater to the ocean. The District continues to take y measures to limit the chlorine residual to a very low level prior to release. This mode of disinfection is expected to continue while the District studies, designs and constructs permanent facilities,and considers alternate disinfection technologies. Beginning in Fiscal Year 2006-07, the addition of disinfection u treatment required an annual outlay of$7.2 million for additional chemicals from the operating budget of the District. Following determination by the Board of Directors in July 2002 to implement full secondary standards, staff prepared the Secondary Treatment NPDES Permit Application that was required to be submitted to the regional office of EPA and the RWQCB in December 2002. An NPDES permit has been issued to the District and the District is currently operating under the Consent Decree. See "THE V DISTRICT—Permits,Licenses and Other Regulations." Currently, the District estimates that it will take approximately four years and require additional capital improvement costs of approximately $456.1 million to add additional secondary treatment capacity to the Wastewater System, with completion expected in December 2012. In addition, operating costs will increase by approximately $7.2 million annually upon completion of facilities necessary to meet secondary treatment standards. In the interim, the District will operate the plants to maximize y available secondary treatment and to reduce effluent biochemical oxygen demand and suspend solid discharges below those currently allowed limits. The District expects its secondary treatment capacity to V increase incrementally each year as operations change and new facilities are constructed and placed in service. Biosolids Management e+ The District produces approximately 650 tons per day (tpd)of digested and dewatered biosolids. By 2012, when new secondary treatment processes are expected to be fully operational, the District's V biosolids production is projected to increase to 830 tpd, though with the planned installation of centrifuges,such production is expected to decrease to 750 tpd in 2014 and 700 tpd in 2016. The District relies on the following technologies and locations for the management of its biosolids: land application of L biosolids in Arizona, land composting to high-grade soil amendment in Riverside County, Kem County and La Paz County,Arizona,and Iandfilling of biosolids in Yuma County,Arizona. L 80336611.6 28 L Book Page 155 r Counties throughout California and Arizona have developed,or are in the process of developing, ordinances that severely restrict or ban the land application of biosolids. In June 2006, Kem County voters approved an anti-sludge initiative that bans the land application of biosolids. It has become clew r that certain land application options currently available to the District are anticipated to be eliminated in the new future due to these developments. The District,and most of California's wastewater agencies, is working to develop sustainable products and management locations for its biosolids. 'tl The dynamic regulatory issues, land application ordinances and bans, and public perception challenges prompted the District, with the help of CH2MHi11, to develop a Long-Range Biosolids Management Plan ("LRBMP"). This LRBMP was approved by the Board in December 2003. The goal r of the LRBMP was to develop a sustainable, reliable, and economical program for long-range biosolids management providing environmentally sound practices that meet the stringent federal, state, and local regulatory requirements. The LRBMP recommendations included new in-plant technologies to reduce r the volume of biosolids, explore the production of high-grade biosolids products, and move into the energy and fuel production and compost markets. r As a result of the LRBMP recommendations,the existing Synagro biosolids management contract was amended in April 2004 to have 250 tons per day of the District's biosolids composted at Synagro's South Kern Compost Manufacturing Facility. This composting facility is receiving its full allocation of contracted biosolids. In May 2006,the District entered into a contract with EnerTech Environmental,Inc. " to convert 225 tons of biosolids per day to a renewable fuel at EnerTech's proposed facility in Rialto, California. The EnerTech solution is a relatively new, patented heat treatment process that increases the ability to dewater biosolids in order to maximize the efficiency of the production of fuel. By decreasing the moisture content of biosolids prior to drying, a smaller dryer is needed, thus reducing capital and energy consumption. The fuel product will be recycled and reused under agreements with wee cement kilns and other fuel users. Residual ash from the fuel combustion becomes part of the cement product, r resulting in no residual waste product liability. The EnerTech facility began receiving biosolids from the District in November 2008. Currently, the balance of the biosolids not managed by either Synagro or EnerTech are being managed by Tule Ranch pursuant to a five-year contract by either land application or landfill disposal in Arizona. The District anticipates releasing a Request for Proposals for long-term biosolids management r for the remainder of the biosolids not managed via existing long-term contracts by either Synagro or EnerTech by June 2009. As a result of the transition to biosolids-based compost and energy products the cost to the District for biosolids management has increased. The Fiscal Year 2006-07 management budget for biosolids was $12.8 million. The Fiscal Yew 2007-08 management budget for biosolids was $14.3 million. The actual cost of biosolids management in Fiscal Yew 2006-07 and Fiscal Year 2007-08 was �+ $11.7 million and$13.5 million, respectively. The Fiscal Year 2008-09 biosolids management budget is $19.9 million. r Urban Runoff In June 2002, legislation was passed that allows the District's charter to include permissive language authorizing the diversion and management of dry weather urban runoff Flows. This legislation allows the District to acquire,construct,operate,maintain,and furnish facilities for the diversion of urban runoff from drainage courses within the District,the treatment of the urban runoff,the return of the water _ to the drainage courses,or the beneficial use of the water. - The legislation allows the District to divert up to 10 million gallons a day and consider more extensive options, such as building artificial wetlands that would naturally filter the runoff, or building a 80336611.6 29 Book Page 156 I V L I runoff treatment plant, similar to a $9.5 million facility built in Santa Monica that recycles 500,000 gallons of runoff a day. The County's beaches have been affected by storm water and urban nmoff pollution. As a result, l j the Santa Ana Regional Quality Control Board has taken direct action to control discharge of pollutants to tributaries and recreational water bodies in the County by issuing a Storm Water Permit to the County and cities. In order to comply with the provisions of the permit, the County and cities have increased Lr resources to fund municipal storm water/urban runoff management and treatment services. However,this effort has been difficult to sustain given the complexity of the program and the competing demands on limited resources. L The District, the County and other local agencies, are currently considering whether to explore public support for levying a fee to property owners to fond regional storm water/urban runoff management and treatment services within the County. L Integrated Emergency Response Program � � In recognition of the potential damage which could occur in the event of a major earthquake, j,+ flood, or other disaster, the District has implemented an Integrated Emergency Response Program (the "IERP") in 1979. The IERP is a two-volume plan which contains policies, plans and procedures Lr preparing for, and responding to, emergencies. The District also analyzed disaster preparedness issues and policies within the Master Plan, and within a 1994 document titled Fault Rupture Hazard Investigation-Wastewater Treatment Plant No.2. According to the Master Plan, earthquakes are considered to be the most potentially devastating natural disaster events which confront the District. The disaster preparedness plan included in the Master Plan reviewed two possible major earthquake scenarios: an 8.3 Richter magnitude ("M") earthquake on the southern San Andreas fault system and an M 7.0 earthquake 7.0 Newport-Inglewood fault zone,which includes Plant No. 2. An M 8.3 earthquake on the southern San Andreas fault,while on the whole more destructive than the M 7.0 Newport-Inglewood fault even, would probably result in less damage to the LI District's service area due to the distance of the fault from most of the service area. However, the 1989 Master Plan stated that damage from such a major earthquake on the San Andreas fault would be extensive. Also, the Master Plan indicated that an M 7.0 earthquake on the Newport-Inglewood fault 'y„j within five miles of the District's sewerage facilities could cause major destruction to those facilities. The disaster preparedness plan in the Master Plan indicated that it would not be economically feasible to upgrade all of the existing sanitary sewerage facilities to survive an earthquake of this magnitude along the Newport-Inglewood fault. The IERP outlines the policies and employee actions to be taken before, during and after an earthquake,earthquake response guidelines and damage assessment procedures. The Master Plan analyzed the wlnerability of the sanitary sewerage facilities and operations of Lr the District and planned a risk reduction program wherein the vulnerability of many of the District's sanitary sewerage facilities to an earthquake could be reduced by recommended retrofit construction I measures. The Master Plan also recommended that designs of existing major structures which were L constructed prior to development of current seismic design standards be reviewed and the structures strengthened,if necessary. Since the 1989 Master Plan and the 1994 Report, the District has completed retrofitting where L deemed appropriate. Pursuant to the Master Plan, all recent and future projects have been, and will be, designed to the same high earthquake code standards as set for other essential services, such as hospitals and fire stations. Many of the older buildings analyzed in the Master Plan have been replaced by structures built after 1989. W 80336611A 30 Book Page 157 L r The Army Corps of Engineers' "All-River Plan" has mitigated any future flooding of the Santa Ana River system and potential threats to the District's Wastewater System. Also, both Plant No. 1 and Plant No.2 are surrounded by three-foot to six-foot high walls,built to federal standards. r The disaster preparedness plan in the Strategic Plan investigates the damage potential posed by coastal flooding, tsunamis(large ocean waves generated by seismic activity) and windstorms. However, based on available information, the District does not believe that any of such events would have a material adverse impact on the Wastewater System. The Strategic Plan also makes recommendations regarding fire protection of the Wastewater System and most of the structures at Plant No. l and Plant No. 2 are constructed of fire-resistant materials. The IERP describes the procedures needed to respond to a possible disaster. For more information regarding emergency response policies, the disaster preparedness plan described in the r Strategic Plan and the IERP can be reviewed at the District's office. DISTRICT REVENUES r Sewer Service Charges General. The District has the power to establish fees and charges for services of the Wastewater System. Such foes and charges are established by the District's Board of Directors and are not subject to review or approval by any other agencies. In Fiscal Year 1997-98, a Rate Advisory Committee (the "RAC") was established comprised of representatives from industrial, commercial and residential users. The goal of the RAC was to examine the then current rate structure and, if needed, develop recommendations for change. The RAC analyzed r the District's rate structure to determine whether its then current sewer service user fees (now known as "Sewer Service Changes') were equitable among residential and industrial customers. This review resulted in a proposal to expand the number of non-residential user categories from one to twenty-three r and to provide for gradual rate increases in seven of the nine Revenue Areas. The increase in the number of categories provided a more equitable fee structure and also provided for future reductions in singlo- family residential Sewer Service Charges. The Sewer Service Charges for those categories were based on the average flow and strength of wastewater discharged for each property type and remain currently in r use. The Board of Directors establishes the annual sanitary sewer service charges by ordinance. The sanitary sewer service charge ordinances are adopted by a two-thirds vote of the Board of Directors as required under law after conducting a noticed public hearing in compliance with Proposition 218. See "LIMITATIONS ON TAXES AND REVENUES — Article XIIIC and Article XIIID of the California .r Constitution." In May 2002,the Board of Directors adopted District Ordinance No. OCSD 18(the"2002 Ordinance") which was effective on July 1, 2002. The 2002 Ordinance included a single family residential ("SFR") rate increase, the underlying basis for all sanitary sewer service charges including sanitary sewer rates for multi-family residential units as well as most commercial and industrial properties, of $7.50 per year, or 9.4%, to $87.50 per year. In June 2003, the Board of Directors authorized a Proposition 218 notice on proposed"not to exceed"rate increases for each year over the next r five years. Each year thereafter,the Board of Directors has ratified the next year's actual rate. The District collects Sewer Service Charges from property owners through the semi-annual property tax bill distributed by the County throughout the District, except in Revenue Area No. 14. Pursuant to the IRWD Agreement, the District receives quarterly fee payments from the Wire Ranch Water District (the "IRWD") which directly collects fees from customers through a monthly billing procedure in Revenue Area No. 14. r 9033661 L6 31 r Book Page 158 � The District has covenanted in the Master Agreement to fix, prescribe and collect fees and L charges to satisfy certain coverage requirements as further described under "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES—Rate Covenant"herein. I u Residential and Cornmereiai Sewer Service Ckarges. Pursuant to the 2002 Ordinance, the District established residential Sewer Service Charges upon a rational basis between the fees charged each - customer and the services and facilities provided to each customer of the District,except those located in L+ Revenue Area No. 14. The noticed public hearing held in connection with the 2002 Ordinance considered increases in the amount of the annual charges by approximately 20% per year for each of the then following five years. In May 2005,the Board of Directors adopted Ordinance No. OCSD-26 increasing the Fiscal Year 2005.06 single family residential rate, the underlying basis for all sewer service charges, L by 31%, from $115.00 to $151.00 for all ratepayers, except those located in Revenue Area No. 14. In _ Jame 2007, the Board of Directors adopted Ordinance No.OCSD-32 increasing the Fiscal Year 2007-08 I single family residential rate by 9.8%. tr On February 27, 2008, the Board of Directors approved increases in its sanitary sewer service charges for all single family and multi-family residential units, and for all commercial properties. The L Board increased the single family residential rate,which is the basis for all of the District's sewer service charges, by 10.5% for Fiscal Year 2008-09, 10% for Fiscal Year 2009-10, 100/0 for Fiscal Year 2010-11, 9.8%for Fiscal Year 2011-12 and 9.8%for Fiscal Year 2012-13. L Table 6 below sets forth the annual ordinance adoptions following the last Proposition 218 notice 1 and presents a five-year comparison of the Sewer Service Charge rate for single-family residences. L Table 6 Annual Sewer Service Charges Single Family Residence Rate Five Year Rate Schedule Fiscal Years 2004-05 through 2008-09 Effective Sewer Service Percent Fiscal Year Ordinance No. Date Chore e Increase 2004-05 OCSD-20 07/01/04 $115.00 15.0% 2005-06 OCSD-26 07/01/05 151.00 31.3 2006-07 OCSD-30B 07/01/06 165.80 9.8 2007-08 OCSD-32 07/01/07 182.00 9.8 •+ 2008-09 OCSD-35 07/01/09 201.00 10.5 Source: Orange County Sanitation District. Table 7 below sets forth total average annual Sewer Service Charge for single-family residences within the District, together with comparable total average annual charges for wastewater service within the jurisdictions of certain other cities and districts within the State as of July 1, 2008. The District's projected SFR rate of$293 in Fiscal Year 2012-13 remains below the current average annual sewer rate of $406 according to a Fiscal Year 2007-08 survey of 726 agencies encompassing all 58 counties in California conducted by the State Water Resources Control Board _ rl L 80336611.6 32 L Book Page 159 Table 7 Comparison of Total Sewer Service Charges For Single-Family Residences As of July 1,2008 Average Dry Annual Weather Sewer Property Flow Service Treatment Collection Tax Enti (me/d)"' Chareettl Leveh')to Resoonsibilityl" Incoae131 .y City of San Diego 168 $531 2 Yes No City of Los 428 360 4 Yes No r Angeles East Bay MUD 80 247 4 No Yes Sacramento 140 237 3 No Yes Orange County 233 201 2 No Yes Sanitation District Los Angeles 497 117 4 No Yes County Soured obtained from respective entities listed. r 1�1 Treatment Level Categories: "1"—Primary treatment. "2"—Advanced primary or primary with some secondary treatment. "3"—Secondary treatment. ,r "4"—Advanced secondary or secondary with some tertiary treatment. to "5"—Tertiary treatment. Source: 2007-08 Wastewater User Charge Survey Report by the California State Water Resmuces Control Board. r Industrial Sewer Service Charges. The District charges industrial Sewer Service Charges to customers discharging high-strength or high-volume wastes into the sewer systems. Customers subject to industrial Sewer Service Charges are billed directly by the District. The fee charged to each customer is based on the customer's sewage volume, the concentration of suspended solids and biochemical oxygen demand. Pursuant to the 2002 Ordinance, rates for each component factor were revised for certain industrial users in order to be consistent with the rates charged to residential users. Total industrial Sewer Service Charges in Fiscal Year 2007-08 were approximately $12 million. Industrial Sewer Service Charges are applied to both operating and capital funds. r The Sewer Service Charge increases described above are necessary to meet the District's cash flow needs arising from the addition of disinfection treatment and other operating requirements. As r discussed under the caption "THE DISTRICT — Capital Improvement Program," the CIP Validation Study in the Spring of 2005 (as further updated in the 2008 CIP Validation Study) developed a capital improvement program to meet secondary treatment standards as quickly as possible while providing for r increased flows and rehabilitation and refurbishment of existing facilities.As projected out to Fiscal Year 2020-21 the cash flow needs of the CIP total approximately $2.48 billion, approximately $1 billion of which has been spent to date. The bulk of construction is scheduled during the next six years, with r average annual expenditures of$200 million. 80336611.6 33 r Book Page 160 L Additional Revenues L The District has several sources of additional revenue,including property taxes, Capital Facilities Capacity Charges,capacity rights,permit and inspection fees and interest earnings. W Property Taxes. The District receives approximately 2.5%of the one percent County ad valorem property tax levy, based on the allocation procedure under State law. Property tax revenues were $0.6 million in Fiscal Year 2002-03, $46.9 million in Fiscal Year 2003-04, $35.8 million in Fiscal Year 2004- 05, $40.0 million in Fiscal Year 2005-06, $60.6 million in Fiscal Year 2006-07 and $65.2 million in Fiscal Year 2007-08. The $11.2 million decrease in property tax revenues from Fiscal Year 2003-04 to Fiscal Year 2004-05 is reflective of the State of California's then current fiscal crisis and the implementation of the fast year of a two-year 40% secured property tax shift away from independent special districts. During the 2004-05 State Budget process, the State Legislature and the Governor enacted Senate Bill 1096 and Assembly Bill 2115, effectively shifting an additional $1.3 billion in local u property tax revenues from counties, cities, special districts and redevelopment agencies to schools and community colleges. This shift was effective for Fiscal Yew 2004-05 and Fiscal Year 2005-06,resulting in a 400/u secured property loss for the District. See"LIMITATIONS ON TAXES AND REVENUES— V Proposition IA."This 40%reduction for Fiscal Year 2004-05 was somewhat offset by the than existing strength in the real estate market. Total assessed valuations increased in the 2005-06 Fiscal Year by 10.3%over the 2004-05 Fiscal Year,and the full value of than increases was received on all non-secured u property tax distributions. The District received property tax revenues in its full allotment (no State property tax shift) of$65.2 million in Fiscal Year 2007-08. The District expects its property tax receipts to be approximately 5% in Fiscal Year 2008-09. See Table 11 below. The District currently projects its property tax receipts to increase by 5%each year thereafter. This projection reflects the fact that declines in the market value of property in the County do not necessarily result in decreased property tax revenue in the near term because of the limiting effect of Proposition 13 on assessed valuations and other factors. b The apportionment of the ad volorem tax is pursuant to a revenue program adopted by the District in April 1979 to comply with EPA and RWQCB mandates, legal and contractual requirements and Board of Directors policy. L' Capital Facilities Capacity Charges. Capital Facilities Capacity Charges (formerly known as connection fees) are one-time fees with two components, paid at the time property is developed and connected to the Wastewater System. The fees are imposed by the District pursuant to Section 5471 of W the California Health and Safety Code and are levied to pay a portion of the District's capital costs and for access to capacity in the Wastewater System. Currently, the District has Capital Facilities Capacity Charges of $4,517 per residential unit (three-bedroom); however, under the current industrial use L ordinance, additional Capital Facilities Capacity Charges can be imposed on industrial users who place larger than avenge demand on the Wastewater System. Member cities and sanitary, districts collect Capital Facilities Capacity Chagas for the District when building permits are issued. Capital Facilities Capacity Charges are reviewed annually to reflect the changes in the value of the Wastewater System to which a new customer is connecting. I On December 15, 1999, the Board of Directors approved District Ordinance No. OCSD 99-11 1i (the"1999 Ordinance")which established a comprehensive Capital Facilities Capacity Charge. The 1999 Ordinance, effective as of January 1, 2000, renamed connection fees as Capital Facilities Capacity Charges and provided a more equitable schedule of fees among industrial, commercial and residential u users. Pursuant to the 1999 Ordinance,Capital Facilities Capacity Charges were revised for high demand industrial users in five incremental increases from 1999 through 2001. For a summary of historical and projected revenues derived from Capital Facilities Capacity Charges,we Table 14 and Table 15 below. L Pursuant to an agreement with the IRWD, the IRWD is not required to pay Capital Facilities l �� Capacity Charges and in exchange, the IRWD provides funding to the District for the construction costs 4 of certain wastewater collection, transmission, treatment and disposal facilities to be used by the IRWD 9033661 L6 34 Book Page 161 L „r and is obligated to make certain payments to the District for certain services arising from the Wastewater System(including any standby or availability charges). r Sale ojCapacily The District has entered into agreements with the Santa Ana Watershed Project Authority ("SAWPA”) whereby wastewater from Upper Santa Ana River Basin dischargers can be transported through the District's Santa Ana River Interceptor to the District's wastewater treatment facilities. This program was developed in the early 1970's.The agreements establish control mechanisms regarding the quality of wastes deposited into the Wastewater System. At the present time, SAWPA has purchased and paid for 30 mg/d of capacity rights in the District's Santa Ana River Interceptor and 17 mg/d of capacity in the District's wastewater treatment plants. Additional treatment plant capacity can be purchased in increments at the District's current replacement cost. The Santa Ana River Interceptor Line ("SARI") was built in the Chino Basin Preserve Area in r order to remove dairy farm wastes and accommodate future urban development Salts in the wastewater generated from the cleaning of caws and milking equipment were leaching into the groundwater in the Chino Basin and the SARI was built to divert the washwater from this area. However, due to the nature ,r of the Chino Basin Preserve,the development of any infrastructure in the area to accommodate the SARI was limited. The current SARI multi-phase project is designed to connect several dairies to the SARI. Future expansions of this project could include connecting other dairies and other waste streams with the r SARI line. See"THE DISTRICT—Capital Improvement Program"herein. Wastewater Treatment History r The average yearly influent flow to the District has remained relatively stable for the preceding four years. The wastewater flow for Fiscal Year 2004-05 was 243 mg/d.for Fiscal Year 2005-06 was 235 mg/d, for Fiscal Year 2006-07 was 229 mg/d and for Fiscal Year 2007-08 was 221 mg/d. The highest r flow rate experienced was during El Nmo storm periods. Peak flows of 500 mg/d were recorded in December 1997 and February 1998. There were no sewer failures or overflows during these events. " Customers The historical number of customers served by the District for the Fiscal Years 2003-04 through 2007-08 and the projected number of customers served by the District for the Fiscal Years 2008-09 r through 2012-13, identified in Equivalent Dwelling Units ("EDUs"), are set forth in Table 8 below. As discussed below,sewer service charges are based on the expected amount of wastewater flow for a single family dwelling. This base amount is considered the "equivalent dwelling unit" The EDUs set forth in Tables 8 and 9 below equate to total Sewer Service Charge levies. r r r r r 80336611.6 35 Book Page 162 L Table 8 L Historical and Projected Equivalent Dwelling Units Fiscal Years 2003-04 through 2012-13 V Historical Projected Fiscal Year EDUs Fiscal Year EDUstll L 2003-041n 884,169 2008-09 914,677 2004-051n 893,501 2009-10 918,336 2005-06 910,469 2010-11 922,009 2006-07 907,996 2011-12 925,697 2007-08 911,033 2012-13 929,400 EDU-growthduring the projection period is estimated at approximately 0.4%per annum. L of With respect to such Fiscal Years, presentation in the Statistical Section of the District's Comprehensive Annual Financial Report set forth in Appendix A includes EDUs that equate to total Sewer Service Charge collections rather than levies. Source: Orange County Saturation District. y Table 9 below shows the number of residential and commercial customers and industrial L customers and the approximate percentages of Sewer Service Charge revenues derived from the combined residential and commercial use and industrial use for the last five fiscal years. Table 9 L Number of Accounts and Revenues by Customer Class for the Fiscal Years 2003-04 through 2007-08 L, ($ in Millions) Residential/Commercial Industrial Number of Percentage Percentage Equivalent of Sewer of Sewer Single- Service Number of Service Family Total Charge Customer Total Charge Fiscal Year Dwellings Revenue Revenues Accounts Revenue Revenues 2003-04j" 860,156 $ 86.0 92% 530 $ 7.5 8% L+ 2004-0550 860,634 99.0 90 568 10.5 10 2005-06 872,959 132.0 92 557 12.2 8 2006.07 967,035 143.8 91 531 13.4 9 L 2007-08 975,824 159.4 - 93 520 12.1 7 With th respect to such Fiscal Years, presentation in the Statistical Scctionof the Comprehensive Annual Financial Report set forth in Appendix A includes EDUs that equate to total Sewer Service Charge collections as rather than levies. Source:Orange County Sanitation District. 1r The ten largest principal sewer service customers of the District for the Fiscal Year ended June 30, 2008 are shown in Table 10 below. These principal sewer service customers paid a total of L $5,711,033 for wastewater service from the District. U 9033"]L6 36 Book Page 163 U Table 10 Largest Principal Sewer Service Customers of the District for the Fiscal Year Ended June 30,2008 r Percentage of Total Sewer Service Sewer Service User Charges Charge Revenues Kimberly-Clark Worldwide, 0.56% Inc. $1,032,500 .+ Alstyle Apparel—A&G Inc. 1,023,517 0.56 MPC Foods,Inc. 798,449 0.43 Stremicks Heritage Foods, 0.37 r LLC 699,749 House Foods America Corp. 525,676 0.29 Ameripec Inc. 414,671 0.23 Pepsi-Cola Bottling Group 381,371 0.21 Seven-Up Bottling Company 304,964 0.17 Van Law Food Products Inc. 272,011 0.15 Nor-Cal Beverage Co. Inc. 268,225 0.15 TOTAL $5,711,033 3.12% Source: Orange County Sanitation District. r Assessed Valuation The assessed valuation of property in the County is established by the County Assessor, except for public utility property which is assessed by the State Board of Equalization. Due to changes in assessment required under State Constitution Article XIIIA, the County assessment roll no longer sst purports to be proportional to market value. See "LIMITATIONS ON TAXES AND REVENUES" herein. Generally, property can be reappraised to market value only upon a change in ownership or completion of new construction. The assessed value of property that has not incurred a change of r ownership or new construction most be adjusted annually to reflect inflation at a rate not to exceed 2% per year based on the State consumer price index. In the event of declining property value caused by substantial damage, destruction, economic or other factors, the assessed value must be reduced .y temporarily to reflect market value. For the definition of full cash value and more information on property tax limitations and adjustments,see"LIMITATIONS ON TAXES AND REVENUES"herein. The County Assessor determines and enrolls a value for each parcel of taxable real property in the County every year. The value review may result in a reduction in value. Taxpayers in the County also may appeal the determination of the County Assessor with respect to the assessed value of their property. Table l l below shows a five-year history of assessed valuations in the District since Fiscal Year 2004-05. r r r 80336611.6 37 Book Page 164 L II, Table 11 L Assessed Valuations of Property in the District Fiscal Years 2004-05 through 2008-09 ($in Billions) LI Fiscal Year Value % Change 2004-05 $219.3 8.85% U 2005-06 241.8 10.30 2006-07 270.7 11.93 L 2007-08 292.7 8.13 2008-09 307.6 5.09 Source: County of Orange Auditor-Controller. L Prior to 2006, the housing market in Southern California experienced significant price appreciation and accelerated demand. During this period, many homebuyers financed the purchase of their new homes using non-conventional loans. Such loans were made with little or no down payment and included adjustable interest rates subject to being reset at higher rates on a specified date or upon the L occurrence of specified conditions. In addition, many of these loans allow the borrower to pay interest only for an initial period,in some cases up to ten years. I Starting in 2006, housing developers, appraisers and real estate consultants began to report L weakening of prices for single-family homes. There has been tightening of underwriting criteria for mortgage loans such that most lenders now require down payments, stricter verification,higher income to loan ratios,higher credit ratios or some combination of such factors. These factors have contributed to a L decrease in home sales as prospective purchasers are unable to qualify for loans. Declining home sales in some areas of Southern California have resulted in a decrease in home prices. As home values decline, homebuyers may not be able to obtain replacement financing because the outstanding loan balances exceed the value of their homes. Due to the limiting effect of Proposition 13 on assessed valuations, declines in the market value of property in the County will not necessarily result in decreased property tax revenue in the near term. In fact, assessed valuations of property in the District for Fiscal Year 2008-09 i have increased by $14.9 billion, or 5.09%, over Fiscal Year 2007-08 valuations. Under certain Lr circumstances, however, the County may reduce assessed valuations as a result of decreases in market value,leading to decreased property tax collections. V Tax Levies and Delinquencies Property taxes are based on assessed valuation which is determined as described under �. "DISTRICT REVENUES—Assessed Valuation"herein. In accordance with the California Revenue and Taxation Code, the County tax collector collects secured tax levies for each Fiscal Year. Property taxes i on the secured roll are due in two installments, on November 1 and February 1. The District currently participates in the County's Teeter Plan under which the District receives annually I M of the secured property tax levies and Sewer Service Charges to which it otherwise is entitled,regardless of whether the County has actually collected the levies. This alternative method provides for funding each taxing entity y included in the Teeter Plan with its total secured property taxes during the year the taxes are levied, including any amount uncollected at fiscal year end. Under this plan,the District's general fund receives the full amount of secured property taxes levied each year on its behalf and for so long as such plan remains in effect, the participating entities, such as the District, no longer experience delinquent taxes. v The County's general fund is the designated recipient of future collections of penalties and interest on all delinquent taxes collected on behalf of participants in this alternative method of apportionment In recent LI 80336611.6 3$ L Book Page 165 r r years, the County has experienced delinquencies of Sewer Service Charges in the District of approximately 2%. r Unpaid taxes become delinquent after December 10 and April 10, respectively, and a 10% penalty attaches to any delinquent payment. In addition, property on the secured roll with respect to which taxes are delinquent is declared tax-defaulted on or about June 30. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus costs and redemption 11 penalty of one and one-half percent per month to the time of redemption. If taxes am unpaid for a period of five years or more,the tax-defaulted property is subject to sale by the County Treasurer-Tax Collector. r Property taxes on the unsecured roll are due as of the January 1 lien date and become delinquent, if unpaid on August 31. A 10% penalty attaches to delinquent taxes on property on the unsecured roll and an additional penalty of one and one-half percent per month begins to accrue on November 1. The r taxing authority has four ways of collecting unsecured personal property taxes: (1)a civil action against the taxpayer, (2)filing a certificate in the office of the County Clark specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for recordation in the County Recorder's office in order to obtain a Jim on certain property of the taxpayer, and(4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the taxpayer. 'p Table 12 below presents a five-year history of the District's ad valorem total property tax and Sewer Service Charge levies. " Table 12 Total Property Tax and Sewer Service Charge Levies in the District for Fiscal Years 2003-04 through 2007-08 W (In Thousands) Total Tax and Sewer r Fiscal Year Service Charge Levy 2003-04 $134,132 2004-05 152,745 2005-06 191,290 2006-07 209,206 200748 228,622 r Source: Orange County Auditor-Controller's Office. r Budgetary Process The District's operating fiend budget relies on revenues from property taxes and Sewer Service Charges, both of which are collected on the property tax bill. See "DISTRICT REVENUES— Sewer Service Charges"and"—Additional Revenues." The District receives tax revenues from the County in eight allocations,with the largest receipts in December and April. The District operates on a Fiscal Year r beginning each July 1. The operating fund budgets include funds to cover the dry period of each tax year, Le., the period from the beginning of the Fiscal Year until the first taxes are received. The dry-period requirement is budgeted at one-half of the annual operating fund budgeted expenditures. The District r uses the accrual method of accounting in its budgets. The District has conformed to its budgets for the last five fiscal years and is conforming to its budget for the current fiscal year. 80336611.6 39 Book Page 166 V The District's annual budget preparation process begins in January of each year and concludes in 4� June upon its adoption. The General Manager reviews the final operating budgets and then distributes them to the Directors and District Committees for consideration. The Board of Directors then adopts the proposed annual budgets,with any revisions,in June of each year. r Budgetary control is exercised at the individual Department level and administrative policies provide guidelines on budget transfers and the authorization necessary to implement transfers. A budget L adjustment is a transfer which does not change the total appropriated amount and does not require Board of Directors action. Approval may be granted by the General Manager or the Department Head in certain circumstances. Department Heads have the discretion to reapportion funds between certain line items within a division but may not exceed total appropriated amounts for each department. They may also transfer staff across divisional lines. The General Manager and Board of Directors must approve additional capital outlay items. A budget amendment is an adjustment to the total appropriated amount which was not included in the original budget. These supplemental appropriations require formal action by the Board of Directors. Prior year reserves or fund balances may be appropriated to fund items not previously included in the CJ adopted budget. Reserves or fund balances exceeding minimum amounts required by fiscal policies may be appropriated if it is determined to be in the best interest of the District. Directors may also appropriate reserves in case of emergencies or unusual circumstances. Reserves I The District has an established reserve policy with eight separate categories for its reserve funds. V The following table sets forth actual reserves at June 30, 2008, projected reserves at June 30, 2009, and proposed reserves at June 30, 2010, for each fund. Reserve levels are calculated in accordance with the District's reserve policy. Table 13 Actual and Projected Reserves June 30,2009 through 2010 (In Millions) June 30,2007 June 30,2008 June 30 200910 Cash Flow Requirements Reserve— Operating Expenses $110 $ 70 $73 Certificates of Participation Payments - 65 84 Operating Contingencies Reserve 22 14 15 Capital Improvement Program Reserve 51 165 83 Catastrophe and Self Insurance 57 57 58 �- Capital Replacement and Refurbishment 53 54 55 Debt Service Required Reserves 79 108 133 Total $372 $533 $501 Projects d -. Source: Orange County Sanitation District. b The Cash Flow Requirements Reserve was established to fund operation, maintenance and certificates of participation debt service expenses for the first half of the fiscal year,prior to the receipt of rr the first installment of the property tax allocation and sewer service user fees which are collected as a separate line item on the property tax bill. The level of this reserve is established as the sum of an amount equal to six months operations and maintenance expense and the total of certificates of participation debt y service expenses due in the subsequent fiscal year. The Operating Contingencies Reserve was established 80336611.6 40 1r Book Page 167 ,r to provide for non-recurring expenditures that were not anticipated when the annual budget and Sewer Service Charges were adopted. The level of this reserve is equal to 10%of the District's annual operating budget. The Capital Improvement Program Reserve was established to fund annual increments of the r Capital Improvement Program with a target level at one-half of the average annual Capital Improvement Program through the year 2020. Levels higher and lower than the target can be expected while the long- term financing and capital improvement programs are being finalized. The Catastrophic Loss, or Self- Insurance Reserve is established for property damage including fire, flood and earthquake, general liability and workers' compensation. The level of reserve in this fund is maintained at a level to fund the District's non-reimbursed costs which are estimated to be S57 million. The Capital Replacement and Refurbishment Reserve was established to provide 309/o of the funding to replace or refurbish the current r collection, treatment and disposal facilities. The current replacement value of these facilities is estimated to be approximately 56.26 billion. The initial reserve level for this fund was established at $50 million and is augmented by interest earnings and a portion of the annual Sewer Service Charges. Debt Service ,r Required Reserves(or Obligation Reserve Funds as defined in the Master Agreement)are controlled by a trustee pursuant to the provisions of certificates of participation issues and are not available for the general needs of the District. The Rate Stabilization Reserve accumulates all available fimds which r exceed the targets for all other reserves. The Rate Stabilization Reserve is a separate fund from the Rate Stabilization Account established under the Trust Agreement. These funds are applied to future years' needs and most be maintained at specified levels. There is currently no established target for this reserve and, because the reserves of all other funds have not been exceeded,the reserve level for this reserve fund is zero for Fiscal Years 2005-06 through 2008-09. See APPENDIX A — "COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED TUNE 30,2008"herein. r Summary of Operating Data �+ Set forth in Table 14 below is a summary of historic operating results for the District for Fiscal Years 2003.04 through 2007-08. The District's CIP cash flow budget for Fiscal Year 2007-08 is$302.7 million, an increase of$36.6 million from the prior year total, for the financing of joint works treatment W and disposal system improvement projects, and collection system improvement projects. This increase is attributable to the additional infrastructure needs identified in the Interim Strategic Plan and in the CIP Validation Study. The information presented in the summary should be read in conjunction with the financial statements and notes. See APPENDIX A — "COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30,2008"herein. r r r r L 9033"11.6 41 Book Page 168 L Table 14 L Summary of Historical District Revenues and Expenses and Other Financial Information For Fiscal Years 2003-04 through 2007-08 Apt ($in Millions) 2003-04 2004-05 2005-06 2006-07 2007-08 Revenues: Sewer Service Charges(l) $86.0 $ 99.0 $ 132.0 $143.8 S159.4 Industrial Sewer Service i Charges 7.5 10.5 12.2 13.4 12.1 it Revenue Area No. 14 Fees 5.8 6.9 53 5.2 7.1 Ad Valorem Taxes 46.9 35.8 40.0 60.6 65.2 Interest Earnings 6A 15.1 10.4 222 20.2 Capital Facilities Capacity iw Charges (-CFCC") 9.0 9.8 15.6 313 19.8 w Other Revenues 4.0 6.1 9.2 83 6.9 it Total Revenues $166.0 5183.2 $224,7 S284.8 $290.7 Operations and Maintenance L Expenses11 $95.4 $101.8 $105.6 $112.2 $131.9 Net Revenueslsl S_61.6 5-71.11 S103.5 S141.3 S334.4 Debt Service &2L4 $_3.7, $ 4L $98.6 LAM � Coverage Ratios1' 2.17x 1.89x 2.47x 2.91x 3.25x ✓..r CIP Outlay SHM f, lM $260-8 $287A S275.8 Ending Reserves141 Mu 34M S446.0 S287.0 Saa4n L Net of rebates,if any,to commercial users. rn Excludes depreciation and amortization expenses. 01 Calculated in accordance with the Master Agreement,which excludes CFCC from Net Revenues. (y 01 Excludes debt service reserves in accordance with the District's reserve policy. Source: Orange County Sanitation District. - V Projected Operating Data Set forth in Table 15 below are projected operating results for the District for Fiscal Years 2008- it 09 through 2012-13. new projections assume the number of projects and scheduled build out set forth in the CIP Validation Study,and reflect Board-approved annual increases in sewer service rates of 10.5%, l0a/o, 10°/a 9.8% and 10.5% over this five-year period. Principal expenditure components of these L projections are derived from the CIP Validation Study, which identified 114 large capital projects managed by the Engineering Department through 2020-21 at a total cost of$2.48 billion, and currently projected to include over $1.1 billion in the next five years. The District's CIP cash flow budget for L Fiscal Year 2008-09 is $373.7 million, an increase of$94.4 million from the prior year estimated total. This CIP budget finances joint works treatment and disposal system improvement projects,and collection system improvement projects. This increase is attributable to the additional infmstmcture needs identified I + in the CIP Validation Study. The preparation of such projections was based upon certain assumptions and certain forecasts with respect to conditions that may occur in the future. While the District believes that these assumptions and forecasts are reasonable for the purposes of the projected selected operating data,it makes no representations that they will in fact occur. To the extent that actual future conditions differ from those assumed herein,the data will vary. Li 80336611.6 42 Book Page 169 r Table 15 Summary of Projected District Revenues and Expenses and Other Financial Information w for Fiscal Years 2008-09 through 2012-13 ($in Millions) 2008-09 2009-10 2010-11 2011-12 2012-13 .,, Revenues: Residential&Commercial Sewer Service Charges $191.3 $211.3 $2342 $257A $284.7 r Industrial Sewer Service Charges 9.5 10.4 11.5 12.6 13.8 Revenue Area No. 14 Fees 30.2 17.3 20.3 21.2 23.1 Ad Valorem Taxes 64.9 68.2 71.6 75.2 78.9 Interest Earnings 19.2 18.6 19.5 20.6 21.8 r Capital Facilities Capacity Charges("CFCC") 21.7 22.9 24.2 25.6 27.0 Other Revenues 19.2 15.2 18.0 18.2 18.9 Total Revenues $356.0 $363.9 $399.3 $430.8 $468.2 Operations and Maintenance Expenses 146.8 154.0 184.1 199.7 216.9 Net Revenuestll $187.5 $187.0 $191.0 $205.5 $224.3 r Debt Proceeds $200.0 $120.0 $ 90.0 $ 60.0 $ 80.0 I Debt Service $ 74.6 $ 84.3 $ 91.2 $ 95.8 $100.5 ` CIP Outlays $373.7 $228.9 $182.5 $169.8 $188.6 Ending Reserves1�7 $333.9 $341.4 $365.0 $385.8 $421.6 Coverage Ratios") 2.51x 2.22x 2.09x 2.15x 2.23x Cal accordance with the Trust Agreement.which excludes CFCC from Net Revenues. 1�1 Excludes debt service reserves in accordance with the District's reserve policy. r fI Calculated in accordance with the Master Agreement,which excludes CFCC from Net Revenues. Assumptions: (a) Annual growth in equivalent dwelling units is projected to increase 0.4%over the next five years. (b)The Residential and Commercial Sewer Service Charge and the Industrial Sewer Service Charges are forecasts are based on the total projected equivalent dwelling units, the actual 10.5% increase for 2008-09, and the approved rate increases of 10.00/a 10.0% and 9.8%, respectively, for the following three fiscal years. (c) The Capital Facilities Capacity Charge forecast is based on the total projected equivalent dwelling units a. along with a 5.0%project annual increase in the rate. (d) Revenue Area No. 14 fees are derived based on the projected contribution of sewage Flows to the District from the Irvine Ranch Water District. (e) Ad valorem tax revenues are projected to increase at 5.0%per year. (f) Interest carvings are projected as 4.0%of average annual cash balances. Ogg Operating and Maintenance Expenses are projected to increase 7.0%per year. (h) Annual CIP Outlays is based on the cash Flow projections developed from the CIP Validation Study. Solace: Orange County Sanitation District. r Management's Discussion and Analysis of Operating Data The District's Fiscal Year 2008-09 total operating and capital improvement budget is $601.0 million, a 17.1% increase over the prior year budget of$513.2 million. The District's Fiscal Year 2008- 09 budget includes $72.3 million in capital improvement outlays as the District moves towards reaching secondary treatment standards by the target date of December 31, 2012, as specified by the Board of Directors' July 2002 resolution and in keeping With the terms and conditions of its ocean discharge permit and related Consent Decree. r 80336611.6 43 Book Page 170 hi The Fiscal Year 2008-09 operations budget for the collection, treatment, and disposal of �.I wastewater is$148.8 million, an$6.2 million increase from the prior year budget of$142.6 million. This _ increase is primarily attributable to the proposed increase in personnel costs due mostly to the current capital improvement program, totaling $2.48 billion over the next ten years. Personnel costs increased y $3.9 million, or 4.9%. The contractual services budget increased $7.1 million, or 33.1%. The major component of this category is biosolids removal and transport costs. Contracts have been executed with firms for agricultural reuse of residual solids. The utility budget decreased by $0.2 million, or 2.0%, primarily as a result of utility rates not increasing as much as anticipated. Electricity is the largest utility cost incurred by the District and is used to run the plant processes. The Fiscal Year 200" budget reflects an increase in imported electricity because new government regulations on air emission limits has iJ forced a reduction in electrical power production at the District's central generation facilities, a process that converts methane gas into electricity. ' i The Fiscal Year 20O8A9 CIP cash flow budget was approved at $373.7 million an increase of L $94.4 million from the prior year estimated total. In preparation of the Fiscal Year 2006-07 and 2007-08 budgets, the Board of Directors established a CIP Oversight Committee to review the CIP program and staffs annual validation effort of the CIP to ensure that the scope of the projects was appropriate and that u the cost estimates were accurate, and to gain an understanding of the impact from the CIP to the current rate structure. The Fiscal Year 2008-09 CIP includes 86 large capital projects and 28 special projects II , with a projected 15-year cash outlay of$1.47 billion. Over this time period,the CIP will accomplish: L� • Rehabilitation of the existing headworks, primary treatment, secondary treatment, outfall I pumping,and solids handling facilities at both treatment plants; • Replacement and rehabilitation of nine of the District's outlying pumping stations, and rehabilitation and upgrade of 29 trunk sewer improvement projects; 4 • Optimiration of the production of"power"and"biosolids"at each of the treatment plants; i • Reclamation of 70 mg/d of the District's effluent, or nearly one-third of the total daily flow V through the Groundwater Replenishment System;and • Achieve secondary treatment standards by December 2012. M A review completed by the CIP Oversight Committee in Fiscal Year 2006-07 reaffirmed the need for further rate increases in future years. Annual increases are ordered to be subject to reaffirmation by tl the affirmative vote of two-thirds of the members of the Board of Directors prior to implementation of _ arty such charge for each fiscal year. Based on the results of the CIP Oversight Committee, the Board of Directors adopted Ordinance No. OCSD-35 increasing the sanitary sewer service charges by L approximately 10.5% for Fiscal Year 2008-09. This action increased the single family residence user rate, the basis for all sewer user fee rates, from $192 to $201. See "DISTRICT REVENUES — Sewer Service Charges." L Investment of District Funds i State statutes authorize the District to invest in obligations of the United States Govemment,state V and local governmental agencies, negotiable certificates of deposits, bankers acceptances, commercial paper, reverse repurchase agreements and a variety of other investment instruments which are allowable under California Government Code Section 53600 et seq. All District funds, except for Obligation Reserve Funds controlled by a bank trustee pursuant to the provisions of Existing Senior Obligations, are managed by an external money manager, Pacific 1r Investment Management Company ("PIMCO"). Mellon Trust ("Mellon Trust") serves as the District's 80336611.6 44 Book Page 171 y independent custodian bank for its investment program. Callan Associates ("Callan") serves as the District's independent advisor. r At June 30, 2008, the District's externally managed fund consisted of short-term investment portfolio of$98,300,000 with an average maturity of 73 days, and a long-tern investment portfolio of $313,700,000 with average maturities of 2.3 years. Investments consist of United States government securities, corporate bonds and commercial paper. The District's portfolio contains no structured ^' investment vehicles(SI Vs)or reverse repurchase agreements. Deposits in banks are maintained in financial institutions which provide deposit protection on the r bank balance from the Federal Deposit Insurance Corporation. The California Government Code requires State banks and savings and loans to secure local government deposits by pledging government securities equal to 110% of the deposits or by pledging first trust deed mortgage notes equal to 150% of the r deposits. The District's Investment Policy requires that the District invest public fonds in a manner which ensures the safety and preservation of capital while meeting reasonable anticipated operating expenditure needs, achieving a reasonable rate of return and conforming to all state and local statutes governing the investment of public funds. The primary objectives, in order of the District's investment activities are safety, liquidity and return on investments. r FINANCIAL OBLIGATIONS Existing Indebtedness Currently the District has Senior Obligations Outstanding payable on a parity with the Installment r Payments under the Installment Purchase Agreement.The table below describes the District's outstanding certificates of participation as of December 1, 2008. The payment obligations in connection with each series of these certificates constitute Senior Obligations, subject to the provisions of the Master w Agreement and shall be afforded all of the benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. The District has no outstanding general obligation bonds. Table 16 Outstanding Certificates of Participation Debt As of December 1,2008 �+ Original Principal Issue Outstanding Final Amount Date Balance Maturity r 2000 Certificates $218,600,000 08/13/00 $ 195,800,000 O9/O1/30 2003 Certificates 280,000,000 08/26/03 191,500,000 02/01/33 r 2006 Certificates 200,000,000 03/08/06 196,600,000 02/01/36 2007A Certificates 95,180,000 0522/07 93,655,000 021O1/30 2007B Certificates 300,000,000 1220/07 300,000,000 02/01/37 r 2009A Certificates 77,615,000 0529/08 61,665,000 OS1O1/13 2008B Certificates 27,800,000 09/11/08 27,800,000 08/01/16 Total Long-Temr Debt $1,067,020,000 r 80336611.6 45 r Book Page 172 u In connection with the execution and delivery of the above-referenced outstanding certificates of participation, the district entered into certain installment purchase agreements, or equivalent documents providing for the payment of installment payments or similar payments. 6r Variable Rate Obligations In August 2000, the District caused the execution and delivery of the Orange County Sanitation District Refunding Certificates of Participation, Series 2000-A (the "2000-A Certificates") and the Orange County Sanitation District Refunding Certificates of Participation, Series 2000-B (the "2000-B Certificates"and together with the 2000-A Certificates,the"2000 Certificates")in the original aggregate 1 principal amount of$219,600,000, of which $195,800,000 will be outstanding as of December 1, 2008. rr In connection with the execution and delivery of the 2000 Certificates, the District entered into an installment purchase agreement(the"2000 Installment Purchase Agreement") and a Standby Agreement, dated as of August I, 2000 (the"2000 Standby Agreement"), by and among the District,the Trustee and Dexia Credit Local,acting through its New York Agency. In March 2006, the District reused the execution and delivery of the Orange County Sanitation W Refunding Certificates of Participation, 2006 Series (the "2006 Certificates") in the original aggregate principal amount of$200,000,000, of which $196,600,000 will be outstanding as of December 1, 2008. In connection with the execution and delivery of the 2006 Certificates, the District and the Corporation V, entered into an installment purchase agreement (the "2006 Installment Purchase Agreement") and the District entered into a Standby Certificate Purchase Agreement, dated as of March I, 2006 (the "2006 Standby Agreement"), with DEPFA Bank plc, acting through its New York Branch, to provide for it payment of the purchase price of tendered and unremarketed 2006 Certificates. _ The 2000 Standby Agreement and the 2006 Standby Agreement each constitutes a Credit Facility Agreement and a Credit Facility under the Master Indenture. The obligation of the District to repay H amounts drawn on or paid under these agreements, to pay interest on such amounts and to pay any other amounts in connection with such draw or payment constitutes a Reimbursement Obligation, each with i respect to a Senior Obligation. 6. Anticipated Financings 6d From time to time the District expects to deliver other obligations to finance and refinance portions of the CIP. In Fiscal Year 2008-09 the District expects to incur Additional Senior Obligations (including the principal amount of the Certificates) in an aggregate principal amount of approximately $200 million. Over the next four years,the District expects to incur Additional Senior Obligations in an `r aggregate principal amount of approximately$350 million. - Direct and Overlapping Bonded Debt L Table 17 below presents the aggregate direct and overlapping bonded debt of the District as of June 30,2008. L V Ir W 80336611.6 46 V Book Page 173 r r Table 17 Direct and Overlapping Bonded Debt of the District as of June 30,2009 r 2007-08 Assessed Valuation(Land&Improvements Only): $294733,304.951 Redevelopment Incremental Valuation: 35.564.345.09E Adjusted Assessed Valuation: $257,168,959.859 r OVERLAPPING TAX AND ASSESSMENT DEBT (Based on redevelopment adjusted all property assessed valuation of S264,164,343,096): Total Debt District's Share of 630108 %Asilicable(Il Debt 6/30/0 Orange County Teeter Plan Obligations $123,725,000 71.941% 5 88.335,277 The Metropolitan Water District of Southern California 327,215.000 14.941 48,889.193 .ay Coast Community College District 347,759,867 99.495 346,002,695 North Orange County Joint Community College District 233,349,001 96.922 226.166,519 Rancho Santiago Community College District 321,779,339 98.363 316.511.911 Brea-Oliada and Lagom Beach Unified School Districts 59,649,029 99.936&12.793 29,153,237 r Newport Man Unified School District 169,563,490 too. 168.563.490 Placenlia-Yorba Linda Unified School District 169,069,034 98.707 166,882,971 Saddleback Valley Unified School District 142,49%000 11.915 16.976.492 Santa Ana Unified School District 126,037.965 100. 126,037,965 Tustin Unified School District School Facilities Improvement Dishid No.2002-1 43,683,929 99.010 43.251,458 r Anaheim Union High School District 123,433,955 100. 123,493,955 Fullerton Joint Union High School Dishier 61,532,910 90.240 55,545,346 Huntington Beach Union High School District 232,274,998 98.919 229.764,105 School Districts 236.130,071 97319.100, 236342,957 r City of Anaheim 5,220.000 99.083 5,172,133 Irvine Ranch Water District Improvement Districts 271.221,669 Various 271.137342 Ruminator Community Services District Special Tan Obligations 625,000 100. 625.000 Bonita Canyon Community Facilities District No.99-1 42,615,000 100. 42.615.000 Irvine Unified School District Community Facilities Districts 266.430,000 99.998.100, 266,428353 Tustin Unified School District Community Facilities Districts 232,730345 too. 232.730345 Orange County Community Facilities District No.974 39,992,929 99.905 59,826,039 Other Community Facilities Districts 402,455,000 Various 402359,006 r Orange County Assessment Distrids 119.049.296 100. 118,04U% City of Ovine 1915 Act Bonds 905,675,000 too. 905,675,000 City of Tustin 1915 Ad Bonds 52,442,000 100. 52,442,000 Other 1915 Ad bonds 20,306,000 100. 20306.OW asid TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $4,599,922,965 Total Debt District's Share of DIRECT AND OVERLAPPING GENERAL FUND DEBT: N30Po8 %Applicable(II Debt 6/30/0 r Orange County General Fund Obligations $532.326,000 71.941% $ 392,428,322 Orange County Pension Obligations 72,729,867 71.941 52,249,364 Orange County Board of Education Certificates of Participation 19.590,000 71.841 14.073,652 South Orange County Community College District Cadfrales of Participation 34,945,000 35.613 12.444.963 Brea-Olinda Unified School District Certificates of Participation 29,800,000 99.936 29.730,928 Orange Unified School District Cenificda of Participation 49326.604 96.966 49326,604 Placentia-Yorba Linda Unified School District Certificates of Participation 96,310315 98.639 95,628.827 Santa Ana Unified School Dishier Certificates of Participation 64,355.969 100. 64,955,968 Other Unified School District Certificate of Participation 39,317,502 Various 33.933,126 ass Union High School District Cmificates of Participation 117,751,090 Various 114,970,458 School District Certificates of Participation 39.960,000 Various; 59.650.779 City ofAnelseim General Fund Obligations 679,632,465 99.083 673,400235 City of Costa Mesa General Fund Obligations 45.970,000 too. 45.970,000 City of Fullerton General Fund Obligations 29,302,794 too. 28,302,784 City of Huntington Beach General Fund and Judgment Obligations 76.300,000 99.980 76,294,740 City of Irvine General Fund Obligations 24,170,000 too. 24,170,000 City of Santa Arm General Food Obligations 116,220.000 100. 116,220,000 ,r Other City Cenerol Fund Obligations 172,570,000 Various 145.890247 Orange County Samoa don District Certificates of Participation 0 100. 0(2) Wine Ranch Water District Cenifiates of Participation 39,900.000 99.621 34,772,949 Municipal Water District of Orange County Water Facilities Corporation 19.295,000 66.611 12,852,59E ,sw (Continued on neat page.) 80336611.6 47 Book Page 174 W (Continued from previous page.) Total Deb District's Share of DIRECT AND OVERLAPPING GENERAL FUND DEBT: 6/30/0 Aooliable(Il Debt 6/30/03 Ymba Linda County Water District Certificates of Participation 9,860,000 97.773 9.640,418 lal Orange Comfy Fire Authority 10.365.000 $0.310 5,214,632 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $2.077,117.097 Less: Sang Ana Unified School District self-supporting Qualified Zone Academy Bonds 2,042.300 City ofAnahcim self-supporting obligations 650.281,304 W Dow City sclf-supponing obligations 30,162.670 MWDOC Water Facilities Corporation(100%self-supporting) 12,852,592 TOTAL NET OVERLAPPING GENERAL FUND DEBT S1.381,778.221 br GROSS COMBINED TOTAL DEBT 86,676,940,052(2) NET COMBINED TOTAL DEBT $5.981,601,196 (1) Percentage of overlapping agency's redevelopment adjusted all propeny assessed valation($264.164,343,096)located witldn it boundaries of the district. (2) Excludes wastewater revenue carnfiata ofparticipa0un. Previously classified cersificalas ofpmicipation bane been reclassified as district rename supported issues end are no longer included as direct debt in the debt stalanent. (3) Excludes hex and revenue anticipation rotes,enterprise revenue,mortgage revenue and Ian allocation bonds and non-bonded capital Wt lease obligations. Ratios I 2007-08 Land and Mprovemrnt laa Assessed Valuation Total Overlapping Tan and Assessment Debt 1.57% i al Adjusted AdjustedAll Property y Land&Improvement Assessed Valuation Gross Combined Total Debt 2.60% 2,53%No Combined Total Debt 2.33% 2.261/6 1 IY STAR SCHOOL BIJILDINGPAPA AS OF /08: $O Source: California Municipal Statistics W THE CORPORATION The Corporation was organized June 19, 2000 as a nonprofit public benefit corporation pursuant W to the Nonprofit Public Corporation law of the State. The Corporation's purpose is to render assistance to the District in its acquisition of equipment, real property and improvements on behalf of the District. — Under its articles of incorporation,the Corporation has all powers conferred upon nonprofit public benefit corporations by the laws of the State,provided that it will not engage in any activity other than that which had is necessary or convenient for,or incidental to the purposes for which it was formed. The Corporation is a separate legal entity from the District. It is governed by a twenty-five 4 member Board of Directors. The Corporation has no employees. All staff work is performed by employees of the District. The members of the Corporation's Board of Directors are the Board of ! Directors of the District. LI The District's Director of Finance and Administrative Services and other District employees are I. available to provide staff support to the Corporation. Isar The Corporation has not entered into any material financing arrangements other then those referred to in this Official Statement. Further information concerning the Corporation may be obtained from the Orange County Sanitation District office at 10844 Ellis Avenue, Fountain Valley, California, 92708-7018. Isar 80336611.6 48 IaY Book Page 175 r r LIMITATIONS ON TAXES AND REVENUES Article XIIIA of the California Constitution ^ On June 6, 1978, California voters approved Proposition 13 ("Proposition 13"), which added Article X111A to the State Constitution ("Article XIIIA"). Article XIIIA, as amended, limits the amount of any ad valorem tax on real property to one percent of the full cash value thereof, except that additional ad valorem taxes may be levied to pay debt service on (i)indebtedness approved by the voters prior to July 1, 1978,(ii)(as a result of an amendment to Article XIIIA approved by State voters on Jane 3, 1986) on bonded indebtedness for the acquisition or improvement of real property which has been approved on r or after July 1, 1978 by two-third of the voters on such indebtedness, and (iii)bonded indebtedness inured by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district, but only if certain accountability measures are included in the proposition. Article XIIIA defines full cash value to mean 'the county assessor's valuation of real property as shown on the 1975-76 tax bill under "full cash value," or thereafter, the r appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment" The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2%per year or to reflect a reduction in the consumer price index or comparable data for the area under the taxing jurisdiction, or reduced in the event of declining property values caused by substantial damage, destruction, or other factors. Legislation enacted by the State Legislature to implement Article XIIIA provides that notwithstanding any other law,local agencies may not levy any ad valorem property tax except to pay debt service on indebtedness approved by the voters as described ^ above. Legislation Implementing Article XIIIA Or Legislation has been enacted and amended a number of times since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted to levy directly any property tax(except to pay voter-approved indebtedness). The one percent property tax is automatically levied by the County and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to 1989. Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the 2% annual adjustment are allocated among the various jurisdictions in the 'taxing area" based upon their respective "situs." Any such allocation made to a local agency continues as part of its allocation in future years. Beginning in the 1981-82 fiscal year, assessors in the State no longer record property values on tax rolls at the assessed value of 25%of market value which was expressed as$4 per$100 assessed value. All taxable property is now shown at full market value on the tax rolls. Consequently, the tax rate is expressed as$1 per$100 of taxable value. All taxable property value included in this Official Statement is shown at 100% of market value (unless noted differently) and all tax rates reflect the $1 per $100 of taxable value. ^ Article XIIIB of the California Constitution An initiative to amend the State Constitution entitled"Limitation of Government Appropriations" was approved on September 6, 1979, thereby adding Article XIIIB to the State Constitution ("Article XIIIB"). Under Article XIIIB,the State and each local governmental entity has an annual"appropriations limit" and is not permitted to spend certain moneys that are called "appropriations subject to limitation" (consisting of tax revenues, state subventions and certain other funds) in an amount higher than the appropriations limit. Article XIIIB does not affect the appropriations of moneys that are excluded from 80336611.6 49 r Book Page 176 1 the definition of"appropriations subject to limitation,"including debt service on indebtedness existing or 1.1 authorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terms, the appropriations limit is to be based on certain I978-79 expenditures, and is to be adjusted annually to reflect changes in consumer prices, populations, and services provided by these ♦✓ entities. Among other provisions of Article XIIIB, if these entities' revenues in any year exceed the amounts permitted to be spent,the excess would have to be returned by revising tax rates or fee schedules i over the subsequent two years. WO "Appropriations subject to limitation" are authorizations to spend "proceeds of taxes," which consist of tax revenues, state subventions and certain other funds, including proceeds from regulatory licenses, user charges or other fees to the extent that such proceeds exceed"the cost reasonably borne by such entity in providing the regulation,product or service,"but"proceeds of taxes" excludes tax refunds and some benefit payments such as unemployment insurance. No limit is imposed on appropriations of funds which are not "proceeds of taxes," such as reasonable user charges or fees, and certain other non- W tax funds. Not included in the Article XBIB limit are appropriations for the debt service costs of bonds u existing or authorized by January 1, 1979, or subsequently authorized by the voters, appropriations required to comply with mandates of courts or the federal government and appropriations for qualified capital outlay projects. The appropriations limit may also be exceeded in certain cases of emergency. V The appropriations limit for the District in each year is based on the District's limit for the prior i year, adjusted annually for changes in the cost of living and changes in population, and adjusted where applicable, for transfer of financial responsibility of providing services to or from another unit of government. The change in the cost of living is, at the District's option, either(1)the percentage change in State per capita personal income, or (2) the percentage change in the local assessment roll on nonresidential property. Either test is likely to be greater than the change in the cost of living index, which was used prior to Proposition 111. Change in population is to be measured either within the jurisdiction of the District or the County as a whole. tr As amended by Proposition I11, the appropriations limit is tested over consecutive two-year periods. Any excess of the aggregate "proceeds of taxes" received by a District over such two-year period above the combined appropriations limits for those two years is to be returned to taxpayers by r, reductions in tax rates or fee schedules over the subsequent two years. As originally enacted in 1979,the District's appropriations limit was based on 1978-79 authorizations to expend proceeds of taxes and was adjusted annually to reflect changes in cost of living and population (using different definitions, which were modified by Proposition 111). Starting with Fiscal Year 1990-91,the District's appropriations limit was recalculated by taking the actual Fiscal Year 1986-87 limit,and applying the annual adjustments as if - Proposition I I I had been in effect. The District does not anticipate that any such appropriations V limitations will impair its ability to make Installment Payments as required by the Installment Purchase Agreement. i Proposition IA Proposition IA ("Proposition IA"), proposed by the Legislature in connection with the 2004-05 Budget Act and approved by the voters in November 2004,restricts State authority to reduce major local tax revenues such as the tax shifts permitted to take place in Fiscal Years 2004-05 and 2005-06. Proposition IA provides that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject 61 to certain exceptions. Proposition I A generally prohibits the State from shifting to schools or community colleges any share of property tax revenues allocated to local governments for any fiscal year,as set forth under the laws in effect as of November 3, 2004. Any change in the allocation of property tax revenues 6e 80336613,6 50 V Book Page 177 y among local governments within a county must be approved by two-thirds of both houses of the Legislature. Proposition I A provides,however, that beginning in Fiscal Year 2008-09,the State may shift to schools and community colleges up to 8%of local government property tax revenues,which amount most be repaid, with interest, within three years, if the Governor proclaims that the shift is needed due to a severe state financial hardship, the shift is approved by two-thirds of both houses and certain other conditions are met. Such a shift may not occur more than twice in any ten-year period. The State may also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. r Proposition IA also provides that if the State reduces the vehicle license fee ("VLF") rate currently in effect, 0.65% of vehicle value, the State must provide local governments with equal replacement revenues. Further, Proposition IA requires the State to suspend State mandates affecting cities, counties and special districts, excepting mandates relating to employee rights, schools or community colleges,in any year that the State does not fully reimburse local governments for their costs to comply with such mandates. Proposition 62 On November 4, 1986, California voters adopted Proposition 62, a statutory initiative which amended the Califomia Government Code by the addition of Sections 53720-53730. Proposition 62 requires that(i)any local tax for general governmental purposes(a"general tax")must be approved by a majority vote of the electorate; (ii)any local tax for specific purposes (a"special tax")must be approved by a two-thirds vote of the electorate; (iii)any general tax must be proposed for a vote by two-thirds of the legislative body; and(iv)proceeds of any tax imposed in violation of the vote requirements most be s deducted from the local agency's property tax allocation. Provisions applying Proposition 62 retroactively from its effective date to 1985 are unlikely to be of any continuing importance;certain other restrictions were already contained in the Constitution. ti Most of the provisions of Proposition 62 were affirmed by the 1995 California Supreme Court decision in Santa Clara Couaty Local Transportation Authority v. Guardino, which invalidated a special sales tax for transportation purposes because fewer than two-thirds of the voters voting on the measure had approved the tax. The District has not imposed any taxes subject to the provisions of Proposition 62 and believes that it will not impair its ability to make its Installment Payments as required by the Installment Purchase Agreement. The requirements of Proposition 62 have generally been superseded by the enactment of Article XIIIC of the Constitution(Proposition 218)in 1996. Article XIIIC and Article XIIID of the California Constitution r Proposition 218, a State ballot initiative known as the "Right to Vote on Taxes Act," was approved by the voters on November 5, 1996. The initiative added Articles XIIIC and XIIID to the ,r California Constitution,creating additional requirements for the imposition by most local governments of "general taxes,""special taxes,""assessments,""fees,"and"charges." Proposition 218 became effective, pursuant to its terms, as of November 6, 1996, although compliance with some of its provisions was r deferred until July 1, 1997, and certain of its provisions purport to apply to any tax imposed for general governmental purposes (i.e., "general taxes") imposed, extended or increased on or after January 1, 1995 and prior to November 6, 1996. Article XIIID imposes substantive and procedural requirements on the imposition, extension or increase of any"fee"or"charge"subject to its provisions. A"fee"or"charge" subject to Article XIIID includes any levy,other than an ad valorem tax,special tax or assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership. Article XIIID prohibits, among other $0336611.6 51 r Book Page 178 L things, the imposition of any proposed fee or charge, and, possibly, the increase of any existing fee or v charge, in the event written protests against the proposed fee or charge are presented at a required public hearing on the fee or charge by a majority of owners of the parcels upon which the fee or charge is to be imposed. Except for fees and charges for water, sewer and refuse collection services, the approval of a L majority of the property owners subject to the fee or charge,or at the option of the agency,by a two-thirds vote of the electorate residing in the affected area,is required within 45 days following the public hearing on any such proposed new or increased fee or charge. The California Supreme Court decisions in Richmond v. Shasta Community Services District, 32 Cal.4th 409 (2004) ("Richmond'), and Bighorn- Desert View Water Agency v. Vedil, 39 CalAth 205 (2006) ("Bighorn") have clarified some of the - uncertainty surrounding the applicability of Section 6 of Article XIIID to service fees and charges. In Richmond, the Shasta Community Services District charged a water connection fee, which included a capacity charge for capital improvements to the water system and a fire suppression charge. The Court held that both the capacity charge and the fire suppression charge were not subject to Article XIIID because a water connection fee is not a property-related fee or charge because it results from the property owner's voluntary decision to apply for the connection. In both Richmond and Bighorn, however, the Court stated that a fee for ongoing water service through an existing connection is imposed "as an incident of property ownership" within the meaning of Article XIIID, rejecting, in Bighorn, the water W agency's argument that consumption-based water charges are not imposed "as an incident of property ownership"but as a result of the voluntary decisions of customers as to how much water to use. Article XIIID also provides that"standby charges"are considered"assessments"and must follow the procedures required for "assessments" under Article XIIID and imposes several procedural requirements for the imposition of any assessment, which may include (1) various notice requirements, V including the requirement to mail a ballot to owners of the affected property; (2) the substitution of a property owner ballot procedure for the traditional written protest procedure,and providing that"majority - protest" exists when ballots (weighted according to proportional financial obligation) submitted in U opposition exceed ballots in favor of the assessments; and (3) the requirement that the levying entity "separate the general benefits from the special benefits conferred on a parcel"of land. Article XIIID also ' precludes standby charges for services that are not immediately available to the parcel being charged. I Article XIIID provides that all existing, new or increased assessments are to comply with its L+ provisions beginning July I, 1997. Existing assessments imposed on or before November 5, 1996, and "imposed exclusively to finance the capital costs or maintenance and operations expenses for [among w other things] water" are exempted from some of the provisions of Article XIIID applicable to _ assessments. n Article XIIIC extends the people's initiative power to reduce or repeal existing local taxes, assessments,fees and charges. This extension of the initiative power is not limited by the terms of Article XIIIC to leas, taxes, assessment fees and charges imposed after November 6, 1996 and absent other authority could result in retroactive reduction in any existing taxes, assessments, fees or charges. In 4 Bighorn, the Court concluded that under Article XIIIC local voters by initiative may reduce a public agency's water rates and delivery charges. The Court noted however, that it was not holding that the authorized initiative power is free of all limitations, stating that it was not determining whether the electorate's initiative power is subject to the public agency's statutory obligation to set water service charges at a level that will "pay the operating expenses of the agency, . . . provide for repairs and i depreciation of works,provide a reasonable surplus for improvements,extensions,and enlargements,pay (-+ the interest on any bonded debt, and provide a sinking or other fiord for the payment of the principal of _ such debt as it may become due." L The District implemented a five-year plan beginning in Fiscal Year 2002-03 which included a rate increase of$7.50 per year,or 9.4%,for all ratepayers to $97.50 per year. In May 2003,the Board of Directors approved consideration of a 15%rate increase a year,for each year,over the then following five L+ years, upon 2/3 vote of the Board of Directors after conducting a noticed public hearing in compliance 80336611.6 52 Book Page 179 with Article XIIID. The Board of Directors considered this increase necessary to provide needed capital improvements,to cover additional treatment and disinfection costs,and to minimize rate increases over an extended period of time. On July 2, 2003, the Board of Directors adopted Ordinance No. OCSD-20 increasing sanitary sewer service charges for all single family and multi-family residential units as well as .. most commercial and industrial properties. The Ordinance was adopted by a 2/3 vote of the Board of Directors as required under law after conducting a noticed public hearing in compliance with all laws. The Ordinance increases the amount of the annual charges by approximately 15%per year for each of the following five years, commencing with Fiscal Year 2003-04, thereby raising the single family residence user rate from the then current$87.50 to$100.00,$115.00,$132.00. $152.00, and$175.00 annually. The Ordinance discounted by 5%the annual increases which were the subject of the required protest hearings r on the fee increase as described above. After the completion of the CIP Validation Study for Fiscal Year 2005-06 that increased its ten year CIP cash flow projects to $2.2 billion, or an average of$220 million per year, the Board of Directors adopted Ordinance No. OCSD-26 increasing the Fiscal Year 2005-06 ., single family residential late 31%,from $115 to$151 for such year. In May 2006,the Board of Directors adopted Ordinance No. OCSD-3013 increasing the Fiscal Year 2006-07 single family residential rate 9.8%, from$151.00 to$165.80 for such year,except those located in Revenue Area 14. These increases represented the increase permitted under the protest hearings on the fee increase which was held in 2003. In June 2007,the Board of Directors adopted Ordinance No.OCSD-32 increasing the Fiscal Year 2007- 08 single family residential rate by 9.8%. In February 2008, after a noticed public hearing,the Board of Directors adopted Ordinance No.OCSD-35, which provides for annual increases in the single family r residential rate of 10.5%, 10%, 100/6, 9.8% and 9.8%, respectively, for Fiscal Years 2008-09 through 2012-13. Pursuant to the Master Agreement,the District will,to the extent permitted by law,fix,prescribe and collect fees and charges for the services of the Wastewater System which will be at least sufficient to yield during each Fiscal Year(a)Net Revenues equal to 125% of Debt Service on Senior Obligations for s such Fiscal Year, and (b)Net Operating Revenues equal to 100% of Debt Service on all Obligations for such Fiscal Year. The District may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but will not reduce the fees and charges than in r effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to meet the requirements of the Master Agreement. In the event that service charges are determined to be subject to Article XIIID,and proposed increased service charges cannot be imposed as a result of a majority protest, such circumstances may adversely effect the ability of the District to generate revenues in the amounts required by the Master Agreement, and to make Installment Payments as provided in the Installment Purchase Agreement. No assurance may be given that Articles XIIIC and r XIIID will not have a material adverse impact on Net Revenues. Other Initiative Measures r Articles XIIIA, XIIIB, XIIIC and XIIID were adopted pursuant to Calif rmia's constitutional initiative process. From time to time other initiative measures could be adopted by California voters, placing additional limitations on the ability of the District to increase revenues. r LEGAL MATTERS The validity of the Certificates and certain other legal matters are subject to the approving opinion of Fulbright& Jaworski L.L.P., Los Angeles, California, Special Counsel to the District. A complete copy of the proposed form of Special Counsel opinion is attached as Appendix F hereto. Special Counsel, in its capacity as Special Counsel to the District, undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the District and the Corporation by Woodruff, Spradlin & Smart, a Professional Corporation, Costa Mesa, California, and for the District by Fulbright& Jaworski L.L.P. as Disclosure Counsel to the District. 90336611.6 53 Book Page 180 1 60 FINANCIAL ADVISOR The District bas retained Public Resources Advisory Group as financial advisor (the "Financial Advisor") in connection with the execution and delivery of the Certificates. The Financial Advisor has L not been engaged nor have they undertaken,to audit,authenticate or otherwise verify the information set forth in the Official Statement, or any other related information available to the District, with respect to accuracy and completeness of disclosure of such information. The Financial Advisor has reviewed this v Official Statement but makes no guaranty, warranty or other representation respecting accuracy and completeness of the information contained in this Official Statement. - ABSENCE OF LITIGATION r There is no action,suit,proceeding,inquiry or investigation,at law or in equity,before or by any court, regulatory agency, public board or body, pending or, to the best knowledge of the District, W threatened against the District affecting the existence of the District or the titles of its directors in officers to their offices or seeking to restrain or to enjoin the sale or delivery of the Certificates,the application of the proceeds thereof in accordance with the Trust Agreement, or in any way contesting or affecting the 'y validity or enforceability of the Certificates, the Trust Agreement,the Master Agreement,the Installment Purchase Agreement or any action of the District contemplated by any of said documents, or m any way contesting the completeness or accuracy of this Official Statement, or contesting the powers of the District or its authority with respect to the Certificates or any action of the District contemplated by any of said documents,nor,to the knowledge of the District is there any basis therefor. - There is no action, suit,proceeding, inquiry or investigation,at law or in equity,before or by any b court, regulatory agency, public board or body pending or, to the best knowledge of the District, .. threatened against the District contesting or affecting the ability of the District to collect amounts from which Installment Payments are payable, or which would have a material adverse effect on the District's ability to make Installment Payments. FINANCIAL STATEMENTS V The basic financial statements of the District included in Appendix A to this Official Statement have been audited by Mayer Hoffimm McCann P.C., independent certified public accountants. See v APPENDIX A-"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2008" herein. The District has - received the Government Finance Officer's Association Certificate of Achievement for "Excellence in Financial Reporting" for 13 consecutive years. The audited financial statements, including the footnotes y thereto, should be reviewed in their entirety. Mayer Huffman McCann P.C. has consented to the - inclusion of its report as Appendix A but has not undertaken to update its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the Ld statements made in this Official Statement,and no opinion is expressed by Mayer Hoffman McCann P.C. _. with respect to any event subsequent to its report dated ,2008. TAX MATTERS The Internal Revenue Code of 1986(the"Code"), imposes certain requirements that must be met L subsequent to the issuance and delivery of the Certificates for the interest component of each Installment Payment (the "Interest Component"), and the allocable portion thereof distributable in respect of each Certificate (the "Certificate Interest Distribution"), to be and remain excluded from the gross income of Li the owner of such Certificate for federal income tax purposes. Noncompliance with such requirements could cause such amounts to be included in gross income for federal income tax purposes retroactive to i the date of delivery of the Installment Purchase Agreement and the Certificates. The District and the Corporation have covenanted in the Installment Purchase Agreement and in the Trust Agreement to 90336611.6 54 Book Page 181 r maintain the exclusion pursuant to section 103(a)of the Code of the Interest Component from the gross income of the District and its assigns, and of the Certificateholders, respectively, for federal income tax purposes. Upon the delivery of the Certificates, Fulbright & Jaworski L.L.P., Los Angeles, California, Special Counsel, will deliver its opinion that, under existing law, and assuming compliance with the aforementioned covenants, the Interest Component allocable to and the Certificate Interest Distributions in respect of a Certificate we excluded pursuant to section 103(a) of the Code from the gross income of the owner of the Certificate for federal income tax purposes; inasmuch as the Installment Purchase Agreement is not a "specified private activity bond"within the meaning of section 57(a)(5) of the Code, .. neither the Interest Component nor any Certificate Interest Distribution is an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code. It is noted that the Interest Component allocable to and Certificate Interest Distributions in respect of a Certificate owned y by a corporation for federal income tax purposes may affect the computation of the alternative minimum taxable income, upon which the alternative minimum tax is imposed,to the extent that such amounts are taken into account in determining the adjusted earnings of that corporation (75%of the excess(if any)of r such adjusted current earnings over the alternative minimum taxable income being an adjustment to the alternative minimum taxable income(determined without regard to the adjustment or to the alternative tax net operating loss deduction)). Further, on that same day Special Counsel will render its opinion, based solely on the foregoing, and upon existing provisions of the laws of California, that such Interest Component and Certificate Interest Distributions are exempt from personal income taxes of the State of California. .. To the extent that a purchaser of a Certificate acquires that Certificate at a price that exceeds the aggregate amount of scheduled distributions(other than distributions of qualified stated interest within the meaning of section 1.1273-1 of the Treasury Regulations)to be made on the Certificate (determined, in er the case of a prepayable Certificate, under the assumption described below) (the "Stated Redemption Price at Maturity"), such excess will constitute "bond premium" under the Code. Section 171 of the Code, and the Treasury Regulations promulgated thereunder, provide generally that bond premium on a tax-exempt obligation must be amortized on a constant yield economic accrual, basis; the amount of premium so amortized will reduce the owner's basis in such obligation for federal income tax purposes, but such amortized premium will not be deductible for federal income tax purposes. In the case of a r purchase of a Certificate that is subject to prepayment, the determination whether there is amortizable bond premium, and the computation of the accrual of that premium, most be made under the assumption that the Certificate will be prepaid on the permitted date that would minimize the purchaser's yield on the Certificate (or that the Certificate will not be prepaid prior to the stated maturity date in respect of that Certificate if that would minimize the purchaser's yield). The rate and timing of the amortization of the bond premium and the corresponding basis reduction may result in an owner realizing a taxable gain when a Certificate owned by such owner is sold or disposed of for an amount equal to or in some NO circumstamces even less than the original cost of the Certificate to the owner. The excess, if any,of the Stated Redemption Price at Maturity of a Certificate of a maturity over r the initial offering price to the public of the Certificates of that stated maturity set forth on the inside cover page of this Official Statement is"original issue discount" Such original issue discount accruing in respect of a Certificate is treated for federal income tax and California personal income tax purposes as additional interest in respect of that Certificate and is excluded from the gross income of the owner thereof for federal income tax purposes and exempt from the California personal income tax. Original issue discount accruing in respect of any Certificate purchased at such initial offering price and pursuant to such initial offering will accrue on a semiannual basis over the term to the stated maturity date in r respect of the Certificate on the basis of a constant yield method and within each semiannual period,will accrue on a ratable daily basis. The amount of original issue discount in respect of such a Certificate accruing during each period is added to the adjusted basis of such Certificate to determine taxable gain W upon disposition (including upon sale, prepayment or payment on maturity) of such Certificate. The 8033MI1.6 55 Book Page 182 L Code includes certain provisions relating to the accrual of original issue discount in the case of a L purchaser of a Certificate who purchases that Certificate other than at the initial offering price and pursuant to the initial offering of that Certificate. V Any person considering purchasing a Certificate at a price that includes bond premium should consult his or her own tax advisors with respect to the amortization and treatment of such bond premium, including,but not limited to,the calculation of gain or loss upon the sale,prepayment or other disposition of the Certificate. Any person considering purchasing a Certificate of a maturity in respect of which there is original issue discount should consult his or her own tax advisors with respect to the tax consequences of ownership of such Certificate, including the treatment of a purchaser who does not purchase in the original offering and at the original offering price of that Certificate,the allowance of a deduction for any loss on a sale or other disposition, and the treatment of accrued original issue discount in respect of such Certificate under federal individual and corporate alternative minimum taxes. 4 Special Counsel has not undertaken to advise in the future whether any events after the date of delivery of the Installment Purchase Agreement and the Certificates may affect the tax status of the Interest Component and Certificate Interest Distributions. No assurance can be given that future V legislation, or amendments to statutes of the State of California or of the United States, if enacted into law, will not contain provisions that could directly or indirectly reduce the benefit of the exemption of such amounts from personal income taxes of the State of California or of the exclusion of such amounts from the gross income of the owners of Certificates for Federal income tax purposes. Furthermore, Special Counsel will express no opinion as to any federal, state, or local tax law consequences with respect to the Installment Purchase Agreement, Certificates, Interest Component, or Certificate Interest W Distributions, if any action is taken with respect to the Installment Purchase Agreement,the Certificates, or the proceeds thereof, or the Trust Agreement permitted or predicated upon the advice or approval of counsel if such advice or approval is given by counsel other than Fulbright&Jaworski L.L.P. 6o Although Special Counsel is of the opinion that Interest Component and Certificate Interest Distributions in respect of a Certificate are exempt from state personal income taxation and excluded from the gross income of the owner thereof for federal income tax purposes, an owner's federal, state or L. local tax liability may be otherwise affected by the ownership or disposition of the Certificate. The nature and extent of these other tax consequences will depend upon the owner's other items of income or 1 deduction. Without limiting the generality of the foregoing,prospective purchasers of Certificates should y be aware that: (i) section 265 of the Code denies a deduction for interest on indebtedness incurred or continued to purchase or carry the Certificates or, in the case of financial institution, that portion of an owner's interest expense allocated to the Certificates; (ii)with respect to insurance companies subject to r the tax imposed by section 831 of the Code, section 832(b)(5)(11)(i) reduces the deduction for loss reserves by 15% of the sum of certain items, including Interest Component and Certificate Interest - Distributions in respect of Certificates owned by such companies; (iii)Interest Component and Certificate Interest Distributions accrued in respect of Certificates owned by certain foreign corporations doing business in the United States for federal income tax purposes could be subject to a branch profits tax _. imposed by section 884 of the Code; (iv)passive investment income, including Interest Component and Certificate Interest Distributions accrued in respect of Certificates, accruing to a Subchapter S corporation V that at the close of a taxable year has Subchapter C earnings and profits may be subject to federal income taxation under section 1375 of the Code if greater than 25% of the gross receipts of such Subchapter S corporation in passive investment income; (v) section 86 of the Code requires recipients of certain Social it Security and certain Railroad Retirement benefits to take into account, in determining the taxability of such benefits, Installments Interest and Certificate Interest Distributions accrued in respect of Certificates owned by such recipients for Fedeml income tax purposes; and (vi) under section 32(i) of the Code, y receipt of investment income, including Interest Component and Certificate Interest Distributions accrued in respect of Certificates, may disqualify the owner thereof from obtaining the earned income credit -- Special Counsel has expressed no opinion regarding any such other tax consequences. V 90336611.6 56 V Book Page 183 r Special Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the District and the Corporation described above. No ruling has been sought from the Internal Revenue Service (the "Service") with respect to the matters addressed in the r opinion of Special Counsel, and Special Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Certificates is commenced, under current procedures the Service is likely to treat the District as the `taxpayer," and the Owners would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest with respect to the Certificates,the District may have different or conflicting interest from the Owners. Further,the disclosure of the initiation of an audit r may adversely affect the market price of the Certificates,regardless of the final disposition of the audit. The proposed form of opinion of Special Counsel is attached hereto as Appendix F. CONTINUING DISCLOSURE _ The District has covenanted for the benefit of holders and beneficial owners of the Certificates (a)to provide certain financial information and operating data (the "Annual Report") relating to the District and the property in the District not later than eight months after the and of the District's Fiscal Year(which currently would be March 1), commencing with the report for the 20OM9 Fiscal Year, and "r (b)to provide notices of the occurrence of certain enumerated events,if material. The Annual Report will be filed by the Trustee on behalf of the District, with each Nationally Recognized Municipal Securities Information Repository and with each State Repository, if any. The notices of material events will be filed by the Trustee on behalf of the District with the Municipal Securities Rulemaking Board and with each State Repository,if any. The specific nature of the information to be contained in the Annual Report or the notices of material events is set forth in the Continuing Disclosure Agreement. See APPENDIX D d — "FORM OF CONTINUING DISCLOSURE AGREEMENT" These covenants have been made in order to assist the Initial Purchaser in complying with S.E.C. Rule 15c2-12 (the"Rule"). During the past five years, the District has never failed to comply in all material respects with any previous undertaking r with respect to the Rule to provide anal reports or notices of material events. RATINGS The Certificates will be rated "_" by Standard & Poor's Ratings Services, a Division of The McGraw-Hill Companies, Inc. ("S&P"),and '—by Fitch Ratings ("Fitch"). Such ratings reflect only the views of the rating agencies, and do not constitute a recommendation to buy, sell or hold the Certificates. Explanation of the significance of such ratings may be obtained only from the respective organizations at: Standard & Poor's Ratings Group, 55 Water Street, New York, New York 10041 and Fitch Ratings, One State Street Plaza,New York,New York 10004. There is no assurance that any such a.' ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by the respective rating agencies, if in the judgment of any such rating agency circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the r market price of the Certificates. PURCHASE AND REOFFERING (the "Initial Purchaser') has purchased the Certificates from the District at a competitive sale for a purchase price of$ (representing the aggregate principal amount of the Certificates, less a net original issue discount of$ , and less an Initial Purchaser's discount of $ ). The public offering prices may be changed from time to time by the Initial Purchaser. The Initial Purchaser may offer and sell Certificates to certain dealers and others at prices lower than the offering prices shown on the inside cover page hereof. 90336611.6 57 r Book Page 184 u MISCELLANEOUS LI Included herein are brief summaries of certain documents and reports, which summaries do not purport to be complete or definitive, and reference is made to such documents and reports for full and complete statements of the contents thereof. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Certificates. y The execution and delivery of this Official Statement has been duly authorized by the District. r ORANGE COUNTY SANITATION DISTRICT _ By: Chair of the Board of Directors v L U y � 1 L I ` Ira L 90336611.6 58 W Book Page 185 r ,r APPENDIX A COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30,2008 r r r r 1 y r r r r r r 80336611.6 A-I r Book Page 186 J APPENDIX B THE COUNTY OF ORANGE—ECONOMIC AND DEMOGRAPHIC INFORMATION v J J J J �J J 1 J i� U J u J i 80336611.6 B-1 U Book Page 187 y APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS .r .r .d ..i u 1 I d 80336611.6 C-1 Book Page 188 .. APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT THIS CONTINUING DISCLOSURE AGREEMENT(this"Disclosure Agreement"), dated as of December 1, 2008, is by and between the ORANGE COUNTY SANITATION DISTRICT, a county sanitation district organized and existing under the laws of the State of California (the "District'), and DIGITAL ASSURANCE CERTIFICATION LLC,as Dissemination Agent(the"Dissemination Agent"). WITNESSETH: WHEREAS, the District has caused to be executed and delivered Orange County Sanitation ir+ District Certificates of Participation, Series 2008C (the "Certificates"), evidencing principal in the aggregate amount of$ ,000,000,pursuant to a Trust Agreement,dated as of the date hereof(the"Trust Agreement"), by and among Union Bank of Califomia, N.A., as trustee (the "Trustee"), the Orange County Sanitation District Financing Corporation(the"Corporation")and the District;and WHEREAS, this Disclosure Agreement is being executed and delivered by the District and the r Dissemination Agent for the benefit of the owners and beneficial owners of the Certificates and in order to assist the underwriters of the Certificates in complying with the Rule(as defined herein); NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained,the parties hereto agree as follows: Section 1. Definitions. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Trust Agreement or, if not defined therein, in the Master Agreement, dated as of August 1, 2000, by and between the District and the Corporation. In addition, the following capitalized terms shall have the following meanings: r "Annual Report" means any Annual Report provided by the District pursuant to, and as described in, Sections 2 and 3 hereof. r "Annual Report Date" means the dale in each year that is eight months after the end of the District's fiscal year,which dale,as of the date of this Disclosure Certificate,is March 1. "Disclosure Representative" means the Director of Finance and Administrative Services of the District, or such other officer or employee of the District as the District shall designate in writing to the Dissemination Agent and the Trustee from time to time. ti "Dissemination Agent" means an entity selected and retained by the Districk or any successor thereto selected by the District. The initial Dissemination Agent shall be Digital Assurance Certification r LLC. "Listed Events"means any of the events listed in subsection(a)of Section 4 hereof. r "National Repository" means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. As of the date hereof, the National Repositories approved by the Securities and Exchange Commission are identified at http://www.sec.gov/info/municipal/nrmsir.htm. r 9033011.6 D-1 r Book Page 189 y "Official Statement" means the Official Statement, dated December_, 2008, relating to the V Certificates. "Participating Underwriter"means any of the original underwriters of the Certificates required to comply with the Rule in connection with the offering of the Certificates. "Repository"means each National Repository and each State Repository. L., "Rule" means Rule 15c2-12 adopted by the Securities and Exchange Commission under the _.. Securities Exchange Act of 1934,as the same may be amended from time to time. 1�1 'State Repository" means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized by the Securities and Exchange Commission. As of the date of this Disclosure Agreement,there is no State Repository. w Section 2. Provision of Annual Reports. (a) The District shall provide, annually, an electronic copy of the Annual Report to the Dissemination Agent, together with a copy for the Trustee, L not later than 15 days prior to the Annual Report Date. Promptly upon receipt of an electronic copy of the Annual Report,the Dissemination Agent shall provide an Annual Report to each National Repository and the State Depository (if any) not later than March 1 after the end of each fiscal year of the District, commencing with the fiscal year ending June 30,2009. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross reference other information as provided in Section 3 of this Disclosure Agreement. If the District's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under subsection(f)of Section 4 hereof. W (b) If on the fifteenth(I 5th) day prior to the Annual Report Date,the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the Disclosure �+ Representative by telephone and in writing (which may be by e-mail) to remind the District of its undertaking to provide the Annual Report pursuant to Section 2(a). Lr (c) If the Dissemination Agent has not received an Annual Report by 12:00 noon on the fast business day following the Annual Report Date for the Annual Report,the District irevocably directs the Dissemination Agent to immediately send a notice to each National Repository or the MSRB and the �. State Depository(if any)in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall: r (i) determine each year prior to the date for providing the Annual Report the time and address of each National Repository and each State Repository,if any;and W (ii) file a report with the District and(if the Dissemination Agent is not the Trustee) _ the Trustee certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided. Section 3. Content of Annual Reports. The District's Annual Report shall contain or incorporate by reference the following: (a) Audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the District's audited financial statements are not available by the time i.a 8033661 L6 D-2 u Book Page 190 the Annual Report is required to be filed pursuant to subsection(a)of Section 2 hereof,the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Official Statement, and the audited financial statements shall be filed in the same manner as the Annual - Report when they become available. (b) The following information with respect to the Certificates: (i) The principal evidenced by the Certificates Outstanding as of the January I next preceding the Annual Report Date and the principal amount of other Senior Obligations outstanding as of the January I next preceding the Annual Report Date. - (ii) The balance in the Reserve Fond,and a statement of the Reserve Requirement,as of the January 1 next preceding the Annual Report Date. r (c) A summary report showing in reasonable detail Revenues, Operating Revenues, Maintenance and Operation Costs,Net Revenues, Net Operating Revenues and debt service with respect r to the Senior Obligations for the fiscal year ended the June 30 next preceding the Annual Report Date. (d) An update, for the fiscal year ended the June 30 next preceding the Annual Report Date, of the information contained in the Official Statement in Table Nos. 2, 4, 6 (only with respect to information on 6 under the headings Fiscal Year and Sewer Service Charge), 8 (not to include projections),9, 10, 11, 12, 13, 14 and 16. r (e) In addition to any of the information expressly required to be provided under subsections (a), (b), (c) and(d) of this Section, the District shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they .r are made,not misleading. Any or all of the items listed above may be included by specific reference to other documents, r including official statements of debt issues of the District or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The District shall clearly identify each such other document so included by — reference. Section 4. Retorting of Significant Events. (a) Pursuant to the provisions of this Section, r the District shall give, or cause to be given, notice of the oceurnmce of any of the following events with respect to the Certificates,if material: W (1) Principal and interest payment delinquencies. (2) Non-payment related defaults. r (3) Unscheduled draws on debt service reserves reflecting financial difficulties. r (4) Unscheduled draws on credit enhancements reflecting financial difficulties. r (5) Substitution of credit or liquidity providers,or their failure to perform. r 80336611.6 D-3 r Book Page 191 I ILr (6) Adverse tax opinions or events affecting the tax-exempt status of the L security. (7) Modifications to rights of security holders. L (8) Contingent or unscheduled Certificate calls. (9) Defeassnces. (10) Release, substitution, or sale of property securing repayment of the securities. (11) Rating changes. (b) The District shall, within one business day of obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and request that the District promptly notify the Dissemination Agent in writing whether or not to u report the event pursuant to subsection(f)of this Section. (c) Whenever the District obtains knowledge of the occurrence of a Listed Event, whether L because of a notice from the Dissemination Agent pursuant to subsection(b)of this Section or otherwise, the District shall as soon as possible determine if such event would be material under applicable Federal securities law. V (d) If the District has determined that knowledge of the occurrence of a Listed Event would _. be material under applicable Federal securities law, the District shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to 60 subsection(f)of this Section. (a) If in response to a request under subsection (b) of this Section, the District determines y that the Listed Event would not be material under applicable Federal securities law,the District shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection(f)of this Section. L (f) If the Dissemination Agent has been instructed by the District to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the Municipal Securities Rulemaking Board and each Repository. Notwithstanding the foregoing, notice of Listed Events described in paragraphs (8) and(9)of subsection (a)of this Section need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Certificates pursuant to the Trust Agreement. V Section 3. Electronic Filing. Submission of Annual Reports and notices of Listed Events r to DisclosureUSA.org or another "Central Post Office" designated and accepted by the Securities and U Exchange Commission shall constitute compliance with the requirement of filing such reports and notices with each Repository hereunder, and the District may satisfy its obligations hereunder to file any notice, j document or information with a Repository by filing the same with any dissemination agent or conduit, L including DisclosureUSA.org or another"Central Post Office"or similar entity,assuming or charged with responsibility for accepting notices,documents or information for transmission to such Repository,to the — extent permitted by the Securities and Exchange Commission or Securities and Exchange Commission V staff or required by the Securities and Exchange Commission. For this purpose, permission shall be deemed to have been granted by the Securities and Exchange Commission staff if and to the extent the I V 803366r 1.6 D-4 V Book Page 192 r �. agent or conduit has received an interpretive letter, which has not been revoked, from the Securities and Exchange Commission staff to the effect that using the agent or conduit to transmit information to the Repository will be treated for purposes of the Rule as if such information were transmitted directly to the Repository. Section 6. Termination of Reverting Obliestion. The District's obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates,the District shall give notice of such termination in the same manner as for a Listed Event under subsection (t) of Section 4 hereof. Section 7. Dissemination Agent. The District may, from time to time, appoint or engage another Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, r and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. If at any time there is not any other designated Dissemination Agent, the Trustee shall be the Dissemination Agent; provided it shall receive written notice of such designation at the time of such r designation. Section 8. Amendment: Waiver. Notwithstanding any other provision of this Disclosure Agreement, the District and the Dissemination Agent may amend this Disclosure Agreement (and the Dissemination Agent shall agree to any amendment so requested by the District), and any provision of this Disclosure Agreement may be waived,provided that the following conditions are satisfied: r (a) if the amendment or waiver relates to the provisions of subsection(a)of Section 2 hereof, Section 3 hereof or subsection(a)of Section 4 hereof,it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, r nature or status of an obligated person with respect to the Certificates,or type of business conducted; (b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of r nationally mcognired bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Certificates, after taking into account any amendments or interpretations of the Rule,as well as any change in circumstances;and (c) the proposed amendment or waiver (i) is approved by holders of the Certificates in the manner provided in the Trust Agreement for amendments to the Trust Agreement with the consent of holders,or(ii)does not, in the opinion of the Trustee and nationally recogniud bond counsel, materially impair the interests of holders. If the annual financial information or operating data to be provided in the Annual Report is .,� amended pursuant to the provisions hereof, the annual financial information containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of `+ the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order r to provide information to investors to enable them to evaluate the ability of the District to meet its r 8033W 1.6 D-$ r Book Page 193 V obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the L change in the accounting principles shall be sent to the Repositories. Section 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed L to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including my other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is L required by this Disclosure Agreement If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the District shall have no obligation under this Disclosure Agreement to update L such information or include it in any future Annual Report or notice of occurrence of a Listed Event Section le. Default. In the event of a failure of the District or the Dissemination Agent to I comply with any provision of this Disclosure Agreement,the Trustee may(and,at the written direction of V any Participating Underwriter or the holders of at least 25% of the aggregate amount of principal _ evidenced by Outstanding Certificates and upon being indemnified to its reasonable satisfaction,shall),or any holder or beneficial owner of the Certificates may, take such actions as may be necessary and v appropriate, including seeking mandate or specific performance by court order, to cause the District, Trustee or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of V Default under the Trust Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of the District, the Tntstee or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. IW Section 11. Duties. Immunities and Liabilities of Trustee and Dissemination Axent. -- Article VIII of the Trust Agreement is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Trust Agreement. Neither the I" Trustee nor the Dissemination Agent shall be responsible for the form or content of any Annual Report or _ notice of Listed Event. The Dissemination Agent shall receive reasonable compensation for its services provided under this Disclosure Agreement. The Dissemination Agent(if other than the Trustee or the L+ Trustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and the District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss,expense and liabilities which it may y incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates. - Section 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the District, the Trustee, the Dissemination Agent, the Participating Underwriter and holders and beneficial owners from time to time of the Certificates,and shall create no rights in any other person or entity. Section 13. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. L W + L 90336611,6 D-6 , La Book Page 194 IN WITNESS WHEREOF,the parties hereto have executed this Disclosure Agreement as of the date first above written. r ORANGE COUNTY SANITATION DISTRICT By, Lorenzo Tyner Director of Finance and Administrative Services r DIGITAL ASSURANCE CERTIFICATION LLC, as Dissemination Agent By: Authorized Representative r Acknowledged and Accepted: r UNION BANK OF CALIFORNIA,N.A., as Trustee By: r Authorized Officer r r r r W336611.6 D-7 r Book Page 195 V EXHIBIT A r NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT L. Name of Issuer. Orange County Sanitation District Name of Issue: Orange County Sanitation District Certificates of Participation,Series 2008C v Date of Issuance: December_,2008 NOTICE IS HEREBY GIVEN that the Orange County Sanitation District(the"District")has not L provided an Annual Report with respect to the above-named Certificates as required by Section 6.09 of the Trust Agreement, dated as of December 1, 2008,by and among Union Bank of California, N.A., as I Trustee, the Orange County Sanitation District Financing Corporation and the District. [The District L anticipates that the Annual Report will be filed by .] I V Dated: ORANGE COUNTY SANITATION DISTRICT V By: V cc: Trustee Dissemination Agent 4 V 1 V V L L 60 80336611.6 D-8 V Book Page 1% APPENDIX E BOOK-ENTRY SYSTEM The description that follows of the procedures and recordkeeping with respect to beneficial ownership interests in the Certfcates, payment ofprincipal and interest evidenced by the Certificates to Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in the Certificates, and other Certificate-related transactions by and between DTC, Participants and Beneficial Owners, is based on information furnished by DTC which the District and the Corporation each believes to be reliable, bw the District and the Corporation take no responsibility for the completeness or accuracy thereof. The Depository Trust Company—Book-Entry System r The Depository Trust Company("DTC"),New York,NY,will set as securities depository for the securities (the "Certificates"). The Certificates will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other time as may be requested by an authorized representative of DTC. One fully-registered Certificate will be issued for the Certificates in the aggregate principal amount of such issue,and will be deposited with DTC. DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 r countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of Was and other securities transactions in deposited securities,through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations,and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust r & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers,banks,trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at wwwAtcc.com and www.dte.org. The information on such websites is not incorporated herein by such reference or otherwise. .. Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each Certificate ('Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are,however,expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their 80336611.E E-1 r Book Page 197 IL ownership interests in the Certificates, except in the event that use of the book-entry system for the L Certificates is discontinued. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are L registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the time of Cede & Co. or such other nominee do not effect any change in beneficial V ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial u Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment transmission to them of notices of significant events with respect to the u Certificates,such as prepayments,tenders,defaults,and proposed amendments to the security documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners, in the L alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. I Prepayment notices shall be sent to DTC. If less than all of the Certificates within an issue are W being prepaid DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be prepaid. 1 V Neither DTC nor Cede&Co. (nor such other DTC nominee)will consent or vote with respect to the Certificates unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the L record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). V Prepayment proceeds, distributions, and dividend payments on the Certificates will be made to Cede&Co., or such other nominee w may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from the District or the Trostce on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in u bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, nor its nominee, the Tmstee, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of prepayment proceeds, distributions, and dividend payments to Cede&Co. (or such other nominee as may be requested by an authorized representative of _ DTC) is the responsibility of the District or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. v V 80336611.6 E-2 u Book Page 198 DTC may discontinue providing its services as securities depository with respect to the Certificates at any time by giving reasonable notice to the District or the Trustee. Under such circumstances,in the event that a successor securities depository is not obtained,Certificates are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy thereof. Discontinuance of DTC Services In the event(i)DTC determines not to continue to act as securities depository for the Certificates, (ii)DTC shall no longer act and give notice to the Trustee of such determination or (iii)the District determines that it is in the best interest of the Beneficial Owners that they be able to obtain Certificates and delivers a written certificate to the Trustee to that effect, DTC services will be discontinued. If the District determines to replace DTC with another qualified securities depository,the District shall prepare or direct the preparation of a new single, separate,fully registered Certificate for each of the maturities of the Certificates,registered in the name of such successor or substitute qualified securities depository or its nominee. If the District fails to identify another qualified securities depository to replace DTC then the Certificates shall no longer be restricted to being registered in the certificate registration books in the name of Cede&Co.,but shag be registered in such names as are requested in a certificate of the District, in accordance with the Trust Agreement. r All Certificates may be presented for transfer by the Owner thereof, in person or by his attorney duly authorized in writing, at the Principal Office of the Trustee, on the books required to be kept by the Trustee pursuant to the provisions of the Trust Agreement, upon surrender of such Certifications for cancellation accompanied by delivery of a duly executed written instrument of transfer in a form acceptable to the Trustee. The Trustee may treat the Owner of any Certificate as the absolute owner of such Certificate for all purposes, whether or not such Certificate shall be overdue, and the Trustee shall not be affected b an knowledge or notice to the con y y ge Crary; and payment of the interest and principal evidenced by such Certificate shall be made only to such Owner, which payments shall be valid and effectual to satisfy and discharge the liability evidenced by such Certificate to the extent of the am or sums so paid. Whenever any Certificates shall be sur uidered for transfer,the Trustee shall execute and deliver .. new Certificates representing the same principal amount in Authorized Denominations. The Trustee shall require the payment of any Owner requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer. Certificates may be presented for exchange at the Principal Office of the Trustee for a like aggregate principal amount of Certificates of other Authorized Denominations. The Trustee shall require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. The Trustee shall not be required to transfer or exchange any Certificate during the period in which the Trustee is selecting Certificates for prepayment, nor shall the Trustee be required to transfer or exchange any Certificate or portion thereof selected for prepayment from and after the date of mailing the notice of prepayment thereof. 90I0661 L6 E-3 Book Page 199 r r APPENDIX F FORM OF APPROVING OPINION OF SPECIAL COUNSEL Upon the execution and delivery of the Certhcates, Fulbrighr& Jaworski L.L.P., Los Angeles, California, Special Counsel to the District, will render its foral approving opinion with respect to the Certificates in substantially the followingform: (Date of Delivery] r Orange County Sanitation District 10844 Ellis Avenue Fountain Valley,California 92708-7018 r s_,000,000 Grange County Sanitation District Certificates of Participation Series 2008C Ladies and Gentlemen: We have acted as Special Counsel in connection with the s_,000,000 aggregate principal amount of Orange County Sanitation District Certificates of Participation, Series 2008C (the "Certificates") which evidence direct, fractional undivided interests of the Owners thereof in the installment payments (the "Installment Payments"), and the interest thereon, to be made by the Orange County Sanitation District (the "District") pursuant to the hrstallment Purchase Agreement, dated as of r December 1, 2008 (the`Installment Purchase Agreement'), by and between the District and the Orange County Sanitation District Financing Corporation(the"Corporation"). Pursuant to the Master Agreement for District Obligations, dated as of August 1, 2000 (the "Master Agreement"), by and between the District and the Corporation, the District has established conditions and terms upon which obligations such as the Installment Payments and the interest thereon, will be incurred and secured. Installment Payments under the Installment Purchase Agreement are payable solely from Net Revenues as provided r in the Installment Purchase Agreement, consisting primarily of all income and revenue received by the District from the operation or ownership of the Wastewater System of the District (the "Wastewater System") remaining after payment of Maintenance and Operation Costs. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the hnstallment Purchase Agreement. r The Certificates are to be executed and delivered pursuant to a Trust Agreement, dated as of December 1, 2008(the"Trust Agreement'), by and among the District,the Corporation and Union Bank of California,N.A., as trustee(the "Trustee"). Proceeds from the sale of the Certificates will be used to (i)finance certain improvements to the Wastewater System, (ii)fund a reserve fund for the Certificates and(iii)pay the costs incurred in connection with the execution and delivery of the Certificates. As Special Counsel,we have examined copies certified to us as being true and complete copies of the Master Agreement,the Trust Agreement and the Installment Purchase Agreement and the proceedings of the District in connection with the execution and delivery of the Certificates. We have also examined 80336611.6 F-I Book Page 200 I 1L, such certificates of officers of the District, the Corporation and others as we have considered necessary L for the purposes of this opinion. Based upon the foregoing,we are of the opinion that: y 1. The Master Agreement, the Installment Purchase Agreement and the Trust Agreement each has been duly and validly authorized,executed and delivered by the District and assuming the Master Agreement, the Installment Purchase Agreement and the Trust Agreement each constitutes the legally valid and binding obligation of the other parties thereto, enforceable against such parties in accordance with its respective terms, each constitutes the legally valid and binding obligation of the District, enforceable against the District in accordance with its respective terms. 2. The obligation of the District to pay the Installment Payments, and the interest w thereon,and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable, in the manner provided in the Installment Purchase Agreement, solely from Net Revenues and other funds provided for in the Installment Purchase L Agreement lawfully available therefor. 3. Assuming due authorizetion, execution and delivery of the Trust Agreement and L the Certificates by the Trustee,the Certificates are entitled to the benefits of the Trust Agreement. 4. The Internal Revenue Code of 1986 (the "Code") imposes certain requirements that must be met subsequent to the execution and delivery of the Certificates for the component of Li each payment designated as interest in the Installment Purchase Agreement (the "Payment Interest"), and the allocable portion thereof distributable in respect of each Certificate (the "Certificate Interest Distribution'), to be and remain excluded from the gross income of the owner thereof for federal income tax purposes. Noncompliance with such requirements could cause such amounts to be included in gross income of such owner for federal income tax purposes retroactive to the date of delivery of the Certificates. The Corporation and the District have L covenanted in the Trust Agreement, and the District has covenanted in the Installment Purchase Agreement, to maintain the exclusion pursuant to section 103(a) of the Code of the Payment Interest from the gross income of the owners thereof for federal income tax purposes. In our opinion, under existing law, and assuming compliance with the aforementioned covenant, the Payment Interest allocable to and the Certificate Interest Distributions in respect of a Certificate are excluded pursuant to section 103(a) of the Code from the gross income of the owner thereof for federal income tax purposes; inasmuch as the Installment Purchase Agreement is not a "specified private activity bond" within the meaning of section 57(a)(5) of the Code, neither the Payment Interest nor any Certificate Interest Distribution is an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code. It is noted that the accrual of Payment Interest allocable to and Certificate Interest Distributions in respect of a Certificate owned by a corporation may affect the computation of income, upon u which the alternative minimum tax is imposed to the extent that such amounts are taken into account in determining the adjusted eamings of that corporation (75% of the excess (if any) of such adjusted current earnings over the alternative minimum taxable income being an adjustment u to the alternative minimum taxable income(determined without regard to the adjustment or to the alternative tax net operating loss deduction)). Further, based solely on the foregoing, and upon existing provisions of the California Revenue and Taxation Code, we are of the opinion that Payment Interest allocable to and the Certificate Interest Distributions in respect of a Certificate are not subject to taxation under the California personal income tax. V 90336611.6 F-2 u Book Page 201 ,r We have not undertaken to advise in the future whether any events after the date of delivery of the Installment Purchase Agreement may affect the tax status of the Payment Interest or Certificate Interest Distributions. No assurance can be given that future legislation, if enacted r into law, will not contain provisions that could directly or indirectly reduce the benefit of the exclusion of such amounts from the gross income of the owner of Certificates for federal income tax purposes. Furthermore, we express no opinion as to any federal, state, or local tax law consequences with respect to the Installment Purchase Agreement,Certificates,Payment Interest, r or Certificate Interest Distributions,if any action is taken with respect to the Installment Purchase Agreement,the Master Agreement the Trust Agreement the Certificates,or the proceeds thereof, permitted or predicated upon the advice or approval of counsel if such advice or approval is given r by counsel other than us. Except as stated in the preceding three paragraphs, we express no opinion as to any federal or state tax consequences of the ownership or disposition of the Installment Purchase Agreement or the Certificates. We have not been requested to express, and do not express, any view as to the compliance by any person with federal and state securities laws. With the exception of the opinions expressed above, we have not been requested to express and do not express, any opinion as to any matter affected by any taxing or other law of the State of California. r The rights of the owners of the Certificates and the enforceability of the Certificates, the Master Agreement the Trust Agreement and the Installment Purchase Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and may also be subject to the exercise of judicial discretion in appropriate cases. The enforceability of the Certificates, the Master Agreement the Trust Agreement and the Installment Purchase Agreement is subject to the effect of general principles of equity, including,without limitation, r concepts of materiality, reasonableness, good faith and fair dealing, to the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law,and to the limitations on legal remedies against governmental entities in California. r No opinion is expressed herein on the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Certificates. Our opinions are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any r changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in r reliance upon the representations and covenants referenced above. Respectfully submitted r r 80336611.6 F-3 Book Page 202 Fulbright&Jaworski L.L.P.—Draft 11/5/08 r OFFICIAL NOTICE INVITING BIDS S_,000,000 ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION SERIES 2008C r (Book-Entry-Only) NOTICE IS HEREBY GIVEN that bids will be received by the Orange County Sanitation District (the "District") for the purchase of$_,000,000* original principal amount of Orange County Sanitation District Certificates of Participation, Series 2008C(the"Certificates"). Bids for less than all of the Certificates will not be accepted.The bids will be received in the form,at the place,and up to the time specified below(unless postponed as described herein): Date: Wednesday,December 3,2008 10:30 a.m.,New York Time Place: Orange County Sanitation District 10844 Ellis Avenue r Fountain Valley,CA 927087018 Electronic Bids: As an accommodation to bidders, electronic proposals may be submitted to Ipreo LLC; at www.newissuehome.i-deal.com and the Parity bid r delivery system (the "Electronic Service"). The Electronic Service will act as agent of the bidder and not of the District in connection with the submission of bids and the District assumes no responsibility or liability r for bids submitted through the Electronic Service. See "Information Regarding Electronic Proposals"herein. No Facsimile Bids: No bids will be accepted by facsimile. Terms of the Certificates r The Preliminary Official Statement for the Certificates, November. 2008, including the cover page and all appendices thereto (the "Preliminary Official Statement"), provides certain information concerning the sale and delivery of $_,000,000• aggregate principal amount of the Certificates evidencing direct, undivided fractional interests in the Installment Payments (the "Installment Payments"), and the interest thereon, payable by the District pursuant to the Installment Purchase Agreement, dated as of December 1, 2008 (the "Installment Purchase Agreement"), by and between the District and the Orange County Sanitation District Financing Corporation (the "Corporation"). Each bidder must have obtained and reviewed the Preliminary Official Statement prim to bidding for the Certificates. This Official Notice Inviting Bids contains certain information for quick reference only, is not a summary of the issue and governs only the terms of the sale of,bidding for and closing procedures with respect to the Certificates. Bidders must read the entire Preliminary Official Statement to obtain information essential to making an informed investment decision. r Pursuant to the Master Agreement for District Obligations, dated as of August 1, 2000 (the "Master Agreement"), by and between the District and the Corporation, the District has established and declared the conditions and terns upon which obligations such as the Installment Purchase Agreement, r Preliminary,subject to change. 803C04964 Book Page 203 La and the Installment Payments and the interest thereon,will be incurred and secured. Installment Payments Ir under the Installment Purchase Agreement are payable solely from Net Revenues, as provided in the Master Agreement and the Installment Purchase Agreement, consisting primarily of all income and revenue received by the District from the operation or ownership of the Wastewater System of the District (the"Wastewater System")remaining after payment of Maintenance and Operation Costs. The Issue La The proceeds from the sale of the Certificates will be used to: (i)finance certain improvements to the Wastewater System, (ii)fund a reserve fund for the Certificates and (iii) pay costs of execution and delivery of the Certificates. The Certificates are to be executed and delivered pursuant to a Trust Agreement, dated as of December 1, 2008 (the "Tout Agreement"), by and among the District, the Corporation and Union Bank of California,N.A.,as trustee(the"Trustee"). Capitalized terms not defined I herein shall have the same definitions as used in the Tout Agreement or the Master Agreement. 6+ Authorization u On November 19,2008,the District and the Corporation authorized the execution and delivery of the Installment Purchase Agreement and the Trust Agreement in connection with the execution and delivery of the Certificates. Yd Outstanding Senior Obligations I The District has outstanding Senior Obligations payable on a parity with the Installment Payments under the Installment Purchase Agreement. The tern "Existing Senior Obligations"as used in the Preliminary Official Statement refers to the 2000 Installment Purchase Agreement, the 2003 Installment Purchase Agreement, the 2006 Installment Purchase Agreement, the 2007A Installment `+ Purchase Agreement, the 2007B Installment Purchase Agreement, the 2008A Installment Purchase Agreement and the 2008E Installment Purchase Agreement. it Security and Source of Payments The Certificates evidence direct, undivided fractional interests in the Installment Payments, and the interest thereon, paid by the District pursuant to the Installment Purchase Agreement. The obligation of the District to pay the Installment Payments and the interest thereon and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable, in the manner provided under the Installment Purchase Agreement, solely from Net Revenues and other funds as provided in the Installment Purchase Agreement. Net Revenues generally consist of all income and revenue received by the District from the operation or ownership of the Wastewater System remaining after payment of Maintenance and Operation Costs,all as further provided in the Master Agreement. The District's obligation to make Installment Payments from Net Revenues is on a parity with the District's obligation to make payments with respect to its other outstanding obligations described as :+ Senior Obligations and all Reimbursement Obligations with respect to Senior Obligations,as provided in the Master Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and is subject to the provisions of the Master Agreement and is afforded all of the advantages,benefits,interests and security for Senior Obligations pursuant to the Master Agreement. Pursuant to the Master Agreement, the District pledges all Net Revenues to the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations,and the Net Revenues will not be used for any other purpose while any of the Senior Obligations or Reimbursement Obligations with respect to Senior Obligations remain unpaid; provided, however, that out of the Net Revenues there may be Y,r 80340496.4 2 L.1 Book Page 204 r r apportioned such sums for such purposes as are expressly permitted by the Master Agreement. This pledge constitutes a first lien on the Net Revenues for the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations. The term Senior Obligations, generally r means all revenue bonds or notes(including bard anticipation notes and commercial paper)of the District authorized,executed, issued and delivered under and pursuant to applicable law,the Installment Purchase Agreement and all other contracts (including financial contracts) or leases of the District authorized and executed by the District under and pursuant to applicable law, the installment, lease or other payments .. under which are,in accordance with the provisions of the Master Agreement,payable from Net Revenues on a parity with the payments under the Master Agreement. r The District may at any time incur Subordinate Obligations; provided, however, that prior to incurring such Subordinate Obligations,the District will have determined that the incurrence thereof will not materially adversely affect the District's ability to comply with the requirements of the Master r Agreement. The District may at arty time incur Reimbursement Obligations with respect to Subordinate Obligations. For a description of the District's outstanding Senior Obligations and Subordinate Obligations, see "FINANCIAL OBLIGATIONS — Existing Indebtedness" in the Preliminary Official r Statement The District may, in connection with the incurrence of Subordinate Obligations, pledge Net r Revenues to the payment of Subordinate Obligations and Reimbursement Obligations with respect to Subordinate Obligations; provided, however, that such pledge, and any lien created thereby, shall be junior and subordinate to the pledge of, and lien on,Net Revenues for the payment of Senior Obligations and Reimbursement Obligations with respect to Senior Obligations. r Pursuant to the Master Agreement,the District is required to the extent permitted by law,to fix, prescribe and collect fees and charges for the services and facilities of the Wastewater System which will be at least sufficient to yield during each Fiscal Year(a)Net Revenues equal to 125%of Debt Service on Senior Obligations for such Fiscal Year and(b)Net Operating Revenues equal to 100% of Debt Service on all Obligations for such Fiscal Year.The District may make adjustments from time to time in such fees r and charges and may make such classification thereof as it deems necessary,but shall not reduce the fees and charges then in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to meet the requirements of the Master Agreement. See "SECURITY AND ,r SOURCES OF PAYMENT FOR THE CERTIFICATES — Rate Covenant" in the Preliminary Official Statement The Trust Agreement provides for the finding of the Reserve Fund in an amount equal to the r "Reserve Requirement,"which is defined as an amount,as of any date of calculation,equal to the least of (a) 10^/6 of the original aggregate amount of principal evidenced by the Certificates (or if the amount of original issue discount or premium applicable to the Certificates exceeds 2%,then 10%of the issue price of the Certificates), (b) the maximum amount of remaining Installment Payments, and the interest thereon, coming due in any one Certificate Year, and (c) 125% of the average amount of remaining Installment Payments, and the interest thereon, coming due in each Certificate Yen. Amounts in the r Reserve Fund may be used to pay principal of and interest evidenced by the Certificates to the extent that amounts in the Principal Account and Interest Account are insufficient therefore. A portion of the proceeds of the Certificates and, at the District's option, certain other available monies of the District, in ,.� an amount equal to the Reserve Requirement will be deposited into the Reserve Fund. r r amaave.a 3 Book Page 205 IIna Additional Obligations r In addition to the Existing Senior Obligations, the District may at any time incur Obligations payable on a parity or on a subordinate basis to the payment by the District of the Installment Payments LI upon satisfaction of conditions provided in the Master Agreement. See "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES—Limitations on Issuance of Additional Obligations"in the Preliminary Official Statement. y Book-Entry-Only The Certificates will be executed and delivered in the form of fully registered certificates payable v in lawful money of the United States of America.The Certificates will be initially delivered only in book- entry form and will be registered in the time of Cede & Co., sit nominee of The Depository Trust Company, New York, New York ("DTC"), which will act as securities depository for the Certificates. Individual purchases of the Certificates will be made in book-entry form only. Purchasers of Certificates will not receive physical certificates representing their ownership interests in the Certificates purchased. The Certificates will be delivered in Authorized Denominations of $5,000 and any integral multiple u thereof. Payments of principal and interest evidenced by the Certificates are payable directly to DTC by the Trustee. Upon receipt of payments of such principal and interest, DTC will in turn distribute such payments to the beneficial owners of the Certificates. So long as the Certificates are in the DTC book- L entry system,the interest,principal and prepayment premiums, if any,due with respect to the Certificates will be payable by the Trustee,or its agent,to DTC or its nominee. Principal and Interest Payments L The Certificates will be dated as of the date of initial delivery and will evidence interest from that date (computed on the basis of a 360-day year of twelve 30-day months). Interest evidenced by the Certificates is payable semiannually on February 1 and August 1 of each year, commencing on February 1, 2009. Payment of principal and prepayment premium, if any, evidenced by the Certificates will be paid in lawful money of the United States of America upon presentation and surrender thereof at V the Principal Office of the Trustee. Principal Amortization The Certificates will be executed and delivered in the approximate aggregate original principal amount of $_,000,000' and will be subject to principal amortization through serial maturities on February 1 in the years 20 though 20_in the amounts set forth in the Official Bid Form. Mandatory Sinking Amount Prepayment hr If the successful bidder designates principal amounts to be combined into one or more term maturities, each such term maturity shall be subject to mandatory sinking account payments commencing on February 1 of the first year which has been combined to form such term maturities and continuing on February 1 in each year thereafter until the stated maturity date of that term maturity, provided that no term maturity maturing on or after February I,20—may have sinking fund payments prior to February 1, 1 20 . The prepayment price will be equal to the principal amount for such year set forth in the Official W Bid Form, plus accrued interest evidenced thereby to the date fixed for prepayment, without premium. The amount of each such prepayment shall be reduced in the event and to the extent that Installment V Preliminary,subject to change. V NA0C%A 4 V Book Page 206 r Payments payable on the corresponding Installment Payment Date are prepaid pursuant to provisions of the Installment Purchase Agreement governing optional prepayment. .. Optional Prepayment The Certificates with stated Principal Payment Dates prior to February 1,20_are not subject to optional prepayment prior to their stated Principal Payment Dates. The Certificates with stated Principal Payment Dates on or after February 1, 20_ are subject to optional prepayment prior to their stated Principal Payment Dates, on any date on or after February 1, 20_, in whole or in part, in Authorized Denominations, from and to the extent of prepaid Installment Payments paid pursuant to the Installment �+ Purchase Agreement or from any other source of available funds, any such prepayment to be at a price equal to the principal evidenced by the Certificates to be prepaid,plus accrued interest evidenced thereby to the date fired for prepayment,without premium. r Selection of Certificates for Prepayment r Whenever less than all the Outstanding Certificates are to be prepaid on any one date pursuant to provisions of the Trust Agreement with respect to optional prepayment of Certificates, the Trustee shall select the Certificates to be prepaid among Certificates with different Principal Payment Dates as directed in a Written Request of the District Whenever less than all the Outstanding Certificates with the same stated Principal Payment Date are to be prepaid on any one date pursuant to the Trust Agreement, the Trustee shall select the Certificates with such Principal Payment Date to be prepaid w directed in a Written Request of the District, or at the discretion of the District by lot in any manner that the Trustee r' deems fair and appropriate, which decision shall be final and binding upon the District and the Owners. The Trustee shall promptly notify the District in writing of the numbers of the Certificates so selected for prepayment on such date. Notice of Prepayment The Trustee shall, at least 20 but not more than 60 days prior to any prepayment date,give notice r of prepayment to the respective Owners of Certificates designated for prepayment by first-class mail, postage prepaid,at their addresses appearing on the registration books maintained by the Trustee as of the close of business on the day before such notice of prepayment is given. The actual receipt by the Owner r of any notice of such prepayment shall not be a condition precedent to prepayment,and neither failure to receive such notice nor any defect therein shall affect the validity of the proceedings for the prepayment of such Certificates or the cessation of interest evidenced thereby on the date fixed for prepayment. r Interest Rates,Reotfering Prices,and Premium or Discount Bids Bidders must bid to purchase all and not part of the Certificates and must submit their bids on the Official Bid Form. Bidders must specify a rate of interest for each maturity of the Certificates.The rates of interest must be expressed in multiples of one-eighth ('/a) or one-twentieth ('/2,)of one percent(M), and no interest rate can exceed 7.00009 per imam. All Certificates of the same maturity most evidence r interest at the same rate. The successful bidder will,within 30 minutes after being notified of the award of the Certificates, r advise the District of the initial bona fide public reoffering prices of each maturity of the Certificates on the date of award. The successful bidder will also be required, prior to delivery of the Certificates, to furnish to the District a certificate("Bidder's Certificate")acceptable to Special Counsel and taking into account any post bid adjustment of the principal amount of any of the maturities of the Certificates,which states with respect to each maturity of the Certificates that such successful bidder either(A)has purchased the applicable maturity of the Certificates for its own account and not with a view to distribution or resale r 80340496.4 5 Book Page 207 and not in the capacity of a bond house,broker or other intermediary and the price at which such purchase V was made, or(B)(1)has made a bona fide public offering to the public of each applicable maturity of the Certificates at the prices indicated in the information supplied on the date of the award, and(2)an amount at least equal to 10 percent of each such maturity of the Certificates was sold to the public at the prices indicated on the date of the award, with the exception of those maturities, if any, identified in such Bidder's Certificate, as to which such certificate shall explain the reasons why at least 10 percent of each such maturity was not sold to the public at the price indicated for each such maturity on the date of the award. For the purposes of the information submitted on the date of the award and the Bidder's Certificate,the"public"does not include bond houses,brokers or similar persons or organizations acting in the capacity of underwriters or wholesalers. In making such representations,the successful bidder most IJ reflect the anticipated existence, if any, of a "derivative product" (e.g., a tender option) offered or to be offered by the bidder or its affiliate in connection with the initial sale of any of the Certificates. The successful bidder may also be asked by Special Counsel to clarify any discrepancies between the Bidder's Certificate and publicly available information relating to trades of the Certificates and to explain the u failure to sell at least 10%of each maturity to the public at the prices indicated on the date of the award. Bidders may bid to purchase Certificates from the District at a discount or with a premium; however, no bid will be considered if the bid is to purchase Certificates at an aggregate price less than 99%or more than [103j%of the aggregate principal amount of the Certificates. The reoffering price for each maturity of the Certificates maturing in 2019 and thereafter shall not be less than 97% of the principal amount of such maturity. No difference greater than 3% will be permitted between the highest and lowest rates of interest specified. r No bid will be accepted which contemplates the waiver of any interest or other concession by the bidder as substitute for payment in full of the purchase price. Bids which do not conform to the terms of this section may be rejected. See"Right to Reject Bids,Waive Irregularities"below. v Insurance The successful bidder may purchase municipal bond insurance,if available, for some or all of the Lr Certificates. However, the delivery of the Certificates shall not be conditioned upon the issuance of any such insurance. The District makes no representation as to whether the Certificates qualify for insurance. Payment of any insurance premium and satisfaction of any conditions to the issuance of a municipal bond L. insurance policy, including payment for any legal opinion to be delivered to any insurer, shall be the sole responsibility of the bidder. In particular, the District, at its option, may not enter into any additional agreements with respect to the provision of any such insurance. FAILURE OF THE INSURANCE v PROVIDER TO ISSUE ITS POLICY SHALL NOT JUSTIFY FAILURE OR REFUSAL BY THE SUCCESSFUL BIDDER TO ACCEPT DELIVERY OF, OR PAY FOR THE CERTIFICATES. Each successful bidder must provide the District with the municipal bond insurance commitment, if any, L, including the amount of the policy premium, and information with respect to the municipal bond insurance policy and insurance provider for the inclusion in the final Official Statement within one business days following the award of the bid by the District. The successful bidder will be required,prior to the delivery of the Certificates, to furnish to the District a certificate acceptable to Special Counsel, Fulbright&laworski L.L.P.,stating that,in its opinion,the amount of the premium paid for the municipal .- bond insurance policy is not in excess of the present value of the expected interest savings as a result of such policy. L Form of Bid y BIDS FOR LESS THAN ALL OF THE CERTIFICATES WILL NOT BE ACCEPTED. Each bid must be on the Official Bid Form. All electronic proposals shall be deemed to incorporate the tr 803404964 6 Book Page 208 r provisions of the Official Bid Form and must be unconditional and irrevocable. Except for proposals submitted in accordance with the following paragraph, each bid must be accompanied by the applicable bid check or Surety Bond described under the caption "Bid Check" below. In addition, each bidder is _ requested to supply an estimate of the true interest cost resulting from its bid, computed as prescribed below under the caption"Award, Delivery and Payment,"which shall be considered as informative only and not binding on either the bidder or the District. Each bid must be in accordance with the terms and conditions set forth in this Official Notice Inviting Bids. r The District will make its best efforts to accommodate the electronic bids; however, the District, the Financial Advisor(Public Resources Advisory Group)and Special Counsel assume no responsibility r for any error contained in any electronic bid, or for the failure of any electronic bid to be transmitted or received at the official time for receipt of such bids. The official time for receipt of bids will be determined by the District at the place of the bid opening, and the District shall not be required to accept r the time kept by Electronic Service as the official time. The District assumes no responsibility for informing any bidder prior to the deadline that its bid is incomplete,or not received. r If multiple timely bids are received from a single bidder the District shall accept the best of such bids and each bidder agrees that by submitting any bid to be bound by its best bid. r Information Regarding Electronic Proposals Electronic proposals must be submitted through the Electronic Service. If any provision of this Official Notice Inviting Bids conflicts with information provided by the Electronic Service, this Official r Notice Inviting Bids shall control. The District is not responsible for the proper operation of, and shall have no liability for any delays or interruptions of or any damages caused by the Electronic Service.The District is using the Electronic Service as a communication mechanism and not as the District's agent to w conduct electronic bidding for the Certificates. The District is not bound by any advice of or determination by the Electronic Service to the effect that any particular bid complies with the terms of this Official Notice Inviting Bids. All costs and expenses incurred by prospective bidders in connection r with their submission of bids through the Electronic Service are the sole responsibility of such bidders and the District is not responsible for any such costs or expenses.Further information about the Electronic Service, including any fee charged, may be obtained from Ipreo LLC, 1359 Broadway, Second Floor, r New York, NY 10018 (212-849-5021). The District assumes no responsibility or liability for bids submitted through the Electronic Service. The District shall be entitled to assume that any bid submitted through the Electronic Service has been made by a duly authorized agent of the bidder. Bid Check Each bidder must provide with its bid a certified or cashier's check payable in same day or next r day funds drawn on a responsible bank having an office in Orange County, California equal to $ .00("Bid Check Amount")payable to the order of"Orange County Sanitation District,"and delivered to the following address: Orange County Sanitation District, 10844 Ellis Avenue, Fountain ,r Valley, CA 92708-7018, Attention: Lorenzo Tyner. Bid checks will be held by the District, uncashed, until the Certificates are awarded to the successful bidder.Any check accompanying an unaccepted bid will be returned promptly to the unsuccessful bidder by the District. Alternatively, the bidder may r provide its bid with a financial surety bond ("Surety Bond") in the amount of the Bid Check Amount issued by an insurance company rated AAA by Standard &. Poor's and licensed to issue such a bond in the State of California,naming the District as the beneficiary and identifying the bidder whose deposit is guaranteed by the Surety Bond. If the successful bidder has provided a Surety Bond, such bidder shall wire transfer to the District the amount of the Bid Check Amount in immediately available federal funds not later than 3:00 p.m. (New York Time)on the business day next succeeding the day of acceptance of r 60340496.4 7 r Book Page 209 L i the proposal which amount shall be deposited in an escrow fund or account or a similar fund and applied (ar to the purchase price of the Certificates.If the District has not received such federal funds wire transfer by the time stated the District may draw upon the Surety Bond to satisfy the successful bidders deposit requirements.The check accompanying any accepted proposal shall be cashed and deposited in an escrow L fund or account or a similar fund and applied to the purchase price of the Certificates at the time of delivery of the Certificates. If after the award of the Certificates, the successful bidder fails to complete the purchase on the terms stated in its proposal,unless such failure of performance shall be caused by any act or omission of the District, any amount received from such bidder by the District, wh-ther by paid check or pursuant to the Surety Bond procedure set forth above, shall be retained by the District as stipulated liquidated damages.No interest will be paid upon the deposit made by any bidder. Official Statement The District has approved a Preliminary Official Statement for the Certificates, dated the date of v this Official Notice Inviting Bids, which the District has "deemed final" for purposes of Rule 15c2-12 promulgated by the Securities and Exchange Commission, as amended(the "Rule"), although subject to revision,amendment and completion in conformity with the Rule.The District will provide the successful Ir bidder such reasonable number of printed copies of the final Official Statement as such bidder may reasonably,request no later than seven business days after the day the Certificates are awarded Up to 250 copies of the final Official Statement will be furnished without cost to the successful bidder and further y copies, if desired, will be made available at the successful bidder's expense. The successful bidder shall file the final Official Statement with a nationally recognized municipal securities information repository on a timely basis. The successful bidder shall, by accepting the award, agree at all times to comply with the provisions of the Rule and with all applicable rules of the Municipal Securities Rulemaking Board. Award,Delivery and Payment I If satisfactory bids are received the Certificates will be awarded to the highest responsible bidder not later than 24 hours after the time established for the receipt of bids. The highest bidder shall be the bidder submitting the best price for the Certificates,which best price shall be that resulting in the lowest tare interest cost with respect to the Certificates.The true interest cost shall be compared by doubling the semi-annual interest rate (compounded semi-annually) necessary to discount the debt service payments from their respective payment dates to the date of the Certificates and to the price bid If two or more bidders have bid the same true interest cost,the award shall be made at the sole discretion of the District. Delivery of the Certificates is expected to occur on or about December ,2008.The Certificates will be delivered through the facilities of DTC,New York,New York The successful bidder shall pay for the Certificates on the date of delivery in Los Angeles, Calif rmia in immediately available federal funds. Any expenses of providing federal funds shall be home by the purchaser. Payment on the delivery date y shall be made in amount equal to the price bid for the Certificates less the amount of the good-faith deposit. Right to Reject Bids,Waive Irregularities .. The District reserves the right to reject any and all bids and to the extent permitted by law to waive any irregularity or informality in any bid. L CUSIP Numbers It is anticipated that CUSIP numbers will be printed on the Certificates, but the District will V assume no obligation for the assignment or printing of such numbers on the Certificates or for the V 8D340496.4 Ir Book Page 210 r r correctness of such numbers,and neither the failure to print such numbers on any Certificate nor any error with respect thereto shall constitute cause for a failure or refusal by the purchasers thereof to accept delivery of and make payment for the Certificates. The cost for the assignment of CUSIP numbers to the Certificates will be the responsibility of the successful bidder. California Debt and Investment Advisory Commission The successful bidder will be required to pay all fees due to the California Debt and Investment Advisory Commission ("CDIAC")under Califs mia law. CDIAC will invoice the successful bidder after the delivery of the Certificates. r Legal Opinions r The District will furnish to the successful bidder at the closing of the Certificates, the legal opinion of Special Counsel to the effect that,in the opinion of Special Counsel,based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy r of certain representations and compliance with certain covenants, the interest component of each Installment Payment and the allocable portion thereof distributable in respect of each Certificate is excluded from gross income for federal income tax purposes under section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes, and that in the further opinion of Special Counsel the interest component of each Installment Payment and the allocable portion thereof distributable in respect of each Certificate is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Special Counsel observes that such �r interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Special Counsel will express no opinion regarding any other tax consequences related to the ownership or disposition of,or the accrual or receipt of interest on,the Certificates. r Change in Tax Exempt Status r At any time before the Certificates are tendered for delivery,the successful bidder may disaffirm and withdraw its proposal if the interest on the same type and character as that evidenced by the Certificates(as determined by Special Counsel) shall be declared to be includable in gross income under federal income tax laws, either by a ruling of the Internal Revenue Service or by a final decision of any federal court, or shall be declared taxable by the terms of any federal income tax law enacted subsequent to the date of this Official Notice Inviting Bids. Closing Documents The District will furnish to the successful bidder at the time of delivery of the Certificates: (1)a r certificate certifying (i) that as of and at the time of delivery of the Certificates, there is no action, suit, proceeding or investigation, pending or, to the best knowledge of the District, threatened against or affecting the District, (A)which affects or seeks to prohibit, restrain or enjoin the execution and delivery of the Certificates or the Trust Agreement, (B) in any way contesting the validity of the Certificates,the Installation Purchase Agreement or the Trust Agreement or the powers of the District to enter into or perform its obligations under such documents to which it is a party or the existence of the District, or r (C)wherein an unfavorable decision,ruling or finding would materially and adversely affect the District, or the validity or enforceability of the Certificates, the Installation Purchase Agreement or the Trust Agreement or the ability of the District to perform its obligations under such documents to which it is a party, (if)that the Preliminary Official Statement did not on the date of sale of the Certificates and the Official Statement does not on the date of delivery contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, in the light of the 90340096.4 9 r Book Page 211 L circumstances under which they were made,not misleading,and(2)a receipt of the District showing that the purchase price of the Certificates has been received by the District. Continuing Disclosure y To assist the successful bidder in complying with the Rule, the District will undertake, pursuant to the Continuing Disclosure Agreement,to provide certain annual financial information, and notices of L the occurrence of certain events, if material.A description of the Continuing Disclosure Agreement is set forth in the Preliminary Official Statement and will be set forth in the final Official Statement. Additional Information Electronic copies of the Trust Agreement, the Installment Purchase Agreement, the Master Agreement, this Official Notice Inviting Bids, the Official Bid Form, and the Preliminary Official W Statement will be famished to any potential bidder upon request made to the District's Financial Advisor at: Public Resources Advisory Group, 11845 West Olympic Boulevard, Suite 640, I.os Angeles, CA . 90064,310-477-8487,via e-mail at bsiembieda@pragla.com. L Right to Modify or Amend I The District reserves the right to modify or amend this Official Notice Inviting Bids, including but not limited to the right to adjust and change the principal amount of the Certificates being offered; provided,however,that such notifications or amendments shall be made not later than December 2,2008, Ir by 3:00 p.m, New York Time and communicated through Thomson Municipal Market Monitor (available at http:ll w .tm3.com)and by facsimile transmission to any qualified bidder timely requesting such notice.Bidders are required to bid upon the Certificates as so modified L Cancellation or Postponement _ i The District reserves the right to cancel or postpone, from time to time,the date established for jr the receipt of bids for any reason at any time. Any such postponement will be announced by Thomson Municipal Market Monitor. If any date fixed for the receipt of bids and the sale of the Certificates is postponed, any alternative sale date will be announced via Thomson Municipal Market Monitor at least 24 hours prior to such alternative sale date and will be provided by facsimile transmission to any qualified bidder timely requesting such notice. On any such alternative sale date, any bidder may submit a sealed bid for the purchase of the Certificates in conformity in all respects with the provisions of this Official Notice Inviting Bids except for the date of sale and except for the changes announced by Thomson Municipal Market Monitor at the time the sale date and time are announced. Dated: November.2008 V 1 6i L L i L 80340496.a 10 Li Book Page 212 r r OFFICIAL BID FORM $_,000,000- ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION _ SERIES 2008C December_,2009 Orange County Sanitation District 10844 Ellis Avenue Fountain Valley,CA 92708-7018 Attn: Lwww Tyner r Ladies and Gentlemen: We hereby offer to purchase all of the $ ,000,000• aggregate principal amount of the Orange County Sanitation District Certificates of Participation Series 2008C (the "Certificates"), more particularly described in your Official Notice Inviting Bids dated November_,2008,which is incorporated herein by r reference,and made a part thereof, at a purchase price of$ (which purchase price is not less than 99% or more than [103]% of the aggregate principal amount of the Certificates). This offer is for Certificates evidencing interest at the rates and in the form of serial maturities as set forth in the table on the following page. The bid is subject to acceptance not later than 24 hours after the expiration of the time established for the final receipt of bids. w Our calculation of the true interest cost, which is considered to be informative only and not a part of the bid,is_%. r (PLEASE CHECK ONE OF THE FOLLOWING TWO PARAGRAPHS) r [ ] There is enclosed herewith a certified check or cashier's check for $ drawn on a responsible bank having an office in Orange County, California payable in same day or next day funds to the order of the Orange County Sanitation District(the"District"). 'tl [ ] A surety bond has been provided to the District in the amount of$ issued by an insurance company rated AAA by Standard & Poor's and licensed to issue such a bond in the State of California, naming the District as beneficiary and identifying the bidder whose deposit is guaranteed by r the surety bond. We have noted that payment of the purchase price is to be made in immediately available Federal Funds r at the time of delivery of the Certificates. If we are the successful bidder,we will (1)within one hour after being notified of the award of the Certificates, advise the District of the initial public offering prices of the Certificates, (2) prior to delivery of the Certificates, furnish a certificate, acceptable to Special r, Counsel, Fulbright& Jaworski L.L.P., as to the "issue price" of the Certificates within the meaning of Section 1273 of the Internal Revenue Code of 1986; and (3) if municipal bond insurance has been purchased for some or all of the Certificates, prior to delivery of the Certificates furnish a certificate, r Preliminary,subject to change. 8034N%.4 Book Page 213 L acceptable to said Special Counsel, as to the present value of the expected interest savings as a result of L such insurance. Maturity Principal Interest L (February 1) Amount Rate L V L Total We represent that we have full and complete authority to submit this bid on behalf of our bidding jr syndicate and the undersigned will serve as the lead manager for the group if the Certificates are awarded pursuant to this bid. We certify (or declare) under penalty of perjury under the laws of the State of California that this proposal is genuine, and not a sham or collusive, nor made in the interest of or on 'w behalf of any person not herein named, and that the bidder has not directly or indirectly induced or solicited any other bidder to put in a sham bid or any other person, firm or corporation to refrain from bidding,and that the bidder has not in any manner sought by collusion to secure for himself an advantage over any other bidder. Respectfully Submitted, Account Manager: �LI By: Address(for Return of Unsuccessful Bid Check): City: State: Telephone: b Following(or attached)is a list of the members of our account on whose behalf this bid is made. W v w V Preliminary,subject to change. 61 803404%.4 2 V Book Page 214 r �. correctness of such numbers,and neither the failure to print such numbers on any Certificate nor any error with respect thereto shall constitute cause for a failure or refusal by the purchasers thereof to accept delivery of and make payment for the Certificates. The cost for the assignment of CUSIP numbers to the r Certificates will be the responsibility of the successful bidder. California Debt and Investment Advisory Commission ` The successful bidder will be required to pay all fees due to the California Debt and Investment Advisory Commission ("CDIAC")under California law. CDIAC will invoice the successful bidder after the delivery of the Certificates. r Legal Opinions The District will furnish to the successful bidder at the closing of the Certificates, the legal opinion of Special Counsel to the effect that,in the opinion of Special Counsel,based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, the interest component of each Installment Payment and the allocable portion thereof distributable in respect of each Certificate is excluded from gross income for federal income tax purposes under section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes, and that in the further ` opinion of Special Counsel the interest component of each Installment Payment and the allocable portion thereof distributable in respect of each Certificate is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Special Counsel observes that such r interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Special Counsel will express no opinion regarding any other tax consequences related to the ownership or disposition of,or the accrual or receipt of interest on,the Certificates. r Change in Tax Exempt Status At any time before the Certificates are tendered for delivery,the successful bidder may disaffirm and withdraw its proposal if the interest on the same type and character w that evidenced by the Certificates(as determined by Special Counsel) shall be declared to be includable in gross income under federal income tax laws, either by a ruling of the Internal Revenue Service or by a final decision of any federal court, or shall be declared taxable by the terms of any federal income tax law enacted subsequent to the date of this Official Notice Inviting Bids. "r Closing Documents The District will furnish to the successful bidder at the time of delivery of the Certificates: (1)a r certificate certifying (i)that as of and at the time of delivery of the Certificates, there is no action, suit, proceeding or investigation, pending or, to the best knowledge of the District, threatened against or affecting the District,(A)which affects or seeks to prohibit, restrain or enjoin the execution and delivery ,r of the Certificates or the Trust Agreement, (B) in any way contesting the validity of the Certificates, the Installation Purchase Agreement or the Trust Agreement or the powers of the District to enter into or perform its obligations under such documents to which it is a party or the existence of the District, or r (C)wherein an unfavorable decision, ruling or finding would materially and adversely affect the District, or the validity or enforceability of the Certificates, the Installation Purchase Agreement or the Trust Agreement or the ability of the District to perform its obligations under such documents to which it is a party, (ii)that the Preliminary Official Statement did not on the date of sale of the Certificates and the r Official Statement does not on the date of delivery contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, in the light of the r 80340496.4 9 r Book Page 211 W circumstances under which they were made, not misleading, and (2) a receipt of the District showing that the purchase price of the Certificates has been received by the District. Continuing Disclosure To assist the successful bidder in complying with the Rule, the District will undertake, pursuant to the Continuing Disclosure Agreement, to provide certain annual financial information, and notices of the occurrence of certain events, if material. A description of the Continuing Disclosure Agreement is set forth in the Preliminary Official Statement and will be set forth in the final Official Statement. I Additional Information V Electronic copies of the Trust Agreement, the Installment Purchase Agreement, the Master I Agreement, this Official Notice Inviting Bids, the Official Bid Form, and the Preliminary Official L Statement will be famished many potential bidder upon request made to the District's Financial Advisor at: Public Resources Advisory Group, 11845 West Olympic Boulevard, Suite 640, Los Angeles, CA 90064,310,477-8487,via email at bsiembieda@pragla.com. Right to Modify or Amend The District reserves the right to modify or amend this Official Notice Inviting Bids, including L but not limited to the right to adjust and change the principal amount of the Certificates being offered; provided,however,that such notifications or amendments shall be made not later than December 2,2008, by 3:00 p.m., New York Time and communicated through Thomson Municipal Market Monitor L (available at http://r .im3.wm)and by facsimile transmission to any qualified bidder timely requesting such notice.Bidders are required to bid upon the Certificates as so modified. L Cancellation or Postponement I The District reserves the right to cancel or postpone, from time to time, the date established for the receipt of bids for any reason at any time. Any such postponement will be announced by Thomson Municipal Market Monitor. If any date fixed for the receipt of bids and the sale of the Certificates is postponed, any alternative sale date will be announced via Thomson Municipal Market Monitor at least V 24 hours prior to such alternative sale date and will be provided by facsimile transmission to any qualified bidder timely requesting such notice. On any such alternative sale date, any bidder may submit a sealed bid for the purchase of the Certificates in conformity in all respects with the provisions of this Official Notice Inviting Bids except for the date of sale and except for the changes announced by Thomson 44 Municipal Market Monitor at the time the sale date and time are announced. i Dated: November_, 2008 V i L LJ I V I ' u 803404%.4 10 L Book Page 212 r r OFFICIAL BID FORM r s_,000,000- ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION r SERIES 2008C December_,2008 Orange County Sanitation District 10844 Ellis Avenue Fountain Valley, CA 92708-7018 Attn: Lorenzo Tyner r Ladies and Gentlemen: r We hereby offer to purchase all of the$ ,000,000• aggregate principal amount of the Orange County Sanitation District Certificates of Participation Series 2008C (the "Certificates"), more particularly described in your Official Notice Inviting Bids dated November_,2008,which is incorporated herein by � reference, and made a part thereof,at a purchase price of$ (which purchase price is not less than 99% or more than ]103]% of the aggregate principal amount of the Certificates). This offer is for Certificates evidencing interest at the rates and in the form of serial maturities as set forth in the table on the following page. The bid is subject to acceptance not later than 24 hours after the expiration of the time established for the final receipt of bids. r Our calculation of the true interest cost, which is considered to be informative only and not a part of the bid,is_%. r (PLEASE CHECK ONE OF THE FOLLOWING TWO PARAGRAPHS) r [ ] There is enclosed herewith a certified check or cashier's check for $ drawn on a responsible bank having an office in(range County, California payable in same day or next day funds to the order of the Orange County Sanitation District(the"District"). [ ] A surety bond has been provided to the District in the amount of$ issued by an insurance company rated AAA by Standard & Poor's and licensed to issue such a bond in the State of California, naming the District as beneficiary and identifying the bidder whose deposit is guaranteed by r the surety bond. We have noted that payment of the purchase price is to be made in immediately available Federal Funds r at the time of delivery of the Certificates.If we are the successful bidder,we will(1)within one hour after being notified of the award of the Certificates, advise the District of the initial public offering prices of the Certificates, (2) prior to delivery of the Certificates, furnish a certificate, acceptable to Special r Counsel, Fulbright& Jaworski L.L.P., as to the "issue price" of the Certificates within the meaning of Section 1273 of the Internal Revenue Code of 1986; and (3) if municipal bond insurance has been purchased for some or all of the Certificates, prior to delivery of the Certificates furnish a certificate, r Preliminary,subject to change. r 903404964 r Book Page 213 U acceptable to said Special Counsel, as to the present value of the expected interest savings as a result of such insurance. Maturity Principal Interest L (February l) Amount Rate V L L Total We represent that we have full and complete authority to submit this bid on behalf of our bidding L syndicate and the undersigned will serve as the lead manager for the group if the Certificates are awarded pursuant to this bid. We certify (or declare) under penalty of perjury under the laws of the State of California that this proposal is genuine, and not a sham or collusive, nor made in the interest of or on behalf of any person not herein named, and that the bidder has not directly or indirectly induced or solicited any other bidder to put in a sham bid or any other person, firm or corporation to refrain from bidding,and that the bidder has not in any manner sought by collusion to secure for himself an advantage L over any other bidder. Respectfully Submitted, L Account Manager: By: Address(for Return of Unsuccessful Bid Check): Ira City: State: li Telephone: N Following(or attached)is a list of the members of our account on whose behalf this bid is made. tr I L L L Prelbntnary,subject to change. L 80340496.4 2 1 L,1 Book Page 214 r NOTICE OF INTENTION TO SELL r $_,000,000- Orange County Sanitation District Certificates of Participation Series2008C NOTICE IS HEREBY GIVEN that the Orange County Sanitation District (the"District") intends to receive sealed bids and electronic bids until 10:30 a.m., New York time, on Wednesday, December 3,2008, through the use of an electronic bidding service offered by Ipreo LLC; at www.newissuehome.i- deal.com and the Parity bid delivery service, for the purchase of all of the District's Certificates of Participation, Series 2008C (the "Certificates"), dated as of the date of initial delivery, and maturing on such dates as described in the related Official Notice Inviting Bids (the "Notice"). No bids will be accepted by facsimile. Bids for less than all of the Certificates will not be accepted. The District reserves the right to postpone the date established for the receipt of bids as more fully described under the paragraph"Cancellation or Postponement"in the Notice. ,r NOTICE IS HEREBY FURTHER GIVEN that electronic copies of the Notice and the Preliminary Official Statement issued in connection with the sale of the Certificates may be obtained from the District's financial advisor, Public Resources Advisory Group, 11845 West r Olympic Blvd., Suite 640, Los Angeles, California 90064, 310477-8487, via e-mail: bsiembieda@pmgla.com. Orange County Sanitation District Dated: November. 2008 r1 r r r - Prelintinuy,subject to change. r SW42394.3 r Book Page 215 r ADMINISTRATION COMMITTEE Me ng :,a Toea.:Of Il/12/0a AGENDA REPORT I(em Nnmhe HM NUMber ADMOa-36 Orange County Sanitation District .d FROM: James D. Ruth, General Manager Originator. Robert P. Ghirelli, Assistant General Manager r SUBJECT: HAZARDOUS WASTE DISPOSAL PROGRAM GENERAL MANAGER'S RECOMMENDATION 1) Ratify Change Order No. 1 to P.O. 102681-0A, issued to Clean Harbors Environmental Service, Specification No. S-2006-300,for hazardous waste services for an additional amount of$50,000,for a total contract amount not to exceed $158,150,for the contract period ending December 31, 2008; r 2) Approve Change Order No. 2 to P.O. 102681-OA, issued to Clean Harbors Environmental Service, Specification No. S-2006-300, for hazardous waste services, r approving an increase of$51,850, for a total contract amount not to exceed $160,000 for the contract period January 1, 2009 through December 31, 2009, and all subsequent renewal periods; and, 3) Approve an annual contingency of$16,000(10%). SUMMARY The 2008 Clean Harbor's purchase order is for$108,150, which is approximately$9,000 per month. It was budgeted based upon historical cost. The contract with Clean Harbors expires December 31, 2010. Unforeseen increases in fuel charges, and service expenses coupled with a 5% rate increase has exhausted the purchase order. In addition, charges incurred last year, 2007, in the amount of$15,000 were carried over to the 2008 purchase order. Therefore, the Safety Division is requesting an additional $50,000 be added to the purchase order to cover remainder of the calendar year and several outstanding invoices. .. PRIOR COMMITTEE/BOARD ACTIONS Approved in Fiscal Year 2006/2007 Budget. .i ADDITIONAL INFORMATION .r OCSD is required to properly dispose of all hazardous waste generated. The requirements are based upon environmental regulations, specifically, the Resource Conservation and Recovery Act(RCRA). Clean Harbors Environmental Services was awarded the contract in 2006 for a period of four(4)one-year renewals. The purchase order is based upon a calendar year with the vendor. The vendor's primary service is the transportation, treatment, and either recycling or disposal of hazardous waste generated by OCSD. OCSD uses the vendor to provide the +� following additional services: d ram No.Dw-tma a«ixe:owtroi Page 1 r Book Page 216 I� • Hazardous waste profiling —sampling a waste and conducting lab analysis to determine L how the waste is supposed to be disposed of properly; • Lab packs—sampling and properly packing small quantities of chemicals to ensure they are disposed of properly; • Spill cleanup—provide the trained personnel, material, and equipment to clean up spills caused by OCSD activities that are beyond the capabilities of OCSD staff to handle; and, I i • Hazardous waste storage yard inspections—examining all the different storage areas at LI Plant 1 and Plant 2 to ensure they are compliant with regulations. Based on the ongoing need for these services and anticipated escalating costs, the recommendation is to increase the contract amount from $108,150 to$158,150; establish a new contract amount of$160,000 for the renewal periods; and, include a contingency of 10% J 1 per year of the contract period beginning January 1, 2009. �•J The contract with Clean Harbor Environmental Services expires December 31, 2010. This item I i will be revisited by the Board of Directors at that time. u Experiences this year that caused the authorized contract amount to be exceeded include: • Ferric acid spill cleanup, • Lead acid battery disposal, and • Gas cylinder disposal. This recommendation complies with authority levels of the Sanitation District's Delegation of Authority. This item has been budgeted. (Line item: Section 8, Page 25). + ! Award Date: 12127/06 Contract Amount: $105,000 Contingency: NIA �J 12/31107 $108,160 N/A I 111121D8 $168,160 NIA L 12/31108 $160,000 $16,000(10%) 12/31109 $16D,000 $16,000(10%) L JDR:RPG:JR:M u u u Forth No.� 1N 3 gmNM 03e1M • ag02 V Book Page 217 ADMINISTRATION COMMITTEE Mn 1111D1* To ea.orDir u/ xtos AGENDA REPORT Item Rem Number r AIXAOB-3708.37 Orange County Sanitation District -+ FROM: James D. Ruth, General Manager Lorenzo Tyner, Director of Finance and Administrative Services r+ SUBJECT: INTERNAL AUDIT REPORTS GENERAL MANAGER'S RECOMMENDATION Informational item. SUMMARY .r At the direction of the Administration Committee's Audit Oversight Subcommittee, Lance, Soil & Lunghard, LLP (LSL), Certified Public Accountants was engaged to audit internal aspects of the District business activities, including: 1) The Integrated Program Management Consultants (IPMC)Agreement. 2) Contract change orders. 3) Process billing and invoices for design and construction contracts. 4) Travel and business expenses . Based on LSL's review, it is their judgment that the overall processes and controls were r reasonable. However, they did find areas which could be improved upon. LSL will provide a more detailed explanation of the audit scope, methodology, and their findings at the November Administration Committee meeting. .. PRIOR COMMITTEE/BOARD ACTIONS At the February 14, 2007 Administration Committee Meeting, the Committee members approved the selection of LSL, to perform internal auditing services as directed by the Committee. The Committee also at this time established an audit oversight subcommittee consisting of Directors Waldman, Luebben, and Parker assigned to meet with auditors and staff, to give direction on the scope of audit areas, and to report back to the Administration Committee on the results of audits undertaken. ADDITIONAL INFORMATION .r N/A .. FO�No.OWf02] PaNmtl:IXW1N) Page 1 r Book Page 218 u ATTACHMENT Independent Accountants' Reports from Lance Soll & Lunghard, LLP consisting of 1. Evaluation of Internal Control Procedures relating to Change Orders. 2. Evaluation of Certain Provisions and Controls related to Agreements with Integrated Program Management Consultants (IPMC). u 3. Evaluation of Internal Control Procedures relating to Travel and Business Expenses. 4. Evaluation of Internal Control Procedures relating to Progress Billings/invoices J for Design and Construction Contracts. f 1 f JDR:LT:MW II U u u u u u u u Fq No.p iw p�Nwtpgye/ Page 2 i Book Page 219 u Brandon W.Burrows _ Lance Donald L Parker $O1� & MichaelK.Chu Lut ghard DavidE,Bate viol .r, o� ao. Donald G.Slater LLP Richard K.Kikuchi Certified Public Accotimants Retlrd Robert C.Lance r Richard C.Soil Fred J.Lunghard,Jr. 19v iw9 r August 13,2008 r Administration Committee r Orange County Sanitation District Fountain Valley, California Subject: Evaluation of Internal Control Procedures relating to Change Orders INDEPENDENT ACCOUNTANTS' REPORT + We have performed the procedures enumerated below, which were agreed to by the management of the Orange County Sanitation District, Fountain Valley, California (the District), solely to assist the District in evaluating certain aspects of internal control procedures relating to contract change orders. This engagement �1 to apply agreed-upon procedures was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the Orange County Sanitation District. Consequently, we make no representation regarding the sufficiency of the procedures described below, either for the purpose for which + this report has been requested or for any other purpose. The procedures performed and the results obtained from the performance thereof were as follows: r 1. Procedures Performed: We reviewed the Construction CIP Procedure Number C-080 (District'sPolicy) pertaining to change orders. + Findings: Not applicable. 2. Procedures Performed: We obtained an understanding of the District's controls in place for processing and approving change orders. Findings: Notapplirable. r 3. Procedures Performed: We selected a sample of projects and examined each change order pertaining to the project for: a Justification or reason for change and referenced the original purchase order number. a Approval in accordance with the delegation of authority. r a Verified the Approval Form/Merit determination was submitted for changes greater than $35,000 and was approved by Contracts Administration. 75 }'EARS 1929 2004 �k5 r � FCC2�2(ea 203 N.Brea Blvd.,Suirc 203 a Br ff,9?282l LL06-t714)672-0022 o Fox(714)672-0331 a www.lslcoa9.com L Lame Still 6 LYmghard cuna,ee wave�cmue..�x rs Orange County Sanitation District Fountain Valley,California August 13,2008 Findings: The District was unable to locate the Approval Form/Merit Determination pertaining �+ the following change order or field change order which we believe to be isolated instances: I V Proiect# Chance order# Amount 5-51 & 5-52 2 $256,079 I-2-4A 3 $552,984 V P1-37 2 $117.648 P1-76 6 5489,920 541 &5-52 Field Change Order S 71,628 j Although the District was unable to locate the documentation for the items noted above, we did I,.I obtain supporting records to substantiate the appropriateness of the change order and we noted no exceptions. L Management's Response: The five Approval/Merit Forms that could not be located were from the October 2005 to December 2006 timeframe. Currently, the Engineering & Construction Manager reviews all change orders submitted for 01e General Manager's approval and ensures that all change order items that are greater than$35,000 have a signed Approval/Merit Form. Summary of Results Based on our review of the internal control policies and procedures relating to contract change orders, we u feel that, overall, the District's policies and procedure are adequate in form and function. The review was j conducted in order to assess and to provide feedback to the District regarding policies and procedures Ir that are in place. As noted in the previous sections, we performed tests on procedures, conducted inquiries and reviewed the policies that have been established by the District. In terms of application of j policies and procedures, we found certain exceptions as mentioned above. Our procedures and Ir recommendations would be: 1. Item 1, page 1 —no recommendations �+ 2. Item 2,page 1 —no recommendations 3. Item 3, page 1 —Although exceptions were noted through our review, our tests of procedures indicate that for the most part, the District's policy is being followed and adequate controls are in place for change orders. V Conclusion We were not engaged to and did not perform an audit, the objective of which would be the expression of an opinion on certain aspects of Internal control procedures relating to contract change orders. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to the District. This report is intended solely for the information and use of the specified users listed above and is not intended to be,and should not be, used by anyone other than those specified parties. y L Book Page 221 Brandon W.Burrows IMLance Donald L Parker � & MkhadK.Ch. Darid B.Hale ghardDonald G.Slater LLP Richard lL Kikuchl Certified Public Accomrtante Retired Robe"C.Lane r "14lm Richard C.Soil Fred J.Lunghard,Jr. inclwa August 13, 2008 r Administration Committee Orange County Sanitation District Fountain Valley, California r Subject Evaluation of Certain Provisions and Controls related to Agreements with Integrated Program Management Consultants(IPMC) INDEPENDENT ACCOUNTANTS' REPORT We have performed the procedures enumerated below, which were agreed to by the management of the r Orange County Sanitation District, Fountain Valley, California (the District), solely to assist the District in evaluating certain provisions and controls related to the agreements entered into by the District and Integrated Program Management Consultants (IPMC). This engagement to apply agreed-upon procedures was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the Orange County Sanitation District. Consequently,we make no representation regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other r purpose. The procedures performed and the results obtained from the performance thereof were as follows: 1. Procedures Performed: We reviewed the professional services agreement and the subsequent addendums to the agreement entered into by the District and IPMC. Findings: Not applicable. 2. Procedures Performed: We obtained an understanding of the District's controls in place for r processing and approving invoices from IPMC for payment. Findings: Not applicable. r 3. Procedures Performed: We judgmentally selected a sample of disbursements made by the District to IPMC for the period July 2006 through May 2008. We reviewed the invoices and other supporting documents and recalculated the amounts charged for direct labor, overhead and profit and verified a+ the percentages charged for overhead and profit tied to the percentages defined in the professional services agreement We also examined the support for other direct costs charged and verified they were within the scope of work. Lastly, we reviewed the canceled check to verify all payments were r made to IPMC and were posted to the proper general ledger account. Findings: No exceptions were noted as a result of our procedures. r .+ 75 YEARS 1929 s2111M '� 01 Eriit eruta 203 N.Bra Blvd.,Suire 203 a Br gt�a28e6�56 a(714)672-00 2 a Fax(714)672-0331 a Alm ix. ���� � LI L . . Orange County Sanitation District Fountain Valley, California August 13, 2008 V 4. Procedures Performed: We judgmentally selected a sample of IPMC employees performing management services for the District and verified the amount of hours billed were the same as what were recorded on the certified payroll reports and recalculated the hourly rate charged. Findings: No exceptions were noted as a result of our procedures. I i �.I Summary of Results i Based on our review of certain provisions and controls related to the agreements entered into by the u District and IPMC, we feel that, overall, the Districts policies and procedure are adequate in form and function. The review was conducted in order to assess and to provide feedback to the District regarding policies and procedures that are in place. As noted in the previous sections, we performed tests on procedures, conducted inquiries and reviewed the policies that have been established by the District. In terms of application of policies and procedures,we found that there were areas that could be improved upon. Our procedures and recommendations would be: 1. Item 1, page 1 —No recommendations 2. Item 2, page 1 —As part of the Districts procedure for approving IPMC invoices for payment,an Engineering Supervisor reviews each invoice prior to submission for approval. To provide an appropriate level of documentation to substantiate this control procedure, we recommend that the Engineering Supervisor sign or initial the invoice to indicate review. y Managements Response: IPMC will provide the Engineering Supervisor with a list of their staff and the corresponding billing rates to ensure accuracy. As recommended by the auditors L above, a signature line for the Engineering Supervisor will be added to the invoice cover sheet. This process will ensure that the Engineering Supervisor has reviewed and approved the invoice before the Manager forwards it to the Accounting Division for payment N 3. Item 3, page 1 — No recommendations 4. Item 4, page 2— No recommendations L Conclusion We were not engaged to and did not perform an audit, the objective of which would be the expression of an opinion on certain provisions and controls related to the agreements entered into by the District and Integrated Program Management Consultants. Accordingly,we do not express such an opinion. Had we " performed additional procedures, other matters might have come to our attention that would have been I reported to the District. This report is intended solely for the information and use of the specified users listed above and is not intended to be, and should not be, used by anyone other than those specified parties. L Li N Book Page 223 Brandon W.Burrows LL_ LLce Donald L.Parker I Michael K.Chu David E Hale nghard AY f~,cwp as Donald G.Slater LLP Richard K.Kikuchi Cerdikil Pnb/ic Accounlnnrs Retired Robert C.lame 191YIWi Au ust 13,2008 Richard C.Sou g Fred J.Lunghard,Jr. 19361999 r Administration Committee Orange County Sanitation District Fountain Valley, California r Subject: Evaluation of Internal Control Procedures relating to Travel and Business Expenses r INDEPENDENT ACCOUNTANTS' REPORT We have performed the procedures enumerated below, which were agreed to by the management of the Orange County Sanitation District, Fountain Valley, California (the District), solely to assist the Sanitation District in evaluating internal control procedures relating to travel and business expenses. This engagement to apply agreed-upon procedures was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the Orange County Sanitation District Consequently, we make rao representation regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose. The procedures performed and the results obtained from the performance thereof were as follows: 1. Procedure Performed: We obtained and reviewed the Finance Department Policy and Procedure .., for Travel and Business Expenses No. 301-6-7 dated January 1, 2005 (District's policy). We also conducted inquiries with related department(division personnel. _ Findings: Not applicable 2. Procedure Performed: We obtained a detail listing of travel and business expenses for the period July 2006 through May 2008, and selected a sample of items. We obtained the related r documentation for the items to ascertain whether the District's policy was appropriately being followed. r Findings: A. Section 4.5 of the District's policy states, "Employee shall utilize either World Wide Travel Service Inc. or the Internet, whichever is more cost effective, to secure rental car or airline reservations. Reservations made through the Internet require a written statement from the employee detailing the cost savings.' During our review, we noted that all requests for travel expense reimbursement, which involved air travel, did not include a written statement from the employee detailing the cost savings. This is an undocumented procedure performed by the travel coordinator. Financial Management's response: While we believe the procedure is being followed informally, as noted by the audit, we will reaffirm with the travel coordinators and those that review the submitted documents for reimbursement the requirement of a written statement uu detailing the cost savings. r 75 }EARS 1929 . 2004 r O� EzeePeW610 203 N.Brea Blvd..Sukc 203 a Br ff0 2ge1&r456 a(714)672-0M2 a Fu(714)672-0331 a...lslcoas.com L Lerree $pn 6 Lugtrerd cs,WEO II�F �I.Vrs Orange County Sanitation District Fountain Valley, Cal'rfomia August 13,2008 L B. Section 4.15.2 of the District's policy states, °A Travel Expense Reimbursement Form shall be completed and submitted by the employee no later than two weeks after the travel has occurred" During our review, we noted that one expense reimbursement associated with y warrant# 1000088960 was submitted approximately three months after travel occurred. Financial Management's response: This particular reimbursement was to the former Joint L Chairman of the Board of Directors for OCSD and approved by the current General Manager, Mr. Ruth. OCSD Director's are subject to Resolution No. OCSD 06-11, passed and adopted on May 24, 2006. Section 12— Requests for Reimbursement, require reports be submitted no later than 60 days after payment. A delinquent expense report must be approved by the t„j Joint Chairman. The policy is"silent'for delinquent expense reports which are submitted by the Joint Chairman. li C. Section 4.15.1 of the District's policy states, 'Original receipts are required for all 1"I reimbursable expenses regardless of the dollar amount' During our review, we noted that one expense reimbursement associated with warrant # 1000091085 did not have an attached receipt for air fare. However, upon our request, the District was able to provide appropriate evidence to substantiate the expense. Financial Management's Response: Review of the reimbursement noted that the L .exception hem' did not have an audit tick mark. This should have triggered a follow-up for the appropriate documentation, but it was reimbursed without receipt. Receipt was subsequently obtained by the auditors as noted above. Financial Management will review Ir with the Accounts Payable staff, the reimbursement procedures requiring that original receipts be obtained prior to the reimbursement of expenses. j L Summary of Results Based on our review of the internal control policies relating to travel and business expenses, we feel that, iW overall, the Diisticts Policy is adequate in form and function. The review was conducted in order to assess and to provide feedback regarding the District's policy. As noted in the previous sections,we reviewed the l i District's policy, conducted inquires, and performed tests on procedures. In terns of application of policies V and procedures, we found certain exceptions as discussed above. Our procedures and recommendations would be: n 1. Item 1, page 1 —No recommendations 2. Item 2A, page 1 —The lack of documentation to substantiate procedures creates a risk of the procedure not being performed. We recommend that the existing policy be followed and controls be put into place to ensure documentation exists. 3. Item 2S, page 2—Although an exception was noted through our review, our tests of procedures j,,, indicate that for the most part,the District's policy is being followed and adequate controls are in place to address timeliness. 4. Item 2C, page 2—Although an exception was noted through our review, our tests of procedures indicate that for the most part, the District's policy is being followed and adequate controls are in place to address receipt documentation. V Y�I Book Page 225 Lance SE, 6 L ghe d cnnpEO IYII/C EOCWNPN IE Orange County Sanitation District Fountain Valley, California August 13, 2008 r Conclusion r We were not engaged to and did not perform an audit, the objective of which would be the expression of an opinion on the internal control procedures relating to travel and business expenses. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have r come to our attention that would have been reported to the District. This report is intended solely for the information and use of the specified users listed above and is not r intended to be,and should not be, used by anyone other than those specified parties. r r r r r r r r r r r r Book Page 226 Brandon W.Burrows IMLance Donald L.Parker I & Micheal K.Chu n g h a rd David E.Hate Donald G.Slater LLP Richard K.Kikuchi Cenijied Public Accorcntnnry Retired Robert C.Lance ,may 191 August 73,2008 reird C. son Fred J.J.Lunghard,Jr. Administration Committee t91e1999 Orange County Sanitation District Fountain Valley, California Subject: Evaluation of Internal Control Procedures relating to Progress BillinglInvoices for Design and Construction Contracts INDEPENDENT ACCOUNTANTS' REPORT wes We have performed the procedures enumerated below, which were agreed to by the management of the Orange County Sanitation District, Fountain Valley, California (the District), solely to assist the District in an evaluating internal controls related to progress billinglinvoices for design and construction contracts. This engagement to apply agreed-upon procedures was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the Orange County Sanitation District. Consequently, we make no representation regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose. ans The procedures performed and the results obtained from the performance thereof were as follows: 1. Procedures Performed: We obtained an understanding of the District's controls in place for as processing and approving progress billings for design and construction contracts. Findings: Not applicable. r 2. Procedures Performed: We obtained a listing of current projects and selected a sample of design and construction contracts in which we obtained and reviewed the applicable agreements and r addendums. Findings: Not applicable. 1� 3. Procedures Performed: For the projects selected in procedure 2 above, we obtained an expenditure detail for the period July 2006 through March 2008, and all related Invoices and supporting documentation and reviewed for the following: r a Approval was a Proper calculations a Compliance with contract terms a Appropriate documentation including receipts, when applicable a Proper recordation in the District's general ledger r Findings: No exceptions were noted as a result of our procedures. ii FEARS 1929 2004 ar 06 EX&ff&cce 203 N.Brca Blvd.,Suite 203 a Brgbg Q887JIjV a(714)672-0022 a Fes(714)672-0331 a www.Wunu.com L C6MMRO N/YC�LLSLCp.1 d r Orange County Sanitation District Fountain Valley, California August 13,2008 L 4. Procedures Performed: For the design contracts selected in procedure 2 above, we selected a sample of invoices and agreed select labor charges to certified payroll records obtained from consultant. u Findings: No exceptions were noted as a mutt of our procedures. 5. Procedures Performed: For the construction contracts selected in procedure 2 above, we selected V a sample of progress billings and agreed to the District's approved inspector records. Findings: During our review, we noticed that there were District inspector sheets missing for the Project P2-66 progress payments dated 4/30/07 for $6,017,607 and 8/15106 for $5,521,279. L These sheets are important in the review process because they are used to document that the inspector went out to the job site and properly documented any discrepancies with the contractor records. Although these inspector sheets were not located, there was appropriate supporting L documentation in which to validate the contractor work performed and approval for the progress billing. We also believe these exceptions to be isolated instances based on the overall sample of items selected and the results. I I Management's Response: As recommended by the auditors, Engineering/ContractsL Administration staff will incorporate a checklist process as part of the overall progress payment procedure. � � Summary of Results rl Based on our review of internal controls related to progress billing/Invoices for design and construction contracts, we feel that, overall, the District's policies and procedure are adequate in form and function. The u review was conducted in order to assess and to provide feedback to the District regarding policies and procedures that are in place. As noted in the previous sections, we performed tests on procedures, conducted inquiries and reviewed the procedures that have been established by the District. In terms of L application of policies and procedures, we found that there were areas that could be improved upon as mentioned above. Our procedures and recommendations would be: V 1. Item 1,page 1 -No recommendations 2. Item 2, page 1 -No recommendations I d 3. Item 3, page 1 -No recommendations 4. Item 4, page 2-No recommendations I d 5. Item 5, page 2 - To ensure and properly document that all procedures have been completed prior to the release of the progress payment, we recommend a progress payment checklist of Ir which should include inspectors reports. Conclusion L We were not engaged to and did not perform an audit, the objective of which would be the expression of an opinion on internal controls related to progress billing/invoices for design and construction contracts. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to the District. r 6+ r Book Page 228 Lanee LLS Lun 6 Luarahaartl /Ee N.OVC�cV.'pMruirs Orange County Sanitation District Fountain Valley, California August 13.2008 This report is intended solely for the information and use of the specified users listed above and is not intended to be,and should not be,used by anyone other than those specified parties. r r r r r r r r r r Book Page 229 L L I`I u u L u u fr u u ORANGE COUNTY SANITATION DISTRICT (714) 962-2411 �+ www.ocsd.com V Mailing Address: R.O. BOX 8127 Fountain Valley, Califomia L 92728-8127 I ' Street Address: IWO 10844 Ellis Avenue Fountain Valley, Califomia y 92708-7018 L it i L.1 Sr T � . I _ J l jr IMPROVING OUR ENVIRONMENT ONE MILESTONE ATATIME COMPREHENSIVE ANNUAL FINANCIAL REPORT �' L\ for the Fiscal Year Ended June 30, 2008 ORANGE COUNTY SANITATION DISTRICT, CALIFORNIA ORANGE COUNTY SANITATION DISTRICT ORANGE COUNTY, CALIFORNIA " COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED JUNE 30, 2008 Prepared By: Administrative Services Department Financial Management Division Michael D. White, CPA ,r Controller (THIS PAGE LEFT INTENTIONALLY BLMIQ W IWI 41 I� W ,UI IW IUI u ORANGE COUNTY SANITATION DISTRICT Comprehensive Annual Financial Report r Table of Contents For the Year Ended June 30, 2008 EIIIIIIII r INTRODUCTORY SECTION: Letterof Transmittal..................................................................................................................... i GFOA Certificate of Achievement................................................................................................ vii Boardof Directors........................................................................................................................ bt OrganizationChart....................................................................................................................... x Mapof Service Area..................................................................................................................... d FINANCIAL SECTION: Independent Auditors'Report....................................................................................................... 1-2 Management's Discussion and Analysis—Required Supplementary Information....................... 3-8 Basic Financial Statements: Statementof Net Assets...................................................................................................... 10 Statement of Revenues, Expenses,and Changes in Net Assets ...................................... 11 Statementof Cash Flows.................................................................................................... 12 Notes to Basic Financial Statements................................................................................... 13-35 Supplementary Information: Scheduleof Net Assets....................................................................................................... 38 Schedule of Revenues, Expenses, and Changes in Net Assets ........................................ 39 Scheduleof Cash Flows...................................................................................................... 40 STATISTICAL SECTION: Net Assets by Component—Last Eight Fiscal Years................................................................... 42 Revenues and Gross Capital Contributions by Source—Last Ten Fiscal Years......................... 43 Expenses by Type—Last Ten Fiscal Years................................................................................. 44 Change in Net Assets—Last Eight Fiscal Years.......................................................................... 45 Cash and Investment Reserve Balancees—Last Ten Fiscal Years.............................................. 46 Sewer Service Fees—Last Nine Fiscal Years&Ned Fiscal Year.............................................. 47 Number of Accounts and Revenues by Customer Class—Last Ten Fiscal Years...................... 48 Principal Sewer Service Customers—Current Fiscal Year and Nine Years Ago......................... 49 r Ratio of Annual Debt Service to Total Expenses—Last Ten Fiscal Years.................................. 50 Debt Coverage Ratios—Last Ten Fiscal Years........................................................................... 51 Computation of Direct and Overiapping Debt—Current Fiscal Year........................................... 52 r, Ratios of Outstanding Debt—Last Ten Fiscal Years................................................................... 53 Comparison of the Volume of Wastewater Treated—Last Ten Fiscal Years............................. 54 Authorized Full-time Equivalents by Function—Last Ten Fiscal Years....................................... 55 Biosolids Produced—Last Ten Fiscal Years................................................................................ 55 Capital Asset Statistics—Last Ten Fiscal Years.......................................................................... 57 Demographic Statistics—Last Ten Fiscal Years.......................................................................... 58 Estimated Populations Served by Orange County Sanitalion District—Current Fiscal Year....... 59 Principal Orange County Employers—Current Fiscal Year and Nine Years Ago........................ 60 OperatingIndicators..................................................................................................................... 61 OTHER DATA 8 TRENDS: Cash and Investment Portfolio—Current Fiscal Year.................................................................. 64 Property Tax Rates—Direct and Overlapping Governments—Last Ten Fiscal Years................ 65 Assessed and Estimated Actual Value of Taxable Property—Last Ten Fiscal Years................. 66 Property Tax and User Fee Levies and Collections—Last Ten Fiscal Years.............................. 67 r Property Value and Construction—Last Ten Fiscal Years........................................................... 68 Insurance in Force—Next Fiscal Year ........................................................................................ 69 r r u u u u u u (THIS PAGE LEFT INTENTIONALLY BLANK) u L u u u u u OCSD Introductory Section 3 0 O a C n 0 O Q N CD n O 7 ORANGE COUNTY SANITATION DISTRICT October 25, 2008 Elbe Awnue 1-.. Valley,rA The Board of Directors of the 92]13e]019 Orange County Sanitation District, Orange County, California b.8m 912] Va".M Submitted herewith is the Comprehensive Annual Financial Report of the Orange County Sanitation 72"127District, Orange County, California for the fiscal year ended June 30, 2008. This report includes the oae.. financial position and activity of individual revenue areas, as described within the Governmental 92 vbm. Structure below, as of June 30. 2008 and was prepared by the Financial Management Division of the 4)WM411 Sanitation District's Administrative Services Department. 4)982ms6 Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, including all disclosures, rests with the Sanitation District. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed sera to present fairly the financial position and results of operations of the Sanitation District. All disclosures necessary to enable the reader to gain an understanding of the agency's financial activities 'enaha'"' have been included. else euane Perk Included within the accompanying financial statements are all of the organizations, activities, and uSsress functions controlled by the Sanitation District's Board of Directors in accordance with the p[6Yl whey Governmental Accounting Standards Board Statement Number 14, "The Financial Reporting Entity". For the purpose of this evaluation, control was determined by the Board's responsibility for: (1) F""PTO" adoption of the budget and user charges, (2) taxing authority, and (3) establishment of policies. The ft M aline reporting entity and its services are described in further detail in Note 1 of the financial statements. Mxma9m"Beads nva,e An audit of the books, financial records and transactions of the Sanitation District is conducted annually by independent certified public accountants. The Sanitation District selected the accounting t'aBb" firm of Mayer Hoffman McCann P.C. to perform the audit for the year ended June 30, 2008. The auditors' report on the Sanitation District's basic financial statements and supplementary information is tps.vemr located on page 1 within the financial section of this report. This report renders an unqualified opinion Nmpo,s Baba, on the Sanitation District's basic financial statements for the year ended June 30, 2008. 0�v, Management's discussion and analysis (MDBA) immediately follows the independent auditor's report vlaeenw and provides a narrative introduction, overview, and analysis of the basic financial statements. The Santa Ana MDBA complements this letter of transmittal and should be read in conjunction with it. Seel beech �"tan GOVERNMENTAL STRUCTURE ruwn ube Park The Orange County Sanitation District encompasses the Northern section of Orange County. The rbr i ,aa Sanitation District provides wastewater treatment for an area of the County covering 471 square miles and serving a population of approximately 2.5 million, or 81 percent of the County's population. The Sanitation District was originally incorporated in 1954 as nine separate public corporations, or districts. Svnrcery n,sv+a In April of 1998. at the Sanitation District's request, the Board of Supervisors of the County of Orange M,m.y o,y passed Resolution No. 98-140 ordering the consolidation of these nine County Sanitation Districts into SenIIaryO,su+ct bane aeon, anew, single sanitation district, to be known as the Orange County Sanitation District, effective July 1, ware,D, v,at 1998. This action was recommended to the Board by the Local Agency Formation Commission in camty or o-ange order to simplify governance structures, reduce the size of the Board, ease administrative processes, streamline decision-making and consolidate accounting and auditing processes. The boundaries of the nine previous districts had remained intact for the purpose of collecting sewer user fees at the i We pmrect pubic heats"ntl the enwmnment by pm filet,eHecbve wastewater w1lecuen, "amen[aM recycling u u previously established rate schedules, and were referred to as nine individual revenue areas through June 30, 2000. Effective July 1,2003, all Revenue Areas, except Revenue Area 14, consolitlatad user I-) fee rates and all enterprise fund accounting and budgeting activities and are now known as the u Consolidated Revenue Area. The Sanitation District is managed by an administrative organization composed of directors appointed by the agencies or cities which are serviced by the Sanitation Disrict, Each of the two remaining Revenue Areas, the Consolidated Revenue Area and Revenue Area 14, has its own budget and is responsible for the construction and maintenance of its own collection system. All Revenue Areas, except Revenue Area 14 and the portion of the Consolidated Revenue Area previously known as Revenue Area 13, receive their own share of the one-percent ad valorem property tax levy. In addition, all Revenue Areas except Revenue Area 14, collect user fees from property owners. Revenue Area 14 receives all of its revenues from service charges to the Irvine Ranch Water District. The purpose of the Sanitation District's wastewater management program is to protect the public's health, preserve the beneficial uses of the coastal waters, and maintain air quality. The objectives of l operating the treatment plants are to process and dispose of the treated wastewater and the separated u solids in accordance with Federal, state, and local laws including the Environmental Protection Agency. The Sanitation District sewerage system includes approximately 568 miles of sewers that convey wastewater generated within the Sanitation District's boundaries to the Sanitation District's two wastewater treatment plants, Reclamation Plant No. 1 located in the City of Fountain Valley, and Treatment Plant No.2 located in the City of Huntington Beach. Plants No. 1 and No. 2 have primary treatment capacities, including standby, of 204 million gallons per day (mgd) and 168 mgd, respectively. In fiscal year 2007-08, approximately 73 percent of the advanced primary effluent also received secondary treatment. Both plants are master-planned for a u future primary and secondary treatment capacity of 235 mgd for a combined total of 470 mgd by the year 2070. II Outflows of treated wastewater from the two plants are combined and discharged to the ocean off the ILII Huntington Beach coast through an outfall pipe that is 120 inches in diameter and approximately five miles long. The last mile of the outfall pipe is a diffuser that dilutes the wastewater with seawater in a ratio of 148 parts seawater to one part treated wastewater at an average depth of 185 feet. u ECONOMIC CONDITIONS AND OUTLOOK LJ In June 2008, the Anderson Center for Economic Research at Chapman University forecasted a decline in total payroll employment for Orange County of 1.2 percent in 2008, or the loss of 18,000 payroll jobs, and a 0.9 percent growth in 2009, or the creation of 14,200 additional new jobs. This u projection is a decline from the actual job growth of 0.0 percent and 2.0 percent in 2007 and 2006, respectively. The major factor that lead to net job losses was a sharp drop in jobs in construction and in financial services. The weakness in these two sectors has negatively impacted the retail and professional and business services sectors leading to a broad-based slowdown as Orange County entered into a recession, defined as two consecutive quarterly job losses, in the second half of 2007. In addition, the unemployment rate for Orange County increased to 5.3 percent in fiscal year 2007-08 I I from the 3.9 percent in the prior year. Personal income in Orange County is expected to increase by u 2.9 and 3.7 percent in 2008 and 2009, respectively, that is expected to keep pace with inflation rates. Following increases of 8.7 percent and 7.4 percent in 2004 and 2005, respecfively, taxable sales have y fallen steadily to projected increases of 1.2 percent and 3.4 percent in 2008 and 2008, respectively. According to Chapman University, these projections are the result of the impact of the recessionary forces and in the anemic growth in jobs and income that will reduce consumer spending in 2008, and I ' ii uu that the sharp and steady increase in consumption over the last few years was fueled by growth in consumer debt and households cashing out a portion of their home equity gains. Chapman University believes that such financing will be sharply curtailed in 2008 and 2009 in light of declining housing prices and collapse of the mortgage secuntization market. In addition to weak economic fundamentals, high energy and food prices and declining home prices are negatively influencing consumers' sentiments about the current and future conditions of the economy. The Chapman University's California Consumers Confidence dipped to its lowest level in the second quarter of 20D8 since the survey began in early 2002. Because of weak demand conditions and a scarcity of funds that financial institutions are making available for construction, Chapman University forecasts lending will lead to a continuing decline in the valuation of residential and nonresidential building permits in Orange County as total building permit valuations declined 19.5 percent in 2007 and are projected to decline another 22 percent in 2008. According to Chapman University, Orange County existing home sales declined by 37.0 percent in the fourth quarter of 2007 as compared to the same quarter of 20D6. Collapse of subprime lending and tighter mortgage underwriting standards are excluding many buyers from the market. Potential buyers are on the sidelines waiting for home prices to bottom out. Meanwhile, the total inventory of unsold housing units remains at high levels. The combination of weak housing demand and a high level of inventory placed downward pressure on home prices. Orange County's median resale single-family home prices declined by 23.0 percent reducing prices from the peak level of$747,000 in April 2007 to $578,000 in April 2008. On a quarterly basis, Orange County median single-family resale housing price is forecasted by Chapman University to decline to $524,500 by the third quarter of 2009, suggesting that the median price will decline by about 30.0 percent from the peak level in April 2007. MAJOR INITIATIVES Moving Towards Full Secondary Treatment Standards The Sanitation District's Board of Directors decided in July 2002 to voluntarily give up its modified ocean discharge permit, issued under section 301(h) of the Federal Clean Water Act, which allowed the Sanitation District to discharge a higher level of Suspended Solids and Biochemical Oxygen Demand than otherwise required by the Act if adequate environmental and public health protection was demonstrated. To obtain a renewal of its ocean discharge permit without the modification (often referred to as a 'Waiver'), the Sanitation District is undertaking a massive capital improvement program ("CIP")of building new, and rehabilitating existing, facilities in order for the Sanitation District to operate its facilities in a manner that will allow it to achieve secondary treatment standards as defined by the Act Construction of the capital improvements necessary to achieving secondary treatment standards will take until December 31, 2012. Permits are issued for a five (5) year duration, and the U.S. Environmental Protection Agency(EPA)has no authority to waive the discharge limits requirements or grant a longer permit (except per Sec. 301(h)). In November 2004, a consent decree was signed by EPA and filed with the U.S. District Court that approved the construction schedule and decrees that no penalties will be imposed for discharges that exceed the secondary treatment limits during the period of construction. Seven milestones towards achieving secondary treatment standards were identified within the consent decree along with due dates. The District is in compliance with the decree and has successfully completed four of these milestones within the time permitted, as follows: r III r i IV 4 • On March 15, 2006—Completion of the new W.4 million"Trickling Filter Facility"at Plant No. 1. V • On November 15, 2006 — Completion of the design and advertising for construction of the "New Activated Sludge System"at Plant No. 1. On January 15, 2007 — Completion of the design and advertising for construction of "Trickling Filters at Plant No. 2". 1 • On March 28, 2008 — Completion of construction for 'Rehabilitation of Activated Sludge Plant at L Plant No.2" Groundwater Replenishment System In a joint effort between the Sanitation District and the Orange County Water District(OCWD), Phase I u of the Groundwater Replenishment (GWR) System became operational in January 2008. The GWR f System is the largest water reclamation project in the nation and provides 72,000 acre-feet per year of reclaimed water for replenishment of the Orange County Groundwater Basin and to augment the seawater intrusion barrier. The GWR System will has the capacity to divert up to 100 million gallons of water a day from the Sanitation District's ocean discharge during peak winter storms,which will allow the Sanitation District to defer construction of an additional ocean ouffall at an estimated cost of$170 million. L The Sanitation District and OCWD agreed to match the funding for this project. The Sanitation District alone budgeted $246.1 million through fiscal year 2007-08 and has incurred total capital outlays of $201.1 million through June 30, 2008. Federal and State Grants of$45 million will offset part of the L Sanitation District's costs. Strategic Planning Beginning in the summer of 2007, the General Manager's Office initiated the process of creating the Strategic Plan, soliciting assistance from all levels of the organization. Input included meetings with staff members who helped to retool the Mission Statement, Vision Statement and Core Values during a series of management workshops and Executive Management Team retreats. This was followed by a series of four workshops with the Board of Directors to provide additional input and direction. In November 2007, the board approved a Five-Year Strategic Plan that addresses major objectives and critical challenges facing the District now, in the next five-years, and further into the future. This Five- Year Strategic Plan also laid down the foundation for the development of the Business Plan as it addressed critical operations and construction issues, financial and budgeting challenges, and gave a clear and concise direction from the Board of Directors to staff, ratepayers, regulatory agencies, and the general public. 4 This Five-year Strategic Plan also identifies 30 specific goals that are expected to be completed over the next five-years. This 30 specific goals fall into four essential areas underlying the business activities of the District that include: L • Environmental Stewardship • Wastewater Management V • Business Principles • Workplace Environment _ I V Following the first year of the board approval of the Five-Year Strategic Plan, staff reported back to the Board in October 2008 that 27 percent of these 30 goals have been completed, including the following: L IV • Implementation of a management control system for environmental compliance • Completion and submittal of an emission inventory to the California Air Resources Board • Developing alternatives for South Coast Air Quality Management lower emission limits • Annual update of the strategic and business plan • Completion of Departmental Business Accountability Charters • Completion of feasibility study on deep injection and methane recovery options for biosolids • Evaluation of processing biosolids at the City of Los Angeles Terminal Island injection well • Completion of in-county Compost Take-Back Program Plan strategy • Implementation of the District's Succession Management Plan In addition, five new goals were identified and incorporated into the ongoing Five-Year Strategic Plan including: • Expansions to the Groundwater Replenishment System. • Re-evaluation of current disinfection practices. • Identify and assess current and future risks and mitigation measures. • Develop Human Resources Strategic Plan. Identify current sustainable environmental practices, evaluate alternatives, and maximize the use of renewable fuels to minimize impact on the environment. SERVICE EFFORTS AND ACCOMPLISHMENTS r Pioneering work to develop the word's largest water purification plant for groundwater recharge has earned the Orange County Water District and the Orange County Sanitation District, California, USA, the 2008 Stockholm Industry Water Award. The Stockholm Industry Water Award honors and encourages business sector contributions to sustainable development in the water sector and is presented each August at the World Water Week in Stockholm. It was established in 2000 by the Stockholm Water Foundation in collaboration with the Royal Swedish Academy of Engineering r Sciences and the World Business Council for Sustainable Development. In July 2008, the Sanitation District received a Gold "Peak Performance" Award from the National Association of Clean Water Agencies. This prestigious award recognizes the Sanitation District's r outstanding work in protecting the nation's water resources. The award recognizes both the Sanitation District's Reclamation Plant No. 1 and Treatment Plant No. 2 for 100 percent compliance with its National Pollutant Discharge Elimination System permit for an entire year. r ACCOUNTING AND BUDGETARY CONTROLS The Sanitation District's accounting records are maintained on the accrual basis. In developing and evaluating the Sanitation District's accounting system, consideration is given to the adequacy of internal accounting controls. Internal accounting controls are designed to provide reasonable, but not absolute, assurance regarding: (1) the safeguarding of assets against loss from unauthorized use or disposition; and (2)the reliability of financial records or preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be derived; and (2)the evaluation of costs and benefits requires estimates and judgments by management. We believe that the Sanitation District's internal amounting controls adequately safeguard assets and provide reasonable assurance of proper recording of financial transactions. r v L Each year the Sanitation District's Board of Directors adopts an annual operating plan. A joint works budget is first prepared that identifies the specific capital projects and operating activities to be undertaken by the Sanitation District during the year. The budgetary level of control, the level at which L expenses cannot exceed budget, is exercised at the individual district, or fund level. The Sanitation District has adopted a Uniform Purchasing Policy that identifies the agreed upon purchasing standards. V CASH MANAGEMENT V The Sanitation District's investment portfolio, except for the Sanitation District's debt service reserves, investments with the State Local Agency Investment Fund, and overnight repurchase agreements of idle cash within the Sanitation District's general bank account, are managed by an outside money manager, Pacific Investment Management Company (PIMCO), who performs the daily investment activities, and by Mellon Trust, who serves as the Sanitation District's independent custodian bank. This externally managed portfolio consists of a short term investment pool of$97,962,000 at June 30, 2008 that has average maturities out to 60 days, and a long-term investment pool of$311,244,000 that has average maturities out to 2.3 years. Investments of this externally managed investment portfolio consist of U.S. Government securities, corporate bonds, commercial paper, and money market mutual funds. Investments of the Sanitation District's debt service reserves totaling $98.6 million consist of L bank investment contracts of $47.8 million and U.S. Government securities and open-ended mutual funds of$50.7 million. The Bank Investment Contracts are with AIG ($2.7 million maturing in 2016, but was subsequently terminated by mutually agreement between AIG and the Sanitation District and invested in an open-ended mutual fund on September 30, 2008), Bayerische Landesbank Girozentrale L ($17.3 million maturing in 2016), MBIA Inc. ($18.3 million maturing in 2036), and FSA Capital Management Services LLC($9.5 million maturing in 2030). I Investment income includes changes in the fair value of investments. Increases or decreases in fair L value during the current year do not necessarily represent trends that will continue; nor is it always expected that such amounts will be realized, especially in the instance of temporary changes in the fair value of investments. v Investment earnings for the year were $20,235,000, a decrease of $2,009,000 from the prior fiscal year total of $22,244.000. This decrease in investment and interest income is attributable to lower L yields earned on investments, as investments earnings yielded 4.8 percent, a decrease from the prior year earnings rate of 5.5 percent. The decrease in the yields earned on investments can also be partially attributed to the change in unrealized gains and losses from year-to-year. As of June 30, 2008, the Sanitation District went from an unrealized gain on investments of$16,000 at June 30, 2007 V to an unrealized loss of$1,312,000,or a total decrease in market value on investments of$1,328,000. However, the Sanitation District's investment policy is structured conservatively towards liquidity to avoid having to sell investments at a loss and having unrealized losses actually becoming realized losses. As of June 30, 2008, the Sanitation District's designated net assets totaled $533 million, and have I been earmarked for the following specific purposes in accordance with the Sanitation Distric-- ------- policy: Designated For Cash Flow Contingency $149 million Designated For Self-Insurance 57 million Designated For Capital Improvements 219 million Designated For Debt Service Requirements 108 million kJ Total Designated Net Assets $533 million L vi L RISK MANAGEMENT For the year ended June 30, 2008, the Sanitation District was self-insured for a portion of workers' compensation and property damage. The self-insured portion for workers' compensation was $500,000 per person per occurrence with outside excess insurance coverage to $300 million. The self-insured portion for property damage covering fire, and other perils other than flood and earthquake was $25,000 per occurrence with outside excess insurance coverage to $1.0 billion. The self-insured portion for property damage covering Flood was $100,000 per occurrence with outside excess insurance coverage to $300 million. The Sanitation District was self-insured for all property damage from the perils of earthquakes. The Sanitation District also maintained outside comprehensive boiler and machinery insurance with a $100 million per occurrence combined limit with deductibles ranging from$25,000 to$350,000, The Sanitation District was insured for general liability up to$25 million per occurrence with a self-insured portion of$250,000. The self-insurance portion of the pollution liability exposure is $100,000 per the loss deductible under the outside pollution liability insurance coverage up to$10 million. Sanitation District management believes that there are no outstanding claims as of June 30, 2008 that would materially affect the financial position of the Sanitation District. CERTIFICATE OF ACHIEVEMENT FOR EXCELLENCE IN FINANCIAL REPORTING The Government Finance Officers' Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Orange County Sanitation District for the Sanitation District's comprehensive annual financial report for the year ended June 30, 2007, This was the fourteenth consecutive year that the Sanitation District has received this award. In order to be awarded a Certificate of Achievement, a governmental unit must publish an easily readable and efficiently organized comprehensive annual financial report, whose contents conform to program standards. Such reports must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program requirements and we are submitting it to GFOA to determine its eligibility for another certificate. ACKNOWLEDGMENTS This report could not have been accomplished without the dedicated services of the Financial Management Division staff, and I would like to especially express my appreciation to those who assisted in its preparation. I would also like to thank the Sanitation District's Board of Directors, the General Manager, and the Director of Finance and Administrative Services for their interest and support in conducting the financial operations of the Sanitation District in a responsible and progressive manner. _ Res ectfully sub Michael D.White, CPA Controller vii i V u L. Certificate of Achievement for Excellence in Financial " Reporting L., Presented to Orange County Sanitation W District, California For its Comprehensive Annual Financial Report for the Fiscal Year Ended L June 30,2007 A Certificate ofAahieveones for Excellence to Financial Reporting is presented by the Governnreut Finance Officers, Association oftlw United stain and Canada to govem acnt units and public employee retirement systems,whose conprehenive annual financial reports(CAM)achieve We highest V standards in governmem accounting and fiesncial reporting. 4 C s D Ptxatdmt � � L' Executive Director V V tr L viii r ORANGE COUNTY SANITATION DISTRICT Board of Directors As of June 30, 2008 r ALTERNATE AGENCY ACTIVE DIRECTOR DIRECTOR Cities: r Anaheim Harry Sidhu Lucille Kring Brea Roy Moore Ron Garcia r Buena Park Patsy Marshall Jim Dow Cypress Phil Luebben Prakash Narain Fountain Valley Larry Crandall Gus Ayer r Fullerton Don Bankhead Sharon Quirk Garden Grove Bill Dalton Steve Jones r Huntington Beach Don Hansen JIII Hardy Irvine Christina Shea Steven Choi La Habra Rose Espinoza James Gomez r La Palma Mark Waldman Henry Charoen Los Alamitos Ken Parker Catharine Driscoll r Newport Beach Don Webb Leslie Daigle Orange Jon Dumitru Carolyn Cavecche Placentia Constance Underhill Joseph Aguirre r Santa Ana Sal TinaJero David Benavitles Seal Beach Charles Antos Gordon Shanks r Stanton David Shawver David Cadena Tustin Doug Davert Jim Palmer r Villa Park Brad Reese Rich Ulmer Yorba Linda Jim Winder John Anderson Sanitary/Water Districts: Costa Mesa Sanitary District James M. Ferryman Robert Ooten Midway City Sanitary District Joy L. Neugebauer Allan P. Krippner r Irvine Ranch Water District Darryl Miller Douglas Reinhart County Areas: Member of the Board of r Supervisors Chris Norby Janet Nguyen r r ix r i L ORANGE COUNTY SANITATION DISTRICT Organizational Chart As of June 30,2008 v V BOARD OF DIRECTORS - L GENERAL GENERAL COUNSEL tr MANAGER OFFICE JADMINISTRATION T ION V ADMINISTRATIVE TECHNICAL OPERATONS ral SERVICES SERVICES ENGINEERINGjmera MAINTEACE L d...eneral Aelmnatraes Te ml Ser Opaatidls3Enpinl Plant No.1 ger Services Ae Reseragon 8 AOmiabaBN1 MBeaenmre OOeraaCon AOmnllnton Reeealtll MINn6traEpn EnVoonmentll Cdletlion FatllNa I7mN5mices Fowl Compgance8 PMmolg Opaatlans8 PM NnY Reguft Aflaim MallOpar I , Public b oonwholl Cmbaft EmnonmenW PMJM Fact MB V owm Pmtlra amna8 Labaabry& Mamg "t m lerenceS Yticam a IMnitls Malty. Ocean MaNanng OSbe Fleet Seniwa Ma�men& 4 Salary anE LInIM FMalRmrlpas SapceConYd orstructimEgM EI¢AA�I Ala®lenance - V INanuEm Faff" Terhalpgy Erguw" - L I V L L 4+ x u ORANGE COUNTY SANITATION DISTRICT Map of Service Area As of June 30, 2008 LOS ANGELES COUMY �B YORBALINDA ry y PIACENTIA \ { 4� 0 FP O c 0 Los no — ms, SEE BEACH 8 AANA k rmrp, o..m� OCSD Reclamation Plant No.1 '"V, OCSD m,n.rsm. Treatment nwn Plant No.2 r a 1 2 1'u _ —acso sar��nrae m�na.y 0050 Pump SUGon(16 Wal) Orange County Sanitation District(OCSD) Orange County.CA unmcmpormeEMeas(wmm) Rae 2005 XI u (THIS PAGE LEFT INTENTIONALLY BLANIQ I� u u U U X„ r r r OCSD Financial Section r L L L I L o L� L L L L L L r L L Mayer Hoffman McCann P.C. An Independent CPA Firm _ Conrad Government Services Division 2301 Dupont Drive, Suite 200 Irvine,California 92612 949474.2020 ph 949-263-5520 fx ..mhm-pc.com Board of Directors Orange County Sanitation District Fountain Valley, California Independent Auditors'Report We have audited the accompanying basic financial statements of the Orange County Sanitation District ("District'), as of and for the year ended June 30, 2008, as listed in the table of contents. These financial statements are the responsibility of the management of the District. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year partial comparative information has been derived from the financial statements of the District for the year ended June 30, 2007 and, in our report dated October 25, 2007, we expressed an unqualified opinion on those financial statements We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Govemmenf Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial _ statement presentation.We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District, as of June 30, 2008, and the changes in financial position and cash Flows of the District for the year then ended in conformity with accounting principles generally accepted in the United States of America. As described further in note 1 to the financial statements, the District changed Its method of accounting for post employment benefits for fiscal years ending on or after June 30, 2008. The information identified in the accompanying table of contents as management's discussion and analysis is not a required part of the basic financial statements, but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary Information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the District's basic financial statements. The introductory section, supplementary information, statistical tables and other data and trends are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplementary information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section, statistical tables and other data and trends have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them. t I ' L. Board of Directors L Orange County Sanitation District Page 2 L In accordance with Government Auditing Standards, we have also Issued a report dated October 30, L 2008 on our consideration of the Orange County Sanitation District's internal control over financial reporting and our tests of Its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of Internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part V of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. j Aar A ' " /� e. id Irvine, California V October 30,2008 L L L I L L L I IJ V I V I , V L 2 1.r Management Discussion and Analysis June 30,2008 This section of the financial statements of the Orange County Sanitation District (Sanitation District) is management's narrative overview and analysis of the financial activities of the Sanitation District for the fiscal year ended June 30, 2008. The information presented here is to be considered in conjunction with '•' additional information provided within the letter of transmittal located in the Introductory Section of this report. Financial Highlights • As of June 30, 2008, the assets of the Sanitation District exceeded 0s liabilities by $1,276.0 million (net assets). Of this amount, $420.3 million (unrestricted net assets) may be used to meet the Sanitation District's ongoing obligations to citizens and creditors. • The Sanitation District's total net assets increased$86.3 million, or 7.2 percent over the prior year. • Net Capital Assets, consisting of non-depreciable capital assets and depreciable capital assets net of accumulated depreciation, increased $227.8 million, or 14.2 percent over the prior year. • Net Assets invested in capital assets, net of related debt decreased$34.1 million, or 3.8 percent. • Unrestricted Net Assets increased$120.9 million, or 40.4 percent from the prior year. Overview of the Basic Financial Statements The Sanitation District operates as a utility enterprise and presents its financial statements using the economic resources measurement focus and the full accrual basis of amounting. As an enterprise fund, the Sanitation District's basic financial statements are comprised of two components:financial statements and notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. .•, In accordance with Governmental Accounting Standards Board (GASB) Statement No. 34, the Sanitation District's financial statements include a statement of net assets, statement of revenues, expenses and changes in net assets, and a statement of cash flows. The statement of net assets includes all of the Sanitation District's assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to Sanitation District creditors (liabilities). It also provides the basis for computing the rate of return, evaluating the capital structure of the Sanitation District, and assessing the liquidity and financial flexibility of the Sanitation District. r The statement of revenues, expenses, and changes in net assets accounts for the current year's revenues and expenses. This statement measures the success of the Sanitation District's operations over the past year and can be used to determine the Sanitation District's creditworthiness. It also highlights the Sanitation District's dependency on property tax revenues in supplementing user fees and other charges for recovering total costs. The final required financial statement is the statement of cash flows. The statement reports cash receipts, cash payments, and net changes in cash resulting from operations and investments during the reporting period. Net Assets As previously stated, net assets increased$86.3 million, or 7.2 percent to $1,276.0 million in FY 2007-08 over the prior year. In comparison, net assets increased $100.6 million, or 9.2 percent, to $1,189.7 million in FY 2006-07 over FY 2005-06. 3 r (Dollars in thousands) Percentage June 30, June 30, Increase Increase L 2008 2007 (Decrease) (Decrease) Assets L Current and other assets $ 599,545 $ 438,055 $ 161,490 36.9% Capital assets, net 1,829,383 1,601,621 227,762 14.2% Total assets 2,428,928 2,039,676 389,262 19.1% Liabilities L Current liabilities 84,087 76,644 7,543 9.9% Noncurrent liabilities 1,068,854 773,395 295,459 38.2% Total liabilities 1,152,941 849,939 303,002 35.6% L Net assets: Investment in capital assets, net of related debt 852,385 886,463 (34,078) -3.8% Restricted 3,311 3,904 (593) -15.2% 1 Unrestricted 420,292 299,370 120,922 40.4% IW. Total net assets $ 1,275,988 $ 1,189,737 $ 86,251 7.2% Current and other assets increased $161.5 million, or 36.9 percent, due primarily to the issuance of L $300.0 million in certificates of participation (COP) debt financing issued in December 2007, net cash provided by operations of$71.8 million, and net non-operating revenues of$64.9 million.These increases were partially offset by the funding of$275.4 million in capital improvements. u Capital assets, net increased $227.8 million, or 14.2 percent, due primarily to the ongoing capital improvement program which generated capital outlays of$275.5 million in FY 2007-08 that was partially offset by depreciation of$47.7 million. Included in total capital outlays was the Headworks Improvements L. at Plant No. 2. This project is replacing the existing headworks due to failing gates and the ineffectiveness of the bar screens and grit chambers that are allowing grit screenings to pass through into the downstream processes causing increased operating costs. This project is to include an influent diversion and metering structure, bar screens, influent pump station, vortex grit chambers, primary influent splitter and metering structure, ferric chloride feed facilities, headworks and trunk line odor control facilities, screenings handling building including a washer/compactor, grit handling building, and an electrical building that includes standby power. In FY 2007-08, $53.5 million of the estimated $257.8 million was incurred bringing the total outlay to$203.2 million with completion expected in FY 2011-12. Another major project underway is the expansion of the secondary treatment facilities at Plant No. 1. This project is one of several capital improvements that are necessary to achieve secondary treatment standards by December 31, 2012 in accordance with a consent decree signed by EPA and filed with the U.S. District Court. This project includes construction of aeration basins, clarifiers, a blower building, and waste sludge pumping stations, that will provide additional secondary treatment capacity of 60 million gallons per day at Plant No. 1. Capital outlays of $53.3 million were incurred in FY 2007-08 with total project outlays to date of $71.9 million. The total projected cost is $265.9 million with completion expected in FY 2011-12. The completion of the Groundwater Replenishment System (GWRS) was another project with significant capital outlays in FY 2007-08. A 50:50 joint cost sharing effort between the Orange County Sanitation District and the Orange County Water District, GWRS has initially provided 72,000 acre-feet per year of reclaimed water for replenishment of the Orange County Groundwater Basin and has augmented the seawater intrusion barrier at a total project cost of$492.2 million. The Sanitation District incurred $14.7 million in construction during FY 2007-08 on this project bringing the Sanitation District's share of total project cost-to-date to$201.1 million. 4 I,y See page 7 for the Schedule of Capital Assets and a listing of the other major capital additions for FY 2007-08. Net assets invested in capital assets, net of related debt decreased $34.1 million, or 3.8 percent over the prior year primarily as a result of the $300 million of new money COP debt proceeds that was mostly offset by the $227.8 million increase in net capital assets, a $4 million increase in defamed charges, a r $14.3 million increase in debt service reserves,and debt service principal payments of$8.9 million. Unrestricted net assets increased $120.9 million, or 40.4 percent over the prior year, and is primarily due to the overall increase in net assets of$86.3 coupled with the reduction in investments invested in capital r assets net of related debt of$34.1 million. Changes in Net Assets Net assets increased $86.3 million in IFY 2007-08, a 72 percent increase over the prior year. r (Dollars in thousands) Percentage June 30, June 30. Increase Increase 2008 2007 (Decrease) (Decrease) Revenues: Operating revenues Service Charges $ 184,180 $ 167,790 $ 16,390 9.8% Permit and inspection fees 1,196 1,866 (670) -35.9% Total operating revenues 185,376 169,656 15,720 9.3% r Non-operating revenues Property taxes 65,210 60,565 4,645 7.7% Investment and interest income 20,235 22,244 (2,009) -9.0% r Captal facilitites capacity charges 19,816 31,278 (11,462) -36.6% Other 13 1,068 (1,055) 18.8% Total non-operating revenues 105,274 115,155 (9,I81) -8.6% ,r Total revenues 290,550 284,811 5,839 2.1% Expenses: r Operating expense other than depreciation and amortization 131,890 112,155 19,735 17.6% Depreciation and amortization 47,767 53,111 (5,344) -10.1% Non-operating expense 40,334 37,837 2,497 6.6% Total expenses 219,991 203,103 16,888 8.3% Income before capital �+ contributions 70,659 81,708 (11,049) -13.5% Capital contributions r (distributions),net 15,592 18,929 (3,337) -17.6% Increase in net assets 86,251 100,637 (14,386) -14.3% r Beginning net assets 1,189,736 1,089,099 100,637 9.2% Ending net assets $ 1,275,987 $ 1,189,736 $ 86,251 7.2% r 5 Sources of Revenue Functional Expenses June 30,2008 June 30,2008 DCollections 7% 8% •Treatment& G lnlerest 22% 7% ie$ Disposal •User Fees 10% ODepreciation& Amortization OTaxes Levied OOlher Olnleresl Expense •Other As previously stated, an enterprise fund is used to account for the operations of the Sanitation District, which is financed and operated in a manner similar to private business enterprises. This allows the Sanitation District to determine that the costs (expenses, including depreciation and amortization) of providing wastewater management services on a continuing basis are financed or recovered primarily through user charges. Sewer service user fees are evaluated annually based primarily on budget requirements for total operation, maintenance and capital expenditures for providing wastewater management services. Property tax revenues are dedicated for the payment of debt service. In FY 2007-08, operating revenues increased $15.7 million, or 9.3 percent over the prior year that is predominately reflective of the $16.4 million, or 9.8 percent increase in service charges. The increase in service charges is primarily due to the 9.8 percent increase in the average sewer user fee rate over the prior year. The $9.9 million, or 8.6 percent decrease in non-operating revenues consists of an $11.5 million, or 36.6 percent decrease in capital facilities capacity charges, a $2.0 million, or 9.0 percent decrease in investment and interest income, and a $1.1 million, or 98.8 percent decrease in other non-operating revenues. These decreases are partially offset by a $4.6 million, or 7.7 percent increase in property tax revenues. The decrease in capital facilities capacity charges is reflective of the decrease in total building permit valuations in calendar year 2007 of 19.5 percent and a projected decrease of 22.0 percent in calendar year 2008. The decrease in investment and interest income is attributable to the lower yields earned on investments over the prior year that were somewhat offset by higher average cash and investment balances. Yields earned on investments decreased from 5.5 percent in FY 2006-07 to 4.8 percent in FY 2007-08. However, cash balances increased during this same time period from $372 million to $533 million. The decrease in other non-operating revenues is primarily reflective of the one- time $747,000 grant reimbursement received in the prior year from the Natural Resources Conservation Services of the U.S. Department of Agricultural. Property tax revenue increases are primarily the result of the total assessed valuation increase of 8.1 percent over the prior year due to the upturn in the real estate market during this time period. Of the $19.7 million, or 17.6 percent increase in operating expense before depreciation and amortization, operating salaries and benefits, totaling $67.6 million, increased $9.8 million, or 17.0 percent over the prior year. These operating salaries and benefits cost are part of the overall increase of$12.0 million in total salaries and benefits when including the salaries and benefits capitalized within capital improvement program. Overall, total Sanitation District salaries and benefits were $83.5 million, a 16.7 percent increase over the prior year total of$71.6 million. This increase is mostly attributable to the $5.9 million recognition of net benefit obligation owed by the District under the Additional Retirement Benefit Account (AREA) pension program. AREA was previously administered by the Orange County Retirement System. The administration of AREA was brought in-house during FY 2007-08 as a result of the drop-off in 6 r pension investment earnings and the underfunding of the net benefit obligation. There was also a $2.5 million increase in regular salaries, or 5.9 percent, that was primarily driven by existing bargaining agreements as total authorized staffing levels were reduced by 10 full time equivalent positions to 634. The remaining $3.6 million increase is attributable to increases in retirement premiums and Insurance benefit costs. Supplies, repairs and maintenance operating expense Increased $4.9 million, or 23.4 percent due to a $4.1 million Increase in repairs and maintenance expenses. These expenses are attributed to maintenance on aging equipment and Infrastructure including co-generation engine overhauls and the cleaning of digesters. Contractual services operating expense increased $3.2 million, or 15.7 percent over the prior year primarily due to the$2.6 million increase in biosolid and other waste disposal. Biosolid cost increase is due to the approximate 15 percent Increase in biosolid hauling costs and to a small increase In the volume of biosolids. The volume of biosolids will continue to grow as the District moves r towards full secondary treatment standards by December 2012. Capital Assets r At June 30, 2008, the Sanitation District had a net investment of $1.829 billion in capital assets. This amount represents a net increase (including additions and deletions) of $227.8 million, or 14.2 percent over the prior year. Schedule of Capital Assets r (Net of Depreciation and Amortization) (Dollars in thousands) r Percentage June 30, June 30, Increase Increase 2008 2007 (Decrease) (Decrease) r Land $ 13,021 $ 13,021 $ - 0.0% Construction in Progress 937,487 803,680 133,807 16.6% Sewage collection facilities 301.564 301,458 106 0.0% Sewage treatment facilities 436,896 351.379 85,517 24.3% Effluent disposal facilities 49.940 52,324 (2,384) -4.6% ,d Solids disposal facilities 384 - 384 0.0% General and administrative facilities 84,681 73,592 10,989 14.9% Assets acquired in excess of book value 5,510 6,167 (657) -10.7% _ Capital assets,net $ 1,829,383 $ 1,601,621 $ 227,762 14.2% Major capital asset additions for the current fiscal year included the following: r • $53.5 million—Headworks Replacement at Plant No. 2 • $53.3 million—New Secondary Treatment Systems at Plant No. 1 • $37.1 million—Replacement of Ellis Avenue Pump Station r • $36.8 million—New Trickling Filters at Plant No. 2 • $14.7 million—Ground Water Replenishment System • $ 9.3 million—Primary Treatment Rehabilitation at Plant No.2 r $ 6.8 million -New Primary Sludge Feed System at Plant No.2 • $ 6.2 million—Expansion of Reclamation Electrical Service Main to 66kV at Plant No. 1 More detailed information about the Sanitation District's capital assets is provided in Notes 1 and 3 of Notes to the Financial Statements. r 7 Ir I Debt Administration At June 30, 2008, the Sanitation District had $1.08 billion outstanding in COP debt, a net increase of $280.6 million, or 35.0 percent over the prior year. This increase is primarily due to the$300.0 million of new COP fixed rate debt issued in December 2007 (COP Series 2007B)to assist in the $275.5 million in capital outlays that had taken place during the year and to assist in the $373.7 million scheduled to be spent in the FY 2008-09. In addition, a second fixed rate COP debt issuance of$77.2 million was made in May 2008 (COP Series 2008A) to refund the $85.5 million outstanding principal balance of the COP u Series 1992 synthetic variable-to-fixed rate debt. The Sanitation District achieved a rating of AAA from Standard and Poor's Corporation, and has maintained ratings of AA from Fitch and Aa3 from Moody's Investor Services. The Sanitation District's v long-range financing plan is designed to maintain these high ratings. Over the next ten years, the Sanitation District is projecting an additional $2.0 billion in future treatment plant and collection system capital improvements. In accordance with the Sanitation District's long-term debt fiscal policy, the Sanitation District will restrict long-term borrowing to capital improvements that cannot be financed from current revenue. In September 2008, COP Series 2008E fixed rate debt in the amount of $27.8 million was issued to refund the$26.8 million outstanding principal balance of the COP Series 1993 synthetic variable-to-fixed rate debt. In December 2008, the Sanitation District is scheduled to issue$200 million of new COP fixed rate debt. A total of$550 million in COP debt issuance is being proposed over the next five years. These financings are needed early in the 10-year capital improvement program because the bulk of the construction is scheduled during the next six years. v For more information on long-term debt activities,see Note 4 of the Notes to Basic Financial Statements. Economic Factors and Next Year's Budgets and Rates L • The unemployment rate within the County of Orange is currently 5.3 percent, which is an increase from a rate of 3.9 percent a year ago. • Inflation for Orange County in 2007 increased 3.3 percent based on the 2007 actual percentage change in the consumer price index according to the June 2008 Economic and Business Review report prepared by Chapman University. V • The actual rate of return on investments decreased from the 5.5 percent earnings rate in FY 2006-07 to 4.8 percent for FY 2007-08. All of these factors were considered in preparing the Sanitation District's two-year budget for FY 2008-09 and FY 2009-10. The Sanitation District's user fee schedule was increased by 10.4 percent for FY 2008-09 over the prior y year. The annual fee applicable to the Sanitation District's largest customer base and the underlying basis for all other user rates: the single-family residential fee, increased by $19.00, from $182.00 to $201.00. This rate increase was necessary to finance the Sanitation District's cash flow needs as capital �+ improvement outlays alone are projected to be $373.7 million in FY 2008-09 and are projected to total $2.0 billion over the next 10 years in order to rehabilitate and upgrade existing facilities and provide for full secondary treatment standards. Requests for Information The financial report is designed to provide a general overview of the Sanitation District's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Financial Management Division, Orange County Sanitation District, P.O. Box 8127, Fountain Valley, CA 92728-8127. V 8 V r ORANGE COUNTY SANITATION DISTRICT BASIC FINANCIAL STATEMENTS r d: r r r 9 ORANGE COUNTY SANITATION DISTRICT Statement of Net Assets June 30,2008 64 (With Comparative Data for June 30,2007) 2008 2007 Current assets: Cash and cash equivalents $ 104,012,814 8 55,472,715 Investments 330,161,649 231,710,077 �+ Accounts receivable, net of allowance for uncollectibles 11.805.761 12.703,227 Accrued interest receivable 2,855,232 2815784 Due from other governmental agencies 5,025.176 6:332:508 Connection fees receivable 1,286,927 962,754 Property tax receivable 3,296,089 2,459,657 Inventories 4,985.358 4,834,811 L Prepaid expenses 814,304 1.281.524 Total current assets 464,243,340 318,573,067 Noncurrent assets: Restricted: Cash and cash equivalents 50,737,114 23,946,510 I Investments 47.829,179 60,778,180 (� Accrued interest receivable 386,960 567,380 Unrestricted: Non-depreciable capital assets 950.508,192 816701,436 I4+ Depreciable capital assets, net of accumulated depreciation 878,875,030 784:919.903 Deferred charges 8.269,966 4,277.005 Other noncurrent assets, net 28,078.450 29,914.713 L Total noncurrent assets 1,964,684,891 1,721,103,127 Total assets 2,428,928,231 2,039,676,194 Current liabilities: 'L Accounts payable 27,577,766 18,966.641 Accrued expenses 8,894.308 15084007 Retentions payable 7,786,756 6:959:199 L Interest payable 12,107,963 7.023.945 Current portion of long-term obligations 27,720,592 28,510,896 Total current liabilities 84,087,385 76,544.688 U Noncurrent liabilities: Noncurrent portion of long-tens obligations 1,068,853,560 773,394,732 L Total liabilities 1,152,940,945 849,939,420 Net assets: d Invested in capital assets, net of related debt 852,384,583 888,482,575 Restricted for debt service 3,311,187 3.904.212 - Unrestricted 420,291,536 299,389,977 L Total net assets $ 1,275,987.286 $ 1,189,736,764 See Accompanying Notes to Basic Financial Statements. L L 10 L ORANGE COUNTY SANITATION DISTRICT Statement of Revenues, Expenses, and Changes in Net Assets For the Year Ended June 30, 2008 (With Comparative Data for the Year Ended June 30, 2007) �+ 2008 2007 Operating revenues: Service charges $ 184.180,220 $ 167,789,660 r Permit and inspection fees 1,196,320 1,866,411 Total operating revenues 185,376,540 169,656,071 r Operating expenses other than depreciation and amortization: Salaries and benefits 67,628,651 57,802,102 r Utilities 8,092,317 8,072,262 Supplies, repairs and maintenance 25,970,799 21.050,912 Contractual services 23,587,835 20,389,454 Directom'fees 144,117 131,750 Meetings and training 1,007,255 1.124,852 Other 5,458,868 3,583,792 r Total operating expenses other than depreciation and amortization 131,889,842 112,155,124 Operating income before depreciation r and amortization 53,486,698 57,500,947 Depreciation and amortization 47,766,956 53,110,609 r Operating loss 5,719,742 4,390,338 Non-operating revenues: Property taxes 65,209,461 60,565,308 Investment and interest income 20,235,214 22,243,554 Capital facilities capacity charges 19,816,293 31,277,647 Other 12,773 1,067,794 r Total non-operating revenues 105,273,741 115,154,303 Non-operating expenses: r Interest 22,517,174 21,746,852 Feasibility studies 12,994,472 11,128,105 Capital grants to member agencies 1,769,894 2,127,154 r Other 3,053,282 2,834,392 Total non-operating expenses 40,334,822 37,836,503 ,r Income before capital contributions 70,658,661 81,708,138 Capital contributions from other agencies 15,591,861 18,929,179 ,r Change in net assets 86,250,522 100,637,317 Total net assets-beginning 1.189,736,764 1,089,099,447 r Total net assets-ending $ 1,275,987,286 $ 1,189,736,764 r See Accompanying Notes to Basic Financial Statements. 11 r L ORANGE COUNTY SANITATION DISTRICT Statement of Cash Flows 1 For the Year Ended June 30,2008 (With Comparative Data for the Year Ended June 30,2007) 2008 2007 Cash flows from operating activities: trr Receipts from customers and user: $ 192,439,636 $ 183,133,292 Payments to employees (58,897,860) (59,691,912) Payments to suppliers (61,790,653) (40,809,378) Net cash provided by operations 71,751,123 82.632,002 6.1 Cash flows from noncapital financing activities: Proceeds from property taxes 64.373.029 59,g89586 I Capital grants to member agencies (1,769,894) (2,127:154) W Net cash provided by noncapital financing activities 62,603,135 57,862.412 Cash flows from capital and related financing activities: Capital facilities capacity charges 19,492.120 31,650,062 Additions to property.plant and equipment (275,406,057) (281,135,6W) Arbitrage payment (307,934) (53,100) Interest paid (31,788,973) (35,250,887) Principal payments an certificates of participation (98,530,000) (101,965,000) L Proceeds from certificates of participation issuance 378,898,628 89,818.081 Certificates of participation Issuance costs (675,401) (319,698) Proceeds from capital contributions 10,750,712 14,163,356 Net cash provided(used)by capital and related financing activities 4,433,095 (283,092,825) u Cash flows from investing activities: Proceeds from the sale of Investments 3,793,917,222 5,282,384.356 I Purchases of investments (3,880,733,353) (5,204,660,027) y/ Interest received 23,359,481 24,647,682 Net cash provided(used)by investing activities (63,456,650) 102,372,011 Net increase(decrease)in cash and cash equivalents 75,330,703 (40,226,400) L Cash and cash equivalents, beginning of year 79.419.225 119,645,625 Cash and cash equivalents,end of year $ 154,749,928 $ 79.419.225 Reconciliation of operating loss to net cash provided by operating activities: L Operating loss $ 5,719,742 $ 4.390.338 Adjustments to reconcile operating loss to not cash provided by operations: Depreciation and amortization 47,766,956 53,110.609 Bad debt expense (4,376) (67,284) Other non-operating revenues and expenses (289,933) 1,488,143 (Increaseydecrease in operating assets: Accounts receivable 2,022,391 5,604,862 L Due from other governmental agencies 5,027,932 6,804,565 Inventories (264,741) (284.670) Prepaid and other assets 467,220 10,052.412 Increasei(decrease)in operating liabilbies: L Accounts payable 8,611.125 (2,777,150) Accrued expenses (6,189,699) 6.639,768 Retentions payable 827,557 (2,286.374) PensiorVOPES payable 6,261,477 - V Compensated absences 546,278 311,438 Claims and judgments 1,250,194 (354,655) Net cash provided by operations $ 71.751,1T3 $ 82,832,002 Noncash Activities: Unrealized gain(loss)on the fair value of investments $ (1,311,560) $ 16,429 Net disposal of assets with no cash effect (1,973.078) (3,243.743) L Certificates of participation Issuance cost-underwriters fee (3,995,218) (468.044) Capital contributions from other agencies 4,841,149 4,765.823 Certificates of participation original issue premium 14,051,290 183,654 Feasibility studies with no cash effect (12,994,472) (11,128.105) V See Accompanying Notes to Basic Financial Statements. 12 ' V ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2008 r (11 Summary of Sicnificant Accountinc Policies Reporting Entitv The Orange County Sanitation District(OCSD) is a public agency which owns and operates certain wastewater facilities in order to provide regional wastewater collection, treatment, and disposal services to approximately 2.5 million people in the northern and central portion of the County of r Orange, California. OCSD is managed by an administrative organimflon comprised of directors appointed by the agencies and cities which are serviced by OCSD. r OCSD's service area was originally formed in 1954 pursuant to the County Sanitation District Act and consisted of seven independent special districts. Two additional districts were formed and additional service areas were added in 1985 and 1986. These special districts were jointly responsible for the treatment and disposal facilities which they each used. In April of 1998, the Board of Supervisors of Orange County passed Resolution 98-140 approving the consolidation of the existing nine special districts into a new, single sanitation district. This action was taken in order to simplify the governance structures, reduce the size of OCSD's Board of Directors, ease administrative processes, streamline decision-making and consolidate accounting and auditing processes. Pursuant to the Resolution and Government Code Section 57500, the predecessor special districts transferred and assigned all of their powers, rights, duties, obligations, functions and properties to OCSD, including all assets, liabilities, and equity. r Effective July 1, 1998, the organization became known as the Orange County Sanitation District. The boundaries of one of the previous districts, now known as Revenue Area No. 14, have been maintained separately because their use of OCSD's collection, treatment, and disposal system is funded by the Irvine Ranch Water District. The boundaries of the other eight districts have been consolidated and are collectively referred to as the Consolidated Revenue Area. OCSD utilizes joint operating and capital outlay accounts to pay joint treatment, disposal, and construction costs. ,. These joint costs are allocated to each revenue area based on gallons of sewage flow. The supplemental schedules and statements show internal segregations and are not intended to represent separate funds for presentation as major or non-major funds in the basic financial r statements. The accompanying financial statements present OCSD and its blended component unit, the Orange County Sanitation District Financing Corporation. The Corporation is a legally separate entity although in substance it is considered to be part of OCSD's operations. OCSD is considered to be financially accountable for the Corporation which is governed by a board comprised entirely of OCSD's board members. There is no requirement for separate financial statements of the Corporation; consequently, separate financial statements for the Corporation are not prepared. �+ The Corporation had no financial activity during the fiscal year ended June 30, 2008, other than principal and interest payments on outstanding certificates of participation (see Note 4). OCSD is independent of and overlaps other formal political jurisdictions. There are many governmental entities, including the County of Orange, that operate within OCSD's jurisdiction; however, financial information for these entities is not included in the accompanying financial statements in accordance with the provisions of Governmental Accounting Standards Board (GASB)Statement 14. Measurement Focus and Basis of Accounting OCSD operates as an enterprise activity. Enterprise funds account for operations that are financed and operated in a manner similar to private business enterprises, where the intent of the Board of Directors is that the costs (expenses, including depreciation and amortization)of providing services 13 r V ORANGE COUNTY SANITATION DISTRICT I Notes to Basic Financial Statements V For the Year Ended June 30,2008 u to the general public on a continuing basis be financed or recovered primarily through user charges. Basis of accounting refers to when revenues and expenses are recognized in the accounts and reported in the financial statements. Enterprise funds are accounted for on the flow of economic resources measurement focus and use the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred, regardless of the timing of y related cash flows. OCSD applies all GASS pronouncements currently in effect as well as Financial Accounting Standards Board Statements and Interpretations, Accounting Principal Board - Opinions and Accounting Research Bulletins of the Committee on Accounting Procedure issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. Ooeratina Plans w Each year, OCSD staff prepares an annual operating plan which is adopted by the Board of Directors. The annual operating plan is used to serve as a basis for monitoring financial progress, estimating the levy and collection of taxes,and determining future service charge rates. During the V year, these plans may be amended as circumstances or levels of operation dictate. Cash Equivalents Investments with original maturities of three months or less are considered to be cash v equivalents. Investments L All investments are stated at fair value (the value at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale). Changes in fair value that occur during the fiscal year are reported as part of investment and interest income. Investment and interest income includes interest earnings and realized and Ld unrealized changes in fair value. Accounts Receivable Accounts receivable is shown net of the allowance for uncollectible receivables which was $189,391 at June 30, 2008. Any unbilled sewer service receivables are recorded at year-end. Inventory V Inventory is stated at cost, which approximates market, on a weighted-average basis. i Capital Assets bw Outlays for property, plant, equipment, and construction in progress are recorded in the revenue area which will use the asset. Such outlays may be for individual revenue area assets or for a I revenue area's share of joint assets. V Capital assets of property, plant, and equipment are defined as assets with an initial, individual cost of more than$5,000 and an estimated useful fife of at least three years. Such assets are recorded L. at cost, except for assets acquired by contribution, which are recorded at fair market value at the time received. Cost includes labor; materials; outside services; vehicle and equipment usage; allocated indirect charges such as engineering, purchasing, supervision and other fringe benefits; and certain administrative and general expenses. Net interest costs are capitalized on projects. During the fiscal year ended June 30, 2008, net interest costs of$13.25 million were capitalized. Ir 14 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2008 r Depreciation of plant and equipment is provided for over the estimated useful lives of the assets using the straight-line method. OCSD generally follows the guidelines of estimated useful lives as recommended in the State of California Controller's Uniform System of Accounts for Waste Disposal Districts, which range from 3 to 75 years. The following are estimated useful lives for major classes of depreciable assets: Sewage collection facilities - 50 years, Sewage treatment facilities - 40 years, Sewage disposal facilities - 40 years, and General plant and administrative facilities- 11.5 years. Amortization .. Amortization of the excess purchase price over the book value of assets acquired is provided using the straight-line method over an estimated useful fife of 30 years. Discounts and deferred charges on the certificates of participation are amortized to interest .+ expense over the respective terms of the installment obligations based on their effective interest rates(note 4). r Restricted Assets Certain assets are classed as restricted because their use is limited by applicable debt covenants. Specifically, the assets are restricted for installment payments due on certificates of participation or are maintained by a trustee as a reserve requirement for the certificates of participation. When both restricted and unrestricted resources are available for use, it is OCSD's policy to use restricted resources first,then unrestricted resources as they are needed. ,r Compensated Absences OCSD's employees, other than operations and maintenance personnel, are granted vacation and sick leave in varying amounts with maximum accumulations of 200 hours and 560 hours for vacation and sick days earned but unused, respectively. Operations and maintenance personnel accrue between 80 and 220 personal leave hours per year depending on years of service. Personal leave can be accumulated up to a maximum of 440 hours. Vacation and sick leave benefits and personal days are recorded as an expense and liability when earned by eligible employees. In determining the estimated sick leave liability at June 30 of each year, OCSD assumes that all employees' accumulated sick leave balances will ultimately be paid r out at 35 percent of the ending balance. The distribution between current and long-term portions of the liability is based on historical trends. Claims and Judgments OCSD records estimated losses, net of any insurance coverage under its salt-insurance program when it is probable that a claim liability, has been incurred and when the amount of the loss can be reasonably estimated. Claims payable includes an estimate for incurred but unreported claims. r The distribution between current and long-term portions of the liability is based on historical trends. Property Taxes The County is permitted by State law (Proposition 13) to levy taxes at one percent of full market value (at time of purchase) and can increase the assessed value no more than two percent per year. OCSD receives a share of this basic levy, proportionate to what was received in the 1976 to _ 1978 period. Property taxes attach as an enforceable lien on property as of January 1. Taxes are levied on July 1 and are payable in two installments which become delinquent after December 10 and April 10. r 15 r V ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements u For the Year Ended June 30,2008 The County bills and collects the property taxes and remits them to OCSD in installments during the year. Property tax revenues are recognized when levied to the extent that they are available to finance current operations. The Board of Directors has designated property tax revenue to be used for the annual debt service requirements prior to being used as funding for current operations. Capital Facilities Capacity Charges Capital facilities capacity charges represent fees imposed at the time a structure is newly L connected to the District's system, directly or indirectly, or an existing structure or category of use is increased. This charge is to pay for District facilities in existence at the time the charge is imposed or to pay for new facilities to be constructed that are of benefit to the property being charged. L Capital Contributions Capital contributions consist of charges to certain special disincts and agencies for their agreed- upon share of additions to capital assets. Ooeratino and Non-operating Revenues and Expenses Operating revenues and expenses result from collecting, treating, and disposing of wastewater and inspection and permitting services. OCSD's operating revenues consist of charges to customers _ for the services provided. Operating expenses include the cost of providing these services, administrative expenses, and depreciation and amortization expenses. All revenues and expenses L not meeting these definitions and which are not capital in nature are reported as nonoperating revenues and expenses. Construction Commitments L OCSD has active construction projects to add additional capacity, improve treatment, or - replace/rehabilitate existing assets. At June 30, 2008, the outstanding commitments with I contractors totaled$424 million. V Self-Insurance Plans For the year ended June 30, 2008, OCSD was self-insured for portions of workers' compensation, L property damage, and general liability. The self-insurance portion of the workers' compensation exposure is the $500,000 deductible per occurrence below the outside excess insurance coverage to $300 million. The self-insurance portion of the property damage exposure covering fire and other perils is the $25,000 per occurrence deductible (for most perils) under the outside excess property insurance coverage to $1 billion. The self-insurance portion of the property damage exposure covering Flood is the $100,000 per occurrence deductible with outside excess property insurance coverage to$300 million. OCSD is self-insured for virtually all property damage from the V peril of earthquake. The self-insurance portion of the boiler&machinery exposure is the deductible ranging from $25,000 to $350,000 under the outside excess boiler & machinery insurance coverage to$100 million per occurrence combined limit. The self-insurance portion of the general liability exposure is the $250,000 per occurrence deductible ($500,000 for employment practices liability) under the outside excess liability coverage to $25 million per occurrence and aggregate. _ The self-insurance portion of the pollution liability exposure is the $100,000 per loss deductible under the outside pollution liability insurance coverage to $10 million. The significant changes in insurance coverage during the fiscal year ended June 30, 2008 are as follows: • The excess insurance coverage for workers' compensation increased from $200 million to L $300 million. L. 18 r ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2008 Duringthree fiscal the past years there have been no settlements in excess of covered amounts. Claims against OCSD are processed by outside insurance administrators. These claims are charged to claims expense based on amounts which will ultimately be paid. Claims incurred but not yet reported have been considered in determining the accrual for loss contingencies. OCSD management believes that there are no unrecorded claims as of June 30, 2008 that would materially affect the financial position of OCSD. Deferred Compensation Plan OCSD offers its employees a deferred compensation plan established in accordance with Internal Revenue Cade Section 457. The plan permits all employees of OCSD to defer a portion of their salary until future years. The amount deferred is not available to employees until termination, retirement, death or for unforeseeable emergency. The assets of the plan are held in trust for the exclusive benefit of the participants and their beneficiaries. Since the plan assets are administered by an outside party and are not subject to the claims of OCSD's general creditors, in accordance with GASB Statement 32, the plan's assets and liabilities are not included within OCSD's financial statements. Pension Accounting OCSD has two pension programs: a pension plan and additional retirement benefit account (ARBA). The pension plan, which is administered by the Orange County Employees' Retirement .. System (OCERS), has been reported since GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers" was established. The ARBA plan has been administered by OCERS in the past; in the current fiscal year it was brought In-house and is now directly administered by OCSD. Since an actuarial study has assigned a value to the liabilities of the program,the ARBA benefit is now recognized on OCSD's statements and reported in note 7. OPEB Accountno r OCSD adopted GASS Statement No. 45, Accounting and Financial Reporting by Employers for Posfemployment Benefits Other Than Pensions." Issued in June 2004, this statement addresses how state and local governments should account for and report their costs and obligations related to postemployment healthcare and other nonpension benefits, collectively referred to as other postemployment benefits (OPEB). The statement generally requires that state and local governmental employers account for and report the annual cost of OPEB and the outstanding �+ obligations and commitments related to OPEB In essentially the same manner as they currently do for pensions. OCSD adopted Statement 45 as a "Phase I Agency", required to implement for the fiscal year beginning July 1, 2007. (2) Cash and Investments Cash and investments as of June 30, 2008 are classified within the accompanying Statement of ..' Net Assets as follows: r r r 17 ri u ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30,2008 V Statement of Net Assets: Current, Unrestricted: Cash and cash equivalents $104,012,814 L Investments 330,161,649 Subtotal -current, unrestricted 434,174.463 - Restricted: Cash and cash equivalents 50.737,114 u Investments 47,829,179 _. Subtotal -restricted 98,566,293 Total cash and cash equivalents and investments $53 ,740,756 W Cash and investments consist of the following as of June 30, 2008: Cash on hand $ 2,000 Deposits with financial institutions 3,209,284 i Investments 430,963,179 L Monies held by trustees: _ Investments $50,737,114 Investment contracts 47.829,179 L Subtotal-monies held bytrustees 98,566.293 Grand total cash and investments $532 740,756 L Investments Authorized by the California Government Code and OCSD's Investment Poll The table below identifies the investment types that are authorized by the California Government Code and OCSD's investment policy. The table also identifies certain provisions of either the California Government Code or OCSD's investment policy (whichever is more restrictive) that address interest rate risk, credit risk,and concentration of credit risk. �I A separate table addresses investments of debt proceeds that are held by trustees. Those investments are governed by the provisions of the debt agreements rather than the general provisions of the California Government Code or OCSD's investment policy. V 6r L L L 18 i6 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2008 r Authorized Maximum by OCSD's Maximum Investment Investment Type-Authorized by the Investment Maximum Percentage in a Single California Government Code Policy? Maturity(1)(3) of Portfolio(1) Issuer(n Local Agency Bonds Yes 5 years None None U.S.Treasury Obligations Yes 5 years None None California State Treasury Obligations Yes 5 years None None U.S.Agency Securities Yes 5 years None None Bankers Acceptances Yes 180 days 400% 30% �,. Commercial Paper Yes 270 days 131 days 15%125% 10% Negotiable Certificates of Deposit Yes 5 years 30% None Repurchase Agreements Yes 1year None None y Reverse Repurchase Agreements Yes 90 days(2) 5%to None Corporate Medium-Term Notes Yes 5 years 30% None Mutual Funds Yes N/A 15%(z) 10% Money Market Mutual Funds Yes N/A 15%(2) None Mortgage Pass-Through Secunties/CMO Yes 5 years 20DDA None County Investment Pools Yes NIA None None Local Agency Investment Fund(LAIF) Yes NIA None None Notes (1)Restr anions are in accordance with the California Government Code unless indicated otherwise. rM (2)The restriction is in accordance with OCSD's Investment Policy which is more restrictive than the California Government Code. (3)As allowed by Celilomla Government Code section 53601,the Board or Directors has adopted a policy of no manmum maturity for investments purchased by OCSD's internal money manager(or the long-term investment portfolio. Havener,the duration of the long-term Investment portfallo on never exceed 6D months. Investments purchased for the short-term portfolio s , r subject to the maturity restdchore noted in this table. Investments Authorized by Debt Agreements .. The investment of debt proceeds held by trustees is governed by provisions of the debt agreements, rather than the general provisions of the California Government Code on OCSD's investment policy. The table below identifies the investment types that are authorized for er investments held by OCSD's.trustees. The table also identifies certain provisions of these debt agreements that address Interest rate risk, credit risk,and concentration of credit risk. r r .r 19 i V ORANGE COUNTY SANITATION DISTRICT L Notes to Basic Financial Statements For the Year Ended June 30,2008 V Maximum Maximum Investment Investment Type -Authorized by the Maximum Percentage in a Single IW California Government Code Maturity of Portfolio Issuer State and Local Agency Bonds 5 years None None U.S. Treasury Obligations 5years None None V U.S. Agency Securities 5 years None None Banker's Acceptances 180 days 40% 10% —. Commercial Paper 270 days/31 days 15%/30% 10% Negotiable Certificates of Deposit 5years 30% 10% Repurchase Agreements 1year None None _ Corporate Medium-Term Notes 5 years 30% None j Mutual Funds N/A 20% 10% y Money Market Mutual Funds N/A 20% None Local Agency Investment Fund (LAIF) N/A None None Guaranteed Investment Contracts N/A None None Disclosures Relating to Interest Rate Risk u Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer an investment has before maturity, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that OCSD L manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time, as necessary to provide the cash flow and j liquidity needed for operations. L.I OCSD monitors the interest rate risk inherent in its managed portfolio by measuring the modified - duration of its portfolio. The duration of monies held for shorter term purposes is recommended by V OCSD's Treasurer and is based on OCSD's cash flow requirements in meeting current operating and capital needs. The average duration of monies invested for shorter term purposes may never exceed 180 days. The duration of monies held for longer term purposes is recommended annually by OCSD's Treasurer and is based on OCSD's five-year cash flow forecast. The average duration may not exceed 120 percent nor be less than 80 percent of the recommended duration. The average duration of monies invested for longer term purposes may never exceed 60 months. There is no stated maturity for the Money Market Mutual Funds. Le Following is a table which summarizes OCSD's investments by purpose with the modified duration. u �y L 20 r1 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2008 r Modified Modified Duration Duration Investment Type Fair Value in ears in months Short-Tenn Portfolio: U.S.Treasury Bills $ 7,262.825 0.121 1.47 U.S.Agency Securities 55,445,452 0.253 3.08 Commercial Paper 12,461,899 0.058 0.71 Corporate Medium-Term Notes 3.474,048 0.442 5.38 Negotiable Certificates of Deposit 3.500,000 0.210 2.56 .� Repurchase Agreements 15,700.000 - - Money Market Mutual Funds 116,265 0.083 1.01 Short-term portfolio subtotal $$ 97,960,4W 0.761 9.26 Long-Tenn Portfolio: U.S. Treasury Notes $ 56,992,380 2241 27.27 U.S. Agency Securities 177,253,171 3.383 41.16 U.S. Govt. Backed Mortgage Pools 869,787 3.658 44.51 Commercial Paper 4,780,667 0.042 0.51 Corporate Medium-Term Notes 66,297,290 2.162 26.30 Money Market Mutual Funds 354,139 0.083 1.01 Mortgage Pass-Through Securities/CMO 4,696,419 1204 14.65 Long-term portfolio subtotal 311,243,853 2.901 35.30 OCSD monitors the interest rate risk inherent in its other investments using speck identification of the investments. Following is a table of these investments as of fiscal year and. Fair Value Maturities Investments held by fiscal agents: Money Market Mutual Funds: Fidelity Treasury Class III Fund 696 $ 2,517.905 N/A First American Treasury Obligation 998.821 N/A Blackrock Institutional Funds 19,370,367 N/A GS Financial Square Treasury Obligations 45,541 N/A Blackrock Institutional T-Fund 429 N/A Blackrock Institutional T-Fund 20,021,D82 N/A r. First American Government Obligation 7,782,969 N/A Guaranteed Investment Agreements: AIG- 1993 COP 2,690,000 July 14,2016 Bayerische Landesbank Girozentrale-2000 COP 17,311,427 August 1,2016 MBIA Inc. -2006 COP 18.309,752 February 1, 2036 FSA Capital Management Services LLC-2007A COP 9.518,000 January 30, 2030 Local Agency Investment Fund (LAIF) 17,992,592 212 day average Fair Value of Other Investments 116,558,885 21 L ORANGE COUNTY SANITATION DISTRICT I Notes to Basic Financial Statements L For the Year Ended June 30,2008 V Investments with Fair Values Nlohly Sensitive to Interest Rate Fluctuations OCSD's investments (including investments held by trustees)include the following investments that j are highly sensitive to interest rate fluctuations (to a greater degree than already indicated in the V information provided above): Mortgage-backed securities: These securities are subject to early payment in a period of declining interest rates. The resulting reduction in expected total cash flows affects the fair value of these securities, making them highly sensitive to change in interest rates. At fiscal year end,the fair value of investments in mortgage-backed securities totaled$43,527,568. W Disclosures Relatina to Credit Risk - Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the yy holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The following table presents the minimum rating as required by the California Govemment Code, OCSD's investment policy, or debt agreements, and i the actual rating as of year-end for each investment type: v V L L L V V 1.+ LO L L 22 L ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30,2008 Investment Type and the Lowest Rating Reported at Year End Fair Value Investments with no legal minimum rating&no required disclosure: U.S.Treasury Obligations $ 68.021.450 U.S.Agency Securities-GNMA 869,787 Subtotal $ 68.891,237 Investments with no legal minimum rating: U.S.Agency Securities(other than GNMA): Rating of AAA(Fitch) 82.206,032 Rating of AGY(Standard&Poors) 150,492,591 Negotiable Certificates of Deposit: r Not rated at fiscal year end 3,500,000 Repurchase Agreements: Not rated at fiscal year end 15,700,000 Local Agency Investment Fund(LAIF): Not rated at fiscal year end 17,992,592 Investments with fiscal agents-Guaranteed Investment Contracts: Not rated at fiscal year end 47,829,179 r Subtotal 317,720,394 Investments with a legal minimum rating(or its equivalent)of A: Commercial Paper. Rating of A-1 (Standard&Poors) 3.795,783 Rating of P-1 (Moody) 13.446,783 Corporate Medium-Term Notes: Rating of A+(Standard&Poor's) 8.047,465 Rating of A(Standard&Poors) 10,749,798 Rating of At (Moody) 1.186,244 Rating of A2(Moody) 8,790.018 Rating of AA+(Standard&Poors) 826,200 Rating of AA-(Filch) 8,166,837 Rating of AA(Fitch) 4.679,603 Rating of AA2(Moody) 6,191,278 Rating of AA3(Moody) 12.743,487 Rating of AAA(Standard&Poors) 4.452,005 Raring of BW (Moody)' 1.266,989 Rating of BBB(Standard&Poors)' 897,606 Rating of BBB-(Standard&Poors)' 1,793,808 Money Market Mutual Funds: Rating of AAA(Standard&Poors) 470,404 Invested with fiscal agents: Rating of Aaa(Moody) 50,737,114 Not rated at fiscal year end - r. Subtotal 138,221,422 Investments with a legal minimum rating(or its equivalent)of AA: Mortgage Pass-Through SecudfiesrCMO: Rating of AAA(Standard&Poors) 726,813 1ert Rating of AGY(Standard&Poors) 3,969.606 Not rated at fiscal year end - Subtotal 4,696.419 Total $529,529,472 Investment was in compliance with legal requirements at the ume it was pumhaw. 23 Ir ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements r For the Year Ended June 30, 2008 l : V Concentration of Credit Risk Limitations on the amount that OCSD is allowed to invest in any one issuer have been identified y previously in the section, 'Investments Authorized by the California Government Code and OCSD's Investment Policy' and in the section, 'Investments Authorized by Debt Agreements.' OCSD follows whichever guideline is the most restrictive. As of fiscal year end, OCSD has investments in i the following types of securities, each of which represents more than 5 percent of OCSD's 1W investments: Federal Home Loan Bank(U.S.Agency Securities),totaling$56,319.421 Federal Home Loan Mortgage Corporation(U.S.Agency Securities), totaling$72,764,762 Federal National Mortgage Association(U.S.Agency Securities), totaling$103,297,068 - Custodial Credit Risk V Custodial credit risk for deposits is the risk that in the event of the failure of a depository financial -- institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside parry. The California Government 4 Code and OCSD's investment policy contain legal requirements that limit the exposure to custodial credit risk for deposits as follows: a financial institution must secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository L regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by - the public agencies. California law also allows financial institutions to secure deposits by pledging first trust deed mortgage notes having a value of 150%of the secured public deposits. L' Custodial credit risk for investments is the risk that in the event of the failure of the counterparty, (e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its y investment or collateral securities that are in the possession of another party. The California Government Code and OCSD's investment policy do not contain legal or policy requirements that - would limit the exposure to custodial credit risk for investments. ' u As of June 30, 2008, OCSD's investments in the following investment types were held by the fiscal agent's safekeeping department of the broker-dealer(counterparty)used to buy the securities. Money market mutual funds $ 50,737,114 Guaranteed investment contracts 47,829.179 Total e Investment in Stale Investment Pool OCSD is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the Stale of California. The fair value of OCSO's investment in this pool is reported in the accompanying _ financial statements at amounts based upon OCSO's pro-rata share of the fair value provided by LAW for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance L j available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. Included in LAIF's investment portfolio are mortgage-backed securities, other asset-backed securities, loans to certain state funds, securities with interest rates L that vary according to changes in rates greater than a one-tor-one basis, and structured notes. L 24 i r r ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2008 r September 1993 Rfundina Certificates of Participation On September 2, 1993, OCSD completed the sale of $46,000,000 of refunding certificates of participation. The certificates were issued to refund $39,740,000 of the outstanding principal balance of the 1990-92 Series B certificates of participation. " The interest rate on the refunding certificates is adjusted by the remarketing agent daily based on market interest rates. The weighted average interest rate for the fiscal year ended June 30, 2008 was 3.53 percent. On September 1, 1993, OCSD and a brokerage company entered into ORANGE COUNTY SANITATION DISTRICT .. Notes to Basic Financial Statements For the Year Ended June 30,2008 ' (3) Capital Assets Capital asset activity for the year ended June 30,2008 is as follows: J Balance at Balance at June 30,2007 Additions Deletions June 30,2008 Capital assets not depreciated, + Cost: Land $ 13,021,480 $ - $ - $ 13.021.460 Construmon in progress $03.679,956 275.529,104 (141,722,348) 937,406.712 Total nondepreciable assets 816.701,438 275,529.104 (141.722.348) 950,508.192 J Depreciable capital assets: Cost Sewage collection facilities 503,914.944 9,674,711 - 513,589,655 + Sewage treatment facilities 764,870.945 109,994,220 - 874,8sll Effluent disposal facilities 97,014,e20 - 97,014.820 Solids disposal facilities 3,074.494 388,742 - 3,463.236 General and edministral facmties 173.218.585 21,054,87e (241,257) 194,642,004 + Excess purchase price over book value on acquired assets 19.979,000 - - 19.979,000 Subtotal 1,66YA72,7ae 141.722.349 (241,257) 1.703.553.880 + Accumulated depreciation'. Sewage collection facilities (202,457.199) (9,568,753) (212,025,952) Sewage treatment facilities (413,492,062) (24,476.754) (437,968.826) Effluent disposal facilities (44,690,079) (2,354,530) - (47,075,215) .� Solids disposal facilities (3.074,493) (4,012) - (3,078,505) General and adminiseeti,e facilities (99,626.563) (f0,e75,182) 240.901 (110,000.754) Exoeas purchase price over book value on acquired assets (13,811.889) (657,709) - (14.409.598) + subtotal (777,152,885) (47.766,9a8) 240,991 624,878.850 - Net depreciable assets 784,919,903 93.955,393 (266) 878IS75IO30 Net capital assets $ 1.601,621,339 $ 359,484,497 $ (141.722.614) $ 1,829,383,222 (4) Loma-Term Liabilities + The following is a summary of the changes in long-term liabilities for the year ended June 30, 2008: Cenifirates _ Arbitrage Compensated Claims and of Net Pension Net OPEB Payable Absences Judgments Participation Obligation Obligation Totals Balance,July 1 340.100 $ 5,885,818 $ 1.025,195 $ 801,785,000 $ 5,493,378 $ . $ 514.528.491 Additions 663,300 6,059,694 1.631.080 377,165,000 657.552 941,961 307.118,507 Delellons (307,900) (5,514,416) (380.886) (98,530.000) (230,330) (601,084) (103,564,616) Balance,June 30 895.500 6,431,096 2,275.389 1,082,420,000 5,920,600 340,877 1,098,0B3,462 Due aetim one year 239,900 5.741,682 284,010 21,455.000 27.720.592 Unamoltized call (premium) - - - (13.629,542) - 113,829.541) Unamor62ed delened amount on refundings - - - 15.138,852 - - 15,138,852 Long-"amount $ 455.600 $ 689.414 $ 1,991.379 $ 1.059.455,690 $ 5,920.600 $ 340,877 1 1,068,853.560 25 ' 9Z '9Z'E se lgap uail laluas lol opw a6wanw a4l '90OZ '09 sung to sy sluawannbai aoinlas lgop lenuue lelol of sluawwinbw aolnlas lgop jol algepene senuanw lenuue lau;o ollw ayl sl ollw abwanoo wnwlulw agl '9Z l to mlw a6wanm wnwlulw e annbal 1041 slueuanw alw gl!m lgap uall joluas v ogoo 101gop 6ulpuelslno agl 1u IN u011ealoled 10 saleopyao nuipuelsino 000'OZV'Z80't 9 elgeAed uogedrulNed to saleoplm lelol 000'99t'LL uollad!oped to saleo9l11ao Bulpunlw y8OOZ _ 000,000,00E uopedlo@ed to saleo94JM SLOOZ 000'999'96 uogedloped to saleopPao 6ulpunlw VL00Z r T T T C Q W V N V M N t0 a. 4f F mr ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2008 r (3) Capital Assets Capital asset activity for the year ended June 30, 2008 is as follows: Balance at Balance at June W.2007 Additions Deletions June 30,2008 Capital assets not depreciated, as Cost: Land $ 13.021,48o $ - $ - $ 13.021.480 Construction in progress 803,679.956 275.529.104 (141,722.348) 937.486.712 _ Total nondepreciable assets 818.701,436 275,529,104 (141,782,348) 950.508,192 Depreciable Capital assets: Cost. Sewage collection facilities 503.914.944 9.674,711 - 513.589.655 Sewage treatment facilities 764.870,945 109.994.220 - 874,565,165 Effluent disposal facilities 97,014,820 - - 97,014,820 Solids disposal facilities 3.074.494 388.742 - 3.463,238 General and administrative facilities 173,218,585 21.664.678 (241.257) 194,642,004 Excess purchase price over book value on acquired assets 19.979,000 - - 19.979,000 Subtotal 1,562,072,785 141.722.349 (241,257) 1,703,553.880 Accumulated depreciation: Sewage collection fedi ies (202,457,199) (9,568,753) - (212.025.952) Sewage treatment facilities (413.492.082) (24,476,764) - (437.988,826) Effluent disposal facilities (44.690,679) (2.384,536) - (47.075.215) r Solids disposal facilNes (3.074.493) (4,012) - (3,078,505) General and administrative facilities (99,826,563) (10,675.182) 240.991 (110,060.754) Excess purchase price over book value on acquired assets (13.811.889) (657.709) - (14.469,598) Subtotal (777.152.885) (47.766,956) 240,991 824,678,850 Net depreciable assets 784.919,903 93,955,393 (266) 878,675,030 r Net capaal assets $ 1.801.821,339 L 369.454.49] $ (14t722,614) $ 1,629,383,222 (4) Lona-Term Liabilities The following is a summary of the changes in long-term liabilities for the year ended June 30, 2008: Certificates w. Arbitrage Compensated Claims and of Net Pension Net OPEB Payable Absences Judgments Participation Obligation Obligation Totals Balance,July S 340,1D0 S 5,885.816 $ 1,025.195 $ 801,785.000 $ 5,493,378 S - S B14,529,491 Additions 663,300 6.059,694 1.631.080 377,165.000 657.552 941,981 387,118,587 Deletions (307,900) (5,514,416) (380,886) (96,530.000) (230,330) (601.004) (103,564,616) Balance,June 30 695,500 6,431,096 2275.309 1,082,420,000 5,92D,600 340,877 1.DBB,0B3,462 Due within one year 239,900 5,741,682 284.010 21,455,OD0 27,720,592 Unamorti7ed discount (premium) - (13,629,542) - (13,629,512) Unamorbaid deferred amount on refundings - - - 15.138,852 - - 15,138,852 Long-term amount It 455,600 $ 689,414 $ 1.991.379 $ 1,059,455,69D $ 5,920,600 $ 340,877 $ 1.068,853,560 r 25 r L ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30,2008 L Arbitrage Payable The Tax Reform Act of 1986 (the Act) requires OCSD to calculate and remit rebatable arbitrage earnings to the Internal Revenue Service. Certain of OCSD's debt and interest earnings on the y proceeds thereof are subject to the requirements of the Act. OCSD's liability at June 30, 2008 is $455,600 for future years'remittances. 1-- Compensated Absences L OCSD's policies related to compensated absences are described in Note 1. OCSD's liability at - June 30, 2008 is$6,431,095 with an estimated $5,741,682 to be paid or used within the next fiscal I year. L+ Claims and Judgments Pavable I_. OCSD is self-insured in a number of areas as described in Note 1. The following is a summary of L the claims and judgments payable as of June 30, 2008 and 2007: _ 2007-08 2006-07 L Claims and judgments payable at July 1 $1.025,195 $1.379.850 Claims incurred during the fiscal year 87.463 222,771 Adjustments to the prior year 1,548,617 (278,374) Payments on claims during the fiscal year (380.886) 299,052) Claims and judgments payable at June 30 2,275.389 1.025.195 Less: current portion (284.010) 340,480 L Total long-term claims and judgments payable $1.991.379 $ 684,715 Certificates of Participation L OCSD issues certificates of participation in order to finance construction of the treatment facilities. Each certificate of participation represents a direct and proportionate interest in the semi-annual interest payments. Installment payments for the issues are payable from any source of lawfully available funds of OCSD. Certificates of participation at June 30,2008 are summarized as follows: Amount j W 7993 refunding certificates of participation $ 26,900,000 2000 refunding certificates of participation 196,600.000 - 2003 certificates of participation 191,500,000 I 2006 certificates of participation 196,600,000 L 2007A refunding certificates of participation 93,655,000 2007B certificates of participation 300,000.000 I 2008A refunding certificates of participation 77,165,000 6r Total certificates of participation payable $ 1,082.420,000 i � u Outstanding Certificates of Participation All of the outstanding debt of OCSD is senior lien debt with rate covenants that require a L minimum coverage ratio of 1.25. The minimum coverage ratio is the ratio of net annual revenues available for debt service requirements to total annual debt service requirements. As of June 30, 2008, the coverage ratio for senior lien debt was 3.25. u 26 1 u r ORANGE COUNTY SANITATION DISTRICT r Notes to Basic Financial Statements For the Year Ended June 30,2008 r September 1993 Refundina Certificates of Participation On September 2, 1993, OCSO completed the sale of $46,000,000 of refunding certificates of r participation. The certificates were issued to refund $39,740,000 of the outstanding principal balance of the 1990-92 Series B certificates of participation. The interest rate on the refunding certificates is adjusted by the remarketing agent daily based r on market interest rates. The weighted average interest rate for the fiscal year ended June 30, 2008 was 3.53 percent. On September 1, 1993, OCSD and a brokerage company entered into an Interest rate exchange swap agreement (Note 5). Annual principal payments are due on August 1, beginning August 1, 1995. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2008 reserve of $2,690,000 is held by the r trustee,JPMorgan, and meets the reserve requirement. August 2000 Rrefundina Certificates of Participation On August 31, 2000, OCSD completed the sale of $218,600,000 of refunding certificates of participation. The certificates were issued to refund the remaining outstanding principal balance of the 1990-92 Series A, B, and C certificates of participation and to reimburse OCSD r for improvements made to the wastewater system. The interest rate on the refunding certificates is adjusted by the remarketing agent daily based on market interest rates. The weighted average interest rate for the fiscal year ended June 30, r 2008 was 2.72 percent. Annual principal payments are due on August 1, beginning August 1, 2001. r The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2008 reserve of $18,055,366 is held by US Bank,the trustee, and meets the reserve requirement. + August 2003 Certificates of Participation On August 26, 2003, OCSD completed the sale of$280,000,000 of certificates of participation. The certificates were Issued to finance and to reimburse OCSD for the acquisition, r construction, and Installation of additional improvements made to the wastewater system. The interest rate on the certificates is fixed and ranges from 5.00 percent to 5.25 percent. Annual principal payments are due on February 1, beginning February 1, 2021. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2008 reserve of$19,369,619 is held by Union Bank, the trustee, and meets the reserve requirement. r March 2005 Certificates of Participation On March 8, 2006, OCSD completed the sale of $200,000,000 of certificates of participation. r The certficates were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The interest rate on the refunding certificates is adjusted by the remarketing agent daily based on r market interest rates. The weighted average interest rate for the fiscal year ended June 30, 2008 was 2.74 percent. Annual principal payments are due on February 1, beginning February 1,2022. 27 r u ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30,2008 L The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2008 reserve of $18,309,753 is held by (- Deutsche Bank,the trustee, and meets the reserve requirement. V May 2007 Certificates of Participation On May 22. 2007, OCSD completed the sale of $95,180,000 of refunding certificates of L participation. The certificates were issued to refund $88,500,000 of the outstanding principal balance of the 2003 Senes cenrfcates of participation (see above) . The interest rate on the _. refunding certi0cates is fixed and ranges from 4.00 percent to 4.5 percent. Annual principal I . payments are due on February 1, beginning February 1, 2008. 4r The trust agreement for the certificates requires the establishment of a reserve which was funded from cenficate proceeds. The June 30, 2008 reserve of$9,518,014 is held by Union Bank, the trustee, and meets the reserve requirement. Lit December 2007 Certificates of Participation On December 20, 2007, OCSD completed the sale of $300,000.000 of certificates of participation. The certificates were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The interest rate on the refunding certificates is fixed and ranges from 4.00 percent to L 5.25 percent. Annual principal payments are due on February 1, beginning February 1, 2008. The trust agreement for the certificates requires the establishment of a reserve which was W funded from certificate proceeds. The June 30, 2008 reserve of$19,982,813 is held by Union Bank,the trustee, and meets the reserve requirement. _ i May 2008 Certificates of Participation (.I On May 29, 2008, OCSD completed the sale of $77,165,000 of refunding certificates of participation. The cerlficetes "reissued to refund the $85,505,000 outstanding principal I balance of the 1992 Series certificates of participation. The interest rate on the refunding V certificates is fixed and ranges from 2.95 percent to 4.0 percent. Annual principal payments are due on February 1, beginning February 1, 2009. I ` The aggregate difference in debt service between the refunding debt and the refunded debt is u a positive amount of approximately $6.3 million. The total future payments for the new debt provides a net present value loss of approximately $1.0 million to refund the old debt in payments. The trust agreement for the certificates requires the establishment of a reserve W which was funded from certificate proceeds. The June 30, 2008 reserve of$7,716,500 is held by US Bank, the trustee, and meets the reserve requirement. Annual Amortization Requirements The annual requirements to amortize all debt related to certificates of participation as of June 30, - 2008, are as follows: IV L L 28 W r ORANGE COUNTY SANITATION DISTRICT . Notes to Basic Financial Statements For the Year Ended June 30,2008 r Estimated Year Interest Rate Ending Estimated Swaps, Net r June 30, Principal Interest _(See Note 5) Total 2009 $ 21,455,000 $ 37,379,800 $ (117,755) $ 58,717.045 2010 21.540,000 36,559.822 (117,095) 57.982.727 2011 22,455,000 35,693,097 (116,435) 58,031,662 2012 23,065,000 36.087,525 (116.775) 58,036,750 2013 24,090,000 34,444,312 (114,913) 58,419,399 r 2014-2018 159,020,000 158,052,381 (241,450) 316.830,931 2019-2023 176.660.000 137,585,749 - 314,225,749 2024-2028 212.460.000 103,349,842 - 315.809,842 2029.2033 300,120,000 56,904,524 - 357,024,524 2034-2037 121,555,000 8,774,730 130329730 Total $ 1,082.420,000 $643,811.782 $ (823,423) $ 1,726.408,359 (51 Interest Rate Swaps on Certificates of Participation r As indicated in Note 4, OCSD has entered into an interest rate swap agreement in connection with the 1993 Refunding Certificates of Participation. .. Objective: The objective of the interest rate swap Is to lower OCSD's borrowing costs when compared against fixed-rate bonds at the time of issuance. The swap effectively changes OCSD's variable Interest rate to a synthetic fixed rate of 4.56 percent on the 1993 Refunding Certificates of Participation. 1993 Refunding Certificates of Participation Terms of the Swap: On September 1, 1993, OCSD and a brokerage company entered into an r Interest rate exchange swap agreement pursuant to which OCSD will pay a fixed interest rate of 4.56 percent. OCSD will receive a variable interest rate equal to the interest paid to the holders of the certificates which is based on a tax exempt daily interest rate as determined by the remarketing agent on an initial notional amount of $46.000,000. The notional value of the swap declines in r tandem with the principal amount of the associated debt. This interest rate swap agreement is accounted for as a hedge, and the associated Interest rate differential to be paid or received is charged to interest expense as interest rates change. The 22-year swap agreement matures on .. August 1,2016. Fair Value: Because interest rates have declined since execution of the swap agreement, the swap had an estimated negative fair value of $2.86 million as of June 30, 2008. Because the variable-rate certificates adjust to changing interest rates, the certificates do not have a corresponding fair value increase. The fair value was estimated using the zero-coupon method. This method calculates the future net settlement payments required by the swap, assuming that r the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zaro-coupon bonds due on the date of each future net settlement on the swap. r Credit Risk: As of June 30, 2008. OCSD was not exposed to credit risk because the swap had a negative fair value. However, should Interest rates change, and the fair value of the swap become positive, OCSD would be exposed to credit risk in the amount of the swap's fair value. The swap's r 29 r L ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30,2008 L counlerparry, Societe Generate Bank, was rated AA- by Standard & Poor's and Aa2 by Moodys Investors Service as of June 30, 2008. To mitigate the potential for credit risk, if the counterpartys - credit quality falls below AA- by Standard & Poor's or Aa3 by Moodys Investors Service, the fair L value of the swap (if the swap has a positive fair value)will be collateralized by the counterparty as follows: 1) with securities issued or guaranteed by the United States Government equaling 106 percent of the fair value, or 2) with securities issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, or the Government National Mortgage L Association equaling 108 percent of the fair value, or 3) other securities to be agreed upon and in an amount to be agreed upon by OCSD, the counterparty, and the Swap Insurer. The collateral would be held by a third-party custodian. 1 Basis Risk: The swap does not expose OCSD to basis risk because the variable-rate interest paid I.1 to the certificate holders is equal to the variable-rate interest earned on the notional amount of the swap. Termination Risk: COW or the counterparty may terminate the swap if the other party fails to - - perform under the terms of the contract. In the event of termination due to default, the defaulting i party will pay to the non-defaulting parry the excess (if any) of the sum of the settlement amount 61 and the unpaid amounts owed less the unpaid amounts due from the non-defaulting party. The swap may be terminated by OCSD 9 the counterpartys credit quality rating falls below AA- by Standard & Poor's or Aa3 by Moodys Investors Service. If the swap is terminated, the variable- V rate certificates of participation would no longer carry a synthetic interest rate. (6) Net Assets j The difference between assets and liabilities is reported as net assets. Net assets are classified as IJ restricted, unrestricted, or invested in capital assets, net of related debt. Net assets at June 30, 2008 consisted of the following: L June 30, 2008 Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation $ 1,829,383,222 L Outstanding debt issued to acquire capital assets, net of: unamortized bond discount, i' defamed amount on refundings, and J unspent proceeds (985,268,625) Unamortized deferred charges of debt issued to acquire capital assets 8.269.966 L Subtotal 852,384,563 Restricted by debt covenants for debt service on certificates of participation 3,311,187 L, Unrestricted 420,291,536 _ Total Net Assets $ 1,275,987,288 6r (7) Pension Benefits j OCSD has two pension plans for retirees: a defined benefit pension plan maintained through and 1..1 by the Orange County Employees'Retirement System (OCERS)and the Additional Retiree Benefit Account(AREA)administered directly by OCSD. ! V 30 1 ORANGE COUNTY SANITATION DISTRICT + Notes to Basic Financial Statements For the Year Ended June 30, 2008 Pension Plan OCSO participates in the Orange County Employee's Retirement System (OCERS), acost-sharing �+ multiple-employer, defined benefit pension plan which is governed and administered by a nine member Board of Retirement. OCERS was established In 1945 under the provisions of the County Employees Retirement Law of 1937, and provides members with retirement, death, disability, and cost-of-living benefits. OCERS issues a standalone comprehensive annual financial raper( which can be obtained from OCERS at 2223 Wallington Avenue, Santa Ana, California 92701. Benefits: All OCSD employees except for interns participate in OCERS. Employees who retire at . or after age 50 with ten or more years of service are entitled to an annual retirement allowance. The amount of the retirement allowance is based upon the member's age at retirement, the member's "final compensation" as defined in Section 31462 of the Retirement Law of 1937, the total years of service under OCERS, and the employee's classification as a Tier I or Tier II member. Benefits fully vest on reaching five years of service. OCERS also provides death and disability benefits. r Contributions: As a condition of participation under the provisions of the County Employees Retirement Law of 1937, members are required to contribute a percentage of their annual compensation to OCERS. Tier I and Tier II covered employees are required to contribute 9.72% - 14.14% and 9.30% - 14.14%, respectively, of their annual compensation to OCERS. OCSD is required to make periodic contributions to OCERS in amounts that are estimated to remain a constant percentage of covered employees'compensation such that, when combined with covered employees' contributions, will fully provide for all covered employees' benefits by the time they retire. For the fiscal years ended June 30, 2008, 2007,and 2006, the required contribution equaled the contribution actually made. Required contributions,which are actuarially determined,are set by OCERS. The following table provides salary and contributions requirements for the two previous fiscal years and the current year. For the Fiscal Year Ending June 30,2006 June 30,2007 June 30, 2008 Total Payroll Costs $ 51,589,226 $ 53,175,199 S 58.671,683 Payroll Costs of Employees Covered by OCERS 48,761,087 49.788.835 53.576,940 Contributors Requirements: Contributed by Employees 3,095.591 3.513.302 3,753,147 Contributed by the District on Behalf of Employees 1,717,969 1,732,296 1851089 �+ Total Employee Required Contribution 4,813,550 5,245,598 5,604,236 District Required Contribution 7,416,556 9,848,854 11011693 Total Contribution $ 12,230,106 $ 15.094,452 $ 16,615,929 r Total Actual Contribution as a Percent of Required Contribution 100.00% 100.00% 100.00% Employee Required Contribution as a Percent of Covered Payroll 9.87% 10.54% 10.46% District Required Contribution as a Percent of r Covered Payroll 15.21% 19.78% 20.55% Total Contribution ass Percent of all Participating Entltles'Contrlbutions 5.98% 5.51% 6.21% r 31 I✓ ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements W For the Year Ended June 30,2008 V Additional Retiree Benefit Account(ARBA) The OCSD ARBA plan is a single-employer defined benefit plan which was administered by L•� OCERS until February 29, 2008, when OCSD began direct administration. This benefit was established by the OCSD Board of Directors on October 25. 1992. It provides a monthly payment to retirees towards the premium costs of health insurance for the retiree and eligible dependents. L The retiree is not required to use this amount for health insurance premium or to remain on the OCSD medical plan. The plan is currently paying benefits to 113 retirees. The plan is included in -. OCSD's financial statements; stand-alone financial statements are not issued for the plan. j ho Benefits: Employees who retire receive $10 per month for every year of service up to a maximum of 25 years, or $250 per month. This amount is independent of salary and is fixed at retirement. Because the District cannot ensure the use of the benefit for payment of eligible health insurance W expenditures, the benefit is taxable to the retiree. Survivor benefits are provided in the event that a refiree pre-deceases his/her spouse. For retirees hired prior to July 1, 1988, OCSD provides health insurance for coverage for 2%months per year of service. ARBA benefits begin immediately after this benefit ends. For those hired on or after July 1, 1988, ARBA benefits begin immediately upon W retirement and continue for life. Funding: There are no employee contributions for this plan; OCSD covers 100% of the cost. An u actuarial evaluation was performed as of June 30, 2007, using the Projected Unit Credit Cost method. This method represents the present value of benefits earned to date assuming that an _. employee eams benefits ratably over his/her career. An investment rate of return of 6.0% per year was used, and no cost of Irving or salary adjustment was used due to the flat dollar nature of the benefit. The unfunded actuarial liability was amortized on a level dollar basis over 30 years. OCSD utilizes a pay-as-you-go method for funding the plan. - The annual pension cost and net pension obligation for the year ended June 30, 2006, 2007 and 2008 were as follows. 1 For the Fiscal Year Ending June 30,2006 June 30,2007 June 30, 2008 Annual required contribution $ 710,336 $ 727,037 $ 727,037 Interest on net pension obligation 277,493 303,663 329,603 Adjustment to annual required contribution (335,993) (367.680) 399,088 Annual pension cost 651,836 663,020 657,552 Contributions made (215,670) (230.698) 230,330 Increase in net pension obligation 436,166 432,322 427,222 Net pension obligation, beginning of year 4,624,890 5,061,056 5,493,378 Net pension obligation, end of year $ 5,0 11,056 $$ 5— 49J,378 $ 5,920,600 yr (8) Other Postemolovment Benefits OCSD offers medical insurance to active and retired employees, as well as their qualified W, dependents. This is a single-employer defined benefit plan administered by OCSD. All retirees may choose coverage in an OCSD medical plan, with retirees paying the full premium. However, for employees hired prior to July 1, 1988, medical benefits begin immediately at retirement with OCSD paying 2.5 months of premium for each year of continuous service toward the cost of coverage under OCSD medical plans. At the termination of this period the retiree may elect to continue coverage at his/her own expense. This plan was established and may be modified only by W 32 u ORANGE COUNTY SANITATION DISTRICT .� Notes to Basic Financial Statements For the Year Ended June 30, 2008 action of the OCSD Board of Directors. The plan is included in the OCSD financial statements; stand-alone financial statements are not issued. As of the date of the actuarial valuation, there were 585 active employees, 158 retirees paying premiums, and 44 retirees whose premium is fully paid by OCSD. Premiums ranged between $322.69 and$1,587.96 per month, depending on the plan and number of dependents covered. Funding Policy: OCSD funds the plan on a payers-you-go basis. For fiscal year 2007-08, OCSD contributed$601,084 and retirees contributed$209,702 to cover current year expenditures. Annual OPES Cost and Net OPEB Obligation., The annual OPES cost Is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize the unfunded actuarial liabilities over 30 years. The following OPEB cost and net OPEB obligation was determined for the year ended June 1, 2008: r Net OPEB obligation as of June 30, 2007 $ - Annual OPEB cost for the fiscal year ended June 30. 2008 941.961 Contributions made in the fiscal year ended 601 084 Net OPEB obligation as of June 30, 2008 $ 340 877 Funded Status and Progress: The funding status of the plan as of the most recent actuarial valuation date is as follows: Unfunded AAL Actuarial as a Actuarial Actuarial Accrued Unfunded Percentage of Valuation Value of Liability AAL Funded Covered Covered ,r Date Assets (AAL) (UAAL) Ratio Payroll Payroll 7/l/2007 9,949638 9949638 0% 49,788,835 19.98% Actuarial valuations of an ongoing plan Involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Actuarially determined amounts are subject to continual revision as actual results are compared with past r expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary Information following the notes to the financial statements, compares whether the actuarial values of plan assets are increasing or decreasing over time relative to the actuarial liabilities for benefits. r Actuarial methods and assumptions: Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing the benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used Include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. r 33 r L '� ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements u For the Year Ended June 30, 2008 u The ARC for the current year was determined as part of the 711/07 actuarial valuation using the Projected Unit Credit cost method. The actuarial assumptions include a 6% investment rate of return and an annual healthcare cost trend rate of 9% reduced by decrements of 1%per year to an ultimate rate of 5% after the 61°year. The UAAL is being amortized ratably over 30 years. Inflation Lt assumptions are included as part of the healthcare cost trend. L (9) Transactions with Irvine Ranch Water District—Revenue Area No. 14 Formation of Revenue Area No. 14 8 Excess Purchase Price Over Book Value of Acquired Assets On July 1, 1985, Revenue Area No. 14 was formed as an independent special district as a result of L a negotiated agreement between OCSD and Irvine Ranch Water District (IRWD). At the time of Revenue Area 14's creation, OCSD consisted of eight independent special districts (see Note 1 — Reporting Entity). The eight existing districts sold a portion of the joint treatment facilities and land L to the newly created district and recorded capacity rights revenue at the time of the sale. In accordance with the negotiated agreement between OCSD and IRWD, IRWD paid OCSD $34,532,000 for an initial 15,000,000 gallons per day capacity in OCSD's joint treatment facilities (with an ultimate collection capacity of 32,000,000 gallons per day)and for a pro-rata interest in real property(based on flow of 32,000,000 gallons per day). The book value of the assets acquired was L determined to be $14,553,000 as of June 30, 1986; these assets were recorded at book value in Revenue Area 14. The excess of the purchase price over the assets' book value was$19,979,000 and was recorded as an intangible asset in Revenue Area No. 14. The excess of the purchase price over the assets' book value is being amortized over the remainder of the useful lives of the original assets acquired. As of June 30, 2008, after recognizing current year amortization of LW $657,709, the unamorlized amount of the excess of purchase price over the assets' book value was$5,509,402. W Annual Transactions IRWD entered into a separate agreement with Revenue Area No. 14 whereby IRWD agreed to annually fund payment of Revenue Area No. 14's proportionate share of OCSD's joint capital outlay revolving fund budget requirements and certain capital improvements during the term of the agreement,which contribution amounted to$15,591,861 in 2008. (10) Commitments L Groundwater Revienishment System: In March 2001, OCSD entered into an agreement with the Orange County Water District, California, to design and construct Phase 1 of the 'Groundwater V Replenishment System"(GWRS). OCSD has no explicit, measurable equity interest in GWRS. No separate financial statements are prepared for GWRS. _ The cost of this project is to be paid equally(50 percent shares)by each agency. The GWRS is a u joint effort by the two agencies to provide reclaimed water for replenishment of the Orange County Groundwater Basin and to augment the seawater intrusion barrier. The first phase of the GWRS became operational in January 2008 with an annual production goal of approximately 72,000 acre- feet per year of recycled water.Future phases of the GWRS will be built in increments over the next 20-25 years based on availability of wastewater Flows to a planned built-out capacity of 145,600 acre-feet per year. Following the completion of Phase 1, the GWRS will have the capacity to divert up to 100 million gallons per day of flow from OCSD's ocean discharge for peak flow storm relief. L. As of June 30, 2008, the total estimated cost of GWRS Phase 1 was $496.80 million. Of this amount, up to $92.50 million may be reimbursed through grants from the U.S. Environmental 34 u ORANGE COUNTY SANITATION DISTRICT r Notes to Basic Financial Statements For the Year Ended June 30, 2008 Protection Agency,the U.S. Bureau of Reclamation,the State Water Resources Control Board, and others. OCSD's estimated gross and net share is$248.40 million and$202.15 million, respectively. Casts incurred by OCSD through June 30, 2008 total$201.08 million. Secondary Treatment, On July 17, 2002, the Board of Directors Approved Resolution No. OCSD- 14, "Establishing the Policy for Level of Treatment of Wastewater Discharged into the Ocean". This resolution established OCSD's policy to treat all wastewater discharges into the ocean to secondary treatment standards thereby providing for continued public safety, marine ecosystem protection, and water reclamation opportunities. To implement this policy, OCSD staff was directed to immediately proceed with the planning, design, and implementation of treatment methods that will allow the agency to meet Federal Clean Water Act secondary treatment standards. OCSD estimates that it will take a total of approximately eleven years and additional capital improvement costs of$631 million to reach secondary treatment discharge standards. Secondary treatment discharge standards are scheduled to be reached at the end of 2012. In the interim, OCSD will operate the plants to maximize available secondary treatment and to reduce effluent biochemical oxygen demand and suspended solid discharges below currently allowed limits. r r r 35 (THIS PAGE INTENTIONALLY LEFT BLANK) 36 r J J J ORANGE COUNTY SANITATION DISTRICT JSUPPLEMENTARY INFORMATION i J J I J J V J J 37 J ORANGE COUNTY SANITATION DISTRICT Schedule of Net Assets June 30,2008 V With Comparative Totals for June 30,2007 1..1 Revenue Consolidated Totals Area No. 14 Revenue Area Eliminations 2008 2007 L Current assets: Cash and cash equivalents $ - $ 104,012,874 $ - $ 104,072,874 $ 55.472.715 Investments - 330,161,649 - 330.161,649 231,710,077 Due from other Revenue Area - 5,595,020 (5,595,020) - - I Accounts receivable,net of allowance L for unoollectibles - 11,805,761 - 11.805,761 12,703,227 Accrued interest receivable 162,748 2,692.484 - 2,855232 2,815,784 Due from other governmental agencies 5.025.176 - - 5,025,176 6,332S08 Connection fees receivable - 1.286.927 - 1.286.927 962:754 y Property tax receivable 101,072 3.195.017 - 3296,089 2,459.657 Inventories 286.854 4,696,534 - 4,985,388 4,834,811 Prepaid expenses 46,418 767,886 - 814,304 1,281.524 Total current assets 5,622268 464Z6,092 (5.595,020) 464.243.340 318.573.057 (r Noncurrent assets: I Restricted: Cash and cash equivalents - 50,737,114 - 50,737,114 23,946,510 Investments - 47,829.179 - 47,829,179 60,776,180 Accrued interest receivable - 386.950 - 386,9W %7,380 Unrestricted: Non-depreciable capital assets 52.828.079 897,680,113 - 950,508,192 816,701,436 Depreciable capital assets, net of accumulated depreciation 59,674.092 819,200,938 - 878,875,030 784,919,903 Deferred charges - 8.269.966 - 8,269.966 4,277,W5 Other noncurrent assets,net 1.610.894 26.467.556 28,078,450 29.914.713 Total noncurrent assets 114,113.065 1,850,571,826 1,964,684,891 1,721,703.127 Iw Total assets 119.735,333 2,314,787.918 (5,595,020) 2.428,928,231 2,039,676.184 Current liabil'd'ies: u Accounts payable 1,566.096 26.011,670 - 27,577,766 18,956,641 Accrued expenses 413.627 8,480.681 - 8.894,308 15,084,W7 Due to other Revenue Area 5,595.020 - (5,595,020) - - Retentions 6,959,19 payable 453,959 7.332,797 - 7,786.756 9 Interest payable - 12,107,963 - 12.107.963 7,023,945 Current Portion of longterm obligations 361.264 27.359.328 27.720.592 28,510,898 4 Total current liabilities 8.389.966 81,292.439 (5,595,020) 84,087,385 76,544,688 _ Norxumant liabilities: Noncurrent portion of V longterm obligations 511,847 1,068,341,713 1.068.853,560 773,394,732 Total liabilities 8,907,813 1,149.834,152 (5,595,020) 1,152,940,945 849,939.420 y Net assets: Invested in capital assets, net of related debt 112,502,171 739,882,392 - 852.384,563 886,462,575 La Restricted for debt service - 3.311,187 - 3.311,187 3,904,212 Unrestricted (1,668,651) 421,960,197 420291,536 299,369.977 Total net assets It 110,833,S20 $1.165,153,766 $ $1,275.987,286 $1,189,736 764 u 38 vy ORANGE COUNTY SANITATION DISTRICT Schedule of Revenues, Expenses,and Changes in Net Assets For the Year Ended June 30,2008 With Comparative Totals for June 30,2007 r Revenue Consolidated Totals Am No-14 Revenue Area 2008 2007 Operating revenues: Service charges $ 5.071.634 $ 179.108.586 $ 184.180.220 $ 167,789.650 Permit and inspection fees 38.604 1.157.716 1,196,320 1.856,411 Total operating revenues 5,110,238 180.266.302 185,376,540 169.656,071 Operaling expenses other than depreciation and amortization: Salaries and benefits 3.414.669 64.213,982 67,628,651 57.802,102 Utilities 517,346 7.574.971 8.092.317 B072,262 Supplies,repairs and maintenance 1.247,208 24,723.591 25,970,799 21,050,912 Contractual services 1,174,173 22,413,662 23,587,835 20.389,454 Directors fees 31,980 112.137 144.117 131.750 Meetings and training 58,845 948,410 1,007,255 1,124.852 Other 287,918 5,170,950 5.458.868 3.583,792 r Total operating expenses other than depreciation and amortization 6,732,139 125,157,703 131,889,&12 112,155,124 Operating income(loss)before depreciation and amortization (1,621,901) 55.108,599 53.406,698 57,50D,947 Depreciation and amortization 4,033,482 43,733.474 47.766,956 53,11Q609 r Operating loss (5,655,383) 11,375,125 5,719.742 4.390,338 Non-operating revenues: Property taxes 1.947.311 63,262.150 55.209.461 60,565,308 ` Investment and interest income(loss) 15,116 20,220.098 2D=,214 22.243,554 Capital facilities capacity charges - 19,816,293 19,816.293 31,277,647 Other 12,773 12,T73 1.067.794 ` Total non-operating revenues 1,975,200 103,298.541 105.273,741 115.154,303 Nonoperaling expenses: ,r Interest 389.027 22,128,147 22.517,174 21,746,852 Feasibility studies 748,222 12,246,250 12.994,472 11,128,105 Capital grants to member agencies - 1,789.894 1,769,894 2.127,154 Other 73,724 2,979.558 3.053,282 2,834,392 r Total norropereting expenses 1,210.973 39.123,849 40.334,822 37,836.503 Income(loss)before r capital contributions (4,891,156) 75,549,817 70.658,661 81,708,138 Capital contributors from other agencies 15,591,861 15,591,861 18,929,179 Change in net assets 10,70D,705 75.549.817 86.250.522 100,637,317 Total net assets beginning 100,132,815 1,009,603,949 1,189,736.764 1.089.099.447 r Total net assets ending $ 110.833.520 $ 1,165.153,766 $ 1.275.987.286 $ 1.189,736,764 r 39 r ORANGE COUNTY SANITATION DISTRICT Schedule of Cash Flows For the Year Ended June 30,2008 With Comparative Totals for June 30,2007 Revenue Consolidated Tolets Area No.14 Revenue Area Eliminations 2008 2007 Cash flows from eperelin9 ao wi les: Receipts from customers and Mors E 10,974,758 S 181,464.878 $ - $ 192,439.636 S 183.133.292 Payments to employees (2,972,501) (55,825.359) - (58,897.860) (59,891,912) Payments to suppliers (3,082,937) (58,7277151 (61790.653) 140,809.3761 Net cash provided by operators 4,939,320 06,811,803 71,751.123 82,632,OD2 Cash flows from nonceplial financing activities: Proceeds from property taxes 1.916,734 62.4156,205 - 64,373,029 59,889,fi08 Grants to member agencies (1,789,894) (1,769,8941 (2t127d54) L Net cash provided by noncapital financing activists 1,916,734 60.686A01 62,603,135 57,802,412 Cash flows from capital and related financing activities: Capital facilities capadly charges 19.492.120 10.492.120 31.651 Additions to property,plain and equipment (17.203,458) (259.412,929) 1210,33D (275.406.057) (251,135.639) Disposal of property,plant,and equlpment - 1,210,330 (1,210,330) - Arblfragepsymeni (307.234) - (3W.934) (53,100) Millions to other assets (45,733) 45,733 - - L Disposal of other assets 45,733 (45.733) Imered paid (389,027) (31,399.946) (31,788,973) (35,250,887) Principal"Memo on cedificales of participation - (98,530,000) (96,530,000) (101.955,000) Proceeds from cor ificates of panidpatlon issuance - 378.898.628 - 378,898828 69.818,081 Certificates of paNcipation Nsuence costs - (675.401) - (675. 01) (319,698) U Proceeds from capital conldbulions 10.750,712 10.750.712 14,103,356 Net man provided(used)by capital and related financing activities (6,887,506) 11,320,601 4,433.095 (283.092.825) Cash flaws from investing activities: Proceeds from the sale of investments - 3793,917.222 - 3,793,917.222 5,282,384,356 Purchases of investments - (3.88D,733,353) - (3.880.733,353) (5,204,660,027) Intereslreceived 31.452 23.328,029 23,359,461 24,647,682 Not cash anwided(uotl)by Investing activists 31.452 (0,488,102) (63.456.850) 102,372,011 Irl Net increase(decrease)In cash and cash equivalents - 75.330.703 - 75.330.703 (40.2251400) Cash and cash equivalents,beginning of year 79,419,225 79,419,225 119.645,625 Cash and cash equivalents,end of year S E 154,748,828 S $ 15g749.928 E 79.419,225 Reconciliation of operating loss to net cash provided by operating activities: L Operating loss $ (5,655.383) S 11,375,125 S - S 5.719,742 S 4,390,338 Adjustments to reconcile opealing loss to net cash provided by operations: Depredation and amortization 4,033.482 43.733.474 47,766.966 53,110,6D9 Bad debt expense goo (5,366) - (4,3711) (67.284) ICI Other nonapemtlrg revenues and expanses 11,200 (301,139) - (299.933) 1.488.143 (Immaseydecresse In operating assets: Due from other Revenue Area - 411.905 (411,905) - Accountsreceivable 1,235.720 785.671 2.022,3811 5,6W,862 J Due from other governmental agencies 5.027.032 5.027,932 6,804,565 Inventories 16,318 (261,55g) (264,741) (284.411 Prepaid and other assets 35.085 432.135 - 467220 10,052Al2 Increasef(decreaea)in operating liabilities: Accounts payable 408,140 8.142.955 - 8.611.125 (21777.150) Accrued expenses (293.132) (5.81fil 1 (eiast,699) 6,639.768 Due to other Revenue Area 1411,905) 411,905 - Relemionspayable 36,797 790,760 - 1 (2,206,374) PensioNOPEB payable 356.904 5.904,573 - 6251.477 W Compensated absences 12,171 533.107 - 545278 311,435 Claims and judgments 04,495 1,185,699 1.25D.194 (354,655) Net cash provided by opeations $ 4.939,320 S 88.811,803 S S lt)51,123 $ 82.832,002 Nar ash Aptly ties, y Unreallzed gain(loss)on the fair value of investments $ - E (1,311.560) S - E (1,311,560) S 16,429 Net deposal of assets with no cash effect (65.300) (1,907.nO) - (1,973,078) (3,243,743) Cariifcetas of parUdpation issuance coat-underwriters fee (3,995,218) - (3,095218) (468,044) Capital contrbutions from other agencies 4,941.149 4.841.149 4.705.823 too Composites of participation original Issue premium 14,051.200 - 14,061,290 1831654 Feasibility studies with no cash effect (748,222) (12,246,250) (12.904,472) (11,128,105) 40 YJ r r r' r r r - OCSD Statistical Section r - r .r u ,u u u u u u u u u u u N n U al u o � u u L' .. ORANGE COUNTY SANITATION DISTRICT STATISTICAL SECTION This part of the comprehensive annual financial report of the Orange County Sanitation District(OCSD) presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information says about OCSD's overall financial health. .. Contents Pages Financial Position and Trends These schedules contain current and trend information to help the reader understand OCSD's financial position and how OCSD's financial performance and well-being have changed over time. 42-46 r Revenue Capacity These schedules contain information to help the reader assess OCSD's most significant revenue source of sewer service fees. 47-49 _ Debt Capacity These schedules present information to help the reader assess the affordability of OCSD's current levels of outstanding debt and OCSD's ability to issue additional debt in the future. All of OCSD's debt is recorded In a proprietary fund; consequently,many 50-53 of the schedules which are applicable to governmental funds are not presented. .+ Operating Information These schedules contain data to help the reader understand how the information in OCSD's financial report relates to the services it provides and the activities it performs. 54-57 Demographic and Economic Factors " These schedules offer demographic Information to help the reader understand the environment within which OCSD's financial activities take place. 58-61 r r r 41 r that ORANGE COUNTY SANITATION DISTRICT Net Assets by Component We (Dollars in Thousands) Last Eight Fiscal Years(Note 1) $1,400,000 $1.200,000 $1.000.000 $800.000 $600,000 $400,000 $200,000 $0 — 2000.01 2001-02 2002-03 2003-N 2004-05 2D05-06 2006-07 2007-08 Clnvested In Capital Mae%,Not of Related Debt eRestdcted for Debt service 3 Capital Acquisition CUrvenri Invested in Restricted for Capital Assets, Debt Service r Net of Related & Capital Fiscal Year Debt Acquisition Unrestricted Total Net Assets 2000-01 $463,935 $36,468 $446,558 $ 946,961 N 2001-02 501,997 36,070 435,906 973.973 2002-03 578,647 35.182 396,518 1,010,347 2003-04 418,267 88,519 517,346 1,024,132 ea 2004-05 558,391 64,514 418,342 1,041,247 2005-06 664,060 3,003 422,036 1,089,099 r 2006-07 888,483 3,904 299,370 1,189,737 2007-08 852,385 3,311 420,291 1,275,987 ear Nate 1: Net Assets are calculated as a result of GASS 34, which was implemented in FY 2001-2, retrospective to 2000-01, Ten years data will eventually be presented as data is accumulated. r Source: Orange County Sanitation District's Financial Management Division. 42 ORANGE COUNTY SANITATION DISTRICT Revenues and Gross Capital Contributions by Source (Dollars in Thousands) Last Ten Fiscal Years $188,768 $165,172 $141,576 $117.980 AM $94.384 M Am $70,788 $47,192 $23.596 $0 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007.08 a�e,alVp Revamre allon-0pe.f R.- OCtnMW.6,w Capacity Operating Revenue Non-Operating Revenue Rights& Permit& Cap.Facilities Total Capital Fiscal service Inspection Total Property Capacity Non. Contrib- Year Charges Fees Operating Taxes Interest Charges Other Operating utions 1998-99 $ 69,453 $ 423 $ 69,876 $ 32.836 $ 17,944 $ 8,751 $ 3,332 $ 62,863 $ 141 1999-00 81,241 396 81,637 35,557 20,836 7,867 2,573 66,833 4,589 2000-01 72,566 688 73,254 38,411 39,868 7,332 1,835 87,446 1,271 2001-02 79,609 396 80.005 41,140 28,073 10,560 2,202 81,975 8,603 2002-03 88,640 524 89,164 44,591 25,889 10,146 706 81,332 3,166 2003-04 101,995 332 102.327 46,943 6,786 8,998 928 63,655 9,245 2004.05 120,917 498 121,415 35,764 15,118 9.814 1,051 61,747 9,536 2005-06 154,291 874 155,166 39,958 10,426 16,632 3,477 69,493 17,358 2006-07 167,790 1,866 169,656 60,565 22,243 31,278 1,068 115,154 18,929 2007-08 184,180 1.196 185.376 65,210 20,235 19,816 13 105,274 15,592 Source: Orange County Sanitation District's Financial Management Division. 43 ORANGE COUNTY SANITATION DISTRICT Expenses by Type (Dollars in Thousands) Last Ten Fiscal Years $180,000 $170,000 11110 $160.000 7. $150,000 $140.000 $130.000 $120.000 $110.000 $100.000 $90.000 s80.000 $70.000 $e0.000 $50.000 $40," $30,000 $20.000 _ $10,000 $0 1998-99 1999-00 MM-01 2001-02 2002-03 2003-04 2004-05 2005.06 2006-07 2007-09 sar...enq e.4�..s orvu,ooe.ao,v r.nema Operating Non-Operating We Fiscal Personnel Maint t$ Depr& Total Interest Total Non- Year Services Utilities Other Amort Operating Expense Other(1) Operating 1998-99 $ 28.809 $ 3,320 $ 22,546 $ 42,470 $ 97.145 $ 18.359 $ 92 $ 18.451 1999-00 33,581 3,621 22.213 36.333 95,748 18,151 23,123 41.274 2000-01 33,734 5,524 23.062 42.797 105,117 17,923 1.479 19.402 2001-02 35,629 4,967 27,967 45,703 114,266 14.406 8.896 23.302 _ 2002-03 38,733 4.622 36,314 41.966 121,635 12,731 2.922 15.653 2003-04 48,711 5.408 41,284 44.412 139,815 15,524 6.102 21.626 2004-05 53,048 6.473 42,325 48,095 149,941 17.470 8.172 25,642 2005-06 53,246 7.563 44,823 49,887 155,519 20,078 18,567 38.645 ee 2006-07 57,802 8.072 46,281 53,111 165,266 21.747 16.089 37,a36 2007-08 67,629 8.092 56,169 47,767 179,657 22.517 17.818 40,335 Notes (1) - For FY 1999-00. Other Non-Operating Expense includes $22,994,647 for the loss on investment in the Orange County Investment Pool. Source: Orange County Sanitation District's Financial Management Division. 44 ORANGE COUNTY SANITATION DISTRICT Change in Net Assets (Dollars in Thousands) Last Eight Fiscal Years (Note 1) - $1,400.000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $o totar,IMF - 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Ending Net Assets by Fiscal Year - Fiscal Total Total Change in Beginning Ending Year Revenues Expenses Net Assets Not Assets Net Assets 2000-01 $161,971 $ 133,543 $ 28,428 $ 918,633 $ 946,961 2001-02 164,580 137,568 27,012 946,961 973,973 2002-03 173,662 137,288 36,374 973,973 1,010,347 - 2003-04 175,226 161,441 13,785 1,010,347 1,024,132 20 04-0 5 192,698 175,583 17,115 1,024,132 1,041,247 2005-06 242,016 194,164 47.852 1,041,247 1,089,099 - 2008-07 303,740 203,102 100,638 1,089,099 1,189,737 2007-08 306,242 219,992 86,250 1,189,737 1,275,987 Note 1: Net Assets are calculated as a result of GASB 34,which was implemented in FY 2001-02, retrospective to 2000-01. Ten years information will eventually be presented as data is accumulated. Source: Orange County Sanitation District's Financial Management Division. 45 ORANGE COUNTY SANITIATION DISTRICT Cash and Investment Reserve Balances (Dollars in Millions) Last Ten Fiscal Years u Capital Debt j Cash Flow Self- Improvement Service V Fiscal Year Contingency Insurance Program Requirements Total 1998-99 $ 56 $ 54 $ 233 $ 33 $ 376 1999-00 60 57 284 32 433 lu 2000-01 77 56 311 33 477 2001-02 70 57 303 35 465 2002-03 100 57 237 33 427 L 2003-04 71 57 390 88 606 2004-05 71 57 242 65 472 2005-06 92 57 257 84 490 2006-07 139 57 91 85 372 I•� 2007-08 191 57 186 99 533 L Notes: The Cash Flow Contingency Reserve is to fund operations,maintenance,and certificates of participation debt service expenses for the first half of the fiscal year,prior to the receipt of the first Installment of the property tax allocation and sewer service user fees. The Self-Insurance Reserve is to provide requirements for property damage including fire,flood and earthquake,general Li liability and workers'compensation. The Capital Improvement Program Reserve is to fund annual increments of the capital improvement program with a target level at one half of the average annual capital Improvement program through the year 2020. The Debt Service Required Reserves are monies held and controlled by a trustee pursuant to the provisions of certificates of participation issues,and the monies are not available for the general needs of the District. _ I ; iy La Source:Orange County Sanitation District's Financial Management Division. L L 46 V ORANGE COUNTY SANITATION DISTRICT Sewer Service Fees Single Family Residence Rate Last Nine Fiscal Years and Next Fiscal Year r Sewer service fees are comprised of three categories: residential customers, commercial customers, and industrial customers. Although the majority of sewer service fee revenues are from residential and commercial customers (see the schedule of Number of Accounts and Revenues by Customer Class), the fee paid by each residential and commercial customer is less than the Individual fees paid by industrial customers. The rates for commercial and industrial customers are derived from the base sewer service fee charged for a single-family residence and are based on the type of business and the strength and volume of waste that is discharged into the sewer system. Due to the complexity of the rate structure for commercial and industrial customers and since the rates are derivatives of the single-family residence rate, only the single-family residence rate is presented within the statistical section. r Sewer Service Fiscal Year Charge 1999-00 $ 81.02 �+ 2D00-01 78.00 2001-02 80.00 2002-03 87.50 2003-04 100.00 2004-05 115.00 2005-06 151.00 2006-07 165.80 2007-08 182.00 2008-09 201.00 r r Annual Sewer Service Fees Single Family Residence r 250 r 4 200 a 150 100 r Sit 0 r 199M 2000-01 2001-02 2002-03 2003-04 2004-05 200508 2006-07 2007-08 2MB-09 Fiscal Year Source: Orange County Sanitation District's Financial Management Division. r 47 r r ORANGE COUNTY SANITATION DISTRICT Number of Accounts and Revenues by Customer Class Y'I (Dollars in Millions) Last Ten Fiscal Years Residential/Commercial Industrial Number of Total Percentage Total Percentage Equivalent Sewer Svc. of Sewer Number of Sewer Svc. of Sewer Single-Family Charge Service Charge Customer Charge Service Charge Fiscal Year Dwellings Revenue Revenues Accounts Revenue Revenues 1998-99 882,103 $61.6 89% 678 $7.8 11% 1999-00 919,072 72.0 89% 649 9.1 11% .� 2000-01 883,603 64.5 91% 596 6.6 9% 2001-02 898,031 70.3 90% 573 7.5 10% 2002-03 897,757 77.0 92% 603 6.3 8% 2003-04 860,156 86.0 92% 530 7.5 8% 2004-05 860,634 99.0 90% 568 10.5 10% 2005-06 872,859 132.0 92% 557 12.2 8% 2006-07 867,035 143.8 91% 531 13.4 9% W 2007-08 875,739 159.4 93% 517 12.1 7% r r $200,000.000 $180,000,000 U $160,000,000 - , ,I $140.000.000 - - - - - - U $120,000,000 ,9 $100.000.000 $80,000.000 - — - $60,000,000 u $40,000,000 - $20,000.000 y $0 1998-99 1999-00 2000.01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 r eReeYenlYVCommeNal Ueen elnEvebYIV_ � r r Source: Orange County Sanitation District's Financial Management Division. r 48 ORANGE COUNTY SANITATION DISTRICT Principal Sewer Service Customers For the Current Fiscal Year and Nine Years Ago Fiscal Year Ended 6/30108 Fiscal Year Ended 6/30199 Industrial Industrial Permittee %to Total Permhtee %to Total Service Service Charge Service Service Charge User Charges Rank Revenue Charges Rank Revenue Kimberly-Clark Worldwide, Inc. $1.032,500 1 0.569/6 $518.458 1 0.75% Alstyle Apparel-A&G Inc. 1.023,517 2 0.56% MCP Foods, Inc. 798.449 3 0.43% 291,377 3 0.42% Stremicks Heritage Foods, LLC 689,749 4 0.37% House Foods America Corp. 525.676 5 0.29% Ameripec Inc. 414.671 6 0.23% Pepsi-Cola Bottling Group 381,371 7 0.21% Seven-Up Bottling Company 304,864 8 0.17% Van Law Food Products Inc. 272,011 9 0.15% Nor-Cal Beverage Co. Inc. 268,225 10 0.15% Disneyland Resort 193.851 5 0.28% Adohr Farms 358,870 2 0.52% Favorite Foods 208,902 4 0.30% AERA Energy 144.871 6 0.21% Rockwell Semiconductor 134,148 7 0.19% Sunder Brands 110,108 8 0.16% Knogs Berry Farm Foods 109.216 9 0.16% r Dean Foods 100,716 10 0.15% $5,711,033 3.12% $2,170,517 3.14% Although the majority of sewer service fee revenues are from residential and commercial customers(see the schedule of Number of Accounts and Revenues by Customer Class), the fee paid by each residential and commercial customer is less than the individual fees paid by industrial customers. Consequently, this schedule shows the largest sewer r service fee customers. r Source: Orange County Sanitation District's Financial Management Division. r 49 r ORANGE COUNTY SANITATION DISTRICT Ratio of Annual Debt Service to Total Expenses r (Dollars in Thousands) Last Ten Fiscal Years 60.0% r 50.0% r 40.0% r 30.0% 20.0% ^ 10.0% ( r 0.0% 19088B 199900 0000-01 2001-02 2002-03 200304 2004-05 2005-06 2006-07 200700 r Ratio of Debt Total Service to Total Fiscal Principal Total Debt Operating Operating r Year (1) Interest Service(3) Expenses(2) Expenses 1998-99 $ 12,120 $ 18,475 $ 30,595 $ 54,675 55.96% 1999-00 12,880 17,169 30,049 59,415 50.57 r 2000-01 13,790 16,690 30,480 62,320 48.91 2001-02 10,370 13,051 23,421 68,563 34.16 r 2002-03 11,025 11,433 22,458 79,669 28.19 2003-04 11,610 22,508 34,118 95,403 35.76 2004-05 12,040 25,871 37,911 101,846 37.22 s. 2005-06 12,755 19,636 32,391 105,632 30.66 2006-07 13,465 21.438 34,903 112,155 31.12 2007-08 11,025 21.724 32,749 131,890 24.83 r Notes (1)-Excludes principal reductions due to advanced refunding. s„ (2)-Excludes depreciation and amortization expense. (3)-All debt consists of certificates of participation. r r Source: Orange County Sanitation District's Financial Management Division. r 50 r ORANGE COUNTY SANITATION DISTRICT Debt Coverage Ratios (Dollars in Millions) Last Ten Fiscal Years The Orange County Sanitation District has no legal debt limits as imposed by State legislation. The District does have contractual covenants within the existing Certificates of Participation indenture agreements which require minimum coverage ratios of 1.25. The coverage ratio is calculated as the ratio of net annual revenues available for debt service payments to total annual debt service requirements. 4.00 3.50 3.00 2.50 2.00 1.so 1.00 0.50 ddigAwl ' 199899 1999-00 200041 2001-02 20024)3 2003-N 2004.05 2005-06 20N-07 2007.08 Fiscal Year Ending June 30, 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Operating 8 Nonopeating Revenues: Service Charges.Net of Refunds $ 61.6 $ 72.0 S 64.5 S 70.3 S 77.0 $ 86.0 $ 99.0 $ 132.0 S 143.8 $ 159.4 Industrial Sewer Service Charges 7.8 9.1 6.6 7.5 6.3 7.5 10.5 12.2 13.4 12.1 Revenue Area No.14 Fees 0.7 2.2 2.0 2.2 3.2 5.8 6.9 5.3 5.2 7.1 Ad Valorem Taxes 32.8 35.6 38.4 41.1 44.6 48.9 35.8 40.0 60.6 65.2 Interest Earnings 17.9 20.5 39.4 27.8 25.9 6.8 15.1 10.4 22.2 20.2 Capital Facilities Capacity Charges 9.5 7.9 7.3 10.0 10.1 9.0 9.8 15.6 31.3 19.8 Other Revenues 2.4 1.2 2.5 2.5 3.4 4.0 6.1 9.2 8.3 6.9 Total Revenues 132.7 148.5 160.7 162.0 170.5 166.0 183.2 224.7 284.8 290.7 Operating Expenses(1) 54.7 59.4 52.3 68.6 79.7 95.4 101.8 105.6 112.2 131.9 Net Revenues $ 78.0 $ 89.1 $ 98.4 $ 93.4 $ 90.8 $ 70.6 $ $1.4 S 119.1 $ 172.6 $ 158.8 Debt Service Requirements Principal Payments 12.1 12.9 13.8 10.4 11.0 11.6 12.0 12.8 13.5 11.0 Interest Payments 18.5 IT2 16.7 13.0 11.7 16.8 25.9 29.1 35.1 31.8 Total Debt Service Requirements $ 30.6 $ 30.1 $ 30.5 $ 23.4 $ 22.7 $ 28.4 $ 37.9 $ 41.9 $ 48.6 S 42.8 Coverage Ratios(2) 2.24 2.70 2.99 3.54 3.56 2.17 1.89 2.47 2.91 3.25 Ending Reserves(3) $ 343.0 _I 401.0 _L 444.0 $ 430.0 $ 3940 $ 518.0 S40Z0 S 406.0 S 287.0 $ 434.0 Notes (i)-Opeating expenses exclude depreciation and amortization expenses. (2)-Calwlated In accordance with the Debt Service Master Agreements. (3)-Ending reserve balances exclude monies In debt service funds. Source:Orange County Sanitation DistncVs Financial Management Division. 51 ORANGE COUNTY SANITATION DISTRICT Computation of Direct and Overlapping Debt - June 30,2008 2W2-08 Assessd Velustion(lad at Improvements Only). SM3,168959,859(a0er tlsvluming S35.SM345.M nodevati saner lncmmenul Valuation) oMG TAX ANDA DUST eared on rodevelopmmt adjusted ell pre,eny aasmud%alcatioo off261,1603A1.096)'. TOW Debt msuin's Sham of (601% %Amtloble(IS ) Orange Count,Teeter Plan Obligations S12 .M.OM 71.891% S "San Mewpolim Wamr DisWn ofSwnimm Cilifada 32T,215.000 16.991 4809,10 Coast Community College Greater 343351,110 99.495 3415M85 Noll Orange County Joint Community College Dicaiel 233349.001 %922 M166,519 L Rancher SanfiaBO Communit,College Do. 32LA9339 99.363 316311,811 Brea-Olirda and Iagum Beach Unified 8choul Dimiets 591649.029 99.936A 12.783 29,155,237 Ncwpon Mmv Unified School Disarm 168563.dH0 IN. 16856Am — Plarentin-Yorba Linda Unified Sehool D,Nin 169,Ob9,Oed M.NG 166,89Z,991 Saddleback Valley Unified School Mang 192A M00 11.915 16,9'26,692 V Santa Arts Unified School District IM,037%5 IN. 126,057546 Tornio United Sehm)Dislriet Sehel Fieilid.lnmmvemem Dseml No.2002-I 43,613,9M 99.010 43251.4% Anaheim unim High Sebool Honorer 123A831955 ISO. 123,M."5 Fullerton Joint Union High School count 6USZ910 902C0 55,56S346 Nomingmn Beach Union High School D'umcr 232371,"l M.919 2M.369.105 School Duaicts 216,130,021 91314100. 236342,951 Cibof Anahew 53M,000 M.083 S,M133 Irvine Ranch Water Dimity Impmvemml Dinah. 271XI,66S V. 221,137312 Rassn.Community Services Dimity Special Tao Obfigauvm 6M ON IN. 6M.000 I 1 Bvoita Can,.Commmiry Facifiuea D rr No.98-1 42b15,OM IN. 62,615J01M Irvin United Schol Destrat Community Facilider Dimicts 266.43O.OM 99.993.I00. 26029" Tustin Unified School Maxim Community FeeiliUn Dimicn 232.730,345 IN. 23;330,N5 Orange County Community Facilities Mcbrict No.81A 59,982,929 M.905 59,126.019 Other Community Fxilitiea D'uaicta 402.455,000 Vmims 602,358,006 1 OrmF Cwnry Aasesment Diurich, I18.048.296 IN. IIBMRgsh 1 City of Irvine L915 Act Bola 90$.675,0001 100. 905.635,000 City ofToatin 1915 Act Bonds 52,442,004) IN. S2,492,000 OMa 1915 At,Mda 20.3M,000 Im, MSmm TUTALOVERLAPPMGTA%ANDAMMN!Ehfr B S1399,/2 M DIRC AND OVIMAPPING GBRELM.FUND DFNr: Orange Counry General Fund Oblignioe, $532326,000 31.841% S 3M.428322 Orange County Pemim Obligation 72,729.867 71.141 52".864 Orange count,Board of Meatki Cerificn,of Participation 19.590,000 71.811 361T3,65d j Smut Orange Cwnry Coalmmiry College District Cmti(cales of Participation 34.945.0o0 35.613 12,66ar" L B—Olinda Unified Schml Dismn Cerufieatn of Paricryvficn 29,100,000 00.936 M,Mms Orange Unified School Dimityt Certificate of Participation 69.326.609 96.966 49326.101 Placentia-Yorba Linda,Unfired School Dimia GruBcmm ofPnnicipaYon 86,810315 98.639 85,628,827 Sams Am Unified Seh od Doom,Certificates of Participation 6g855,968 IN. 6935536/ Other Unified School 0isuict Cenificaren of Panicipalwv 3931230E V. 38,911,126 L Union High School Dimity Certificate of Participation 117f251,090 Vmims 114YA459 School Dishier Cenifieatnuf Paticipation 59,990.000 Various 59b50.TM City nfAvaheim General Fuod Obligdom 629,632A65 99.013 633,10D335 CiryofCmu Meae Gevwal Fud Obligations 45,970,000 1N, 45.5"OUB 0 City ofFullmon Grncrel Fuod Obligdom 2830;7164 IN. 21=.M City ofHunmrgrm Beach General Fund and JuEgmem Obligations 36300000 "..910 26,284,30 CiboflrviveGanenl Fud Obligation 2A,139M00 IN.. 291190.000 City oaS w Ann Greed Fond Obliga6ms 1163E m IN.. 116=1M ., Other City General Fund ObLigations I72330,000 vd 143A".2/3 Orange Cmnry Smimrioo District Cenifiura oncarheipndm 0 IN. 0 (2) j brine Ranch Water Dimity Cntificmea of Paracimtion 38,100.000 Out N,TR,998 YI Municipal Wma Hunter of0range County Water Facilities coronation MMAM 66611 12,852,592 Ynme Ueda Cwnry Water Dimity Cortifieatea oMirticiltior, 9,g6 ON 93.1773 9,640.419 Orange Coovry Fire AuOority IGA51M 50310 5214.63E TOTAL GROSS OVI APPING GENERAL FUND DEBT S2.0T,117,082 less: Santa Am Unified School Dinrict celLmlleb.g Qualified Zone Academy Bolls 2,0623110 ��L111 City ofAmbeim se ricappoNng obligarwm 6MA1306 Other Ciryeel(-supporting ob0ptium 3011626A MWDOC Wow Facititin Cmquati0a(1005k srlfa Mcofing) 1285239E 1POTALNIMOVE111A 11INGGENERALFUNDDIM $1,581.738321 GROSSCOMBMFMTOTALDEBT S6,626,9g0.052 (3) Y1 NUMMBMMTOTALD 15,981,101,185 (2)( Pemenug<o(ovmlappiry agmcysredev<lopmevt etllusOed all progeny assrsM valuation lSi60.IM303,O%)4auted wiMw bwddes of me diraict I m no lmwmmwlde mmuetdebtmu rdebt icimOon. Pmnously clwifid mmf teao(pamdPatim Ware Men rmhmi6dmtlimin revenue mppurvd issue all L/ m longs included m Eimer debt in Ne debt stakmcm (3) Esslutler tax and reuevue anucipatioo notes,enremrise revenue,mnngege revenue aritl Oar allocaYoo OontlsaM wo-hontlM mpitel lrue obligation. Ranges Grican Coadbuicial Dwi Net Comb nor Total Deb Ind And lmmovement AsessW Valuation ISM 2.60% 2.33A lad AIL Property Aasusd VNuaion N/A 2.53% 2.26% A 1O Scoria:Califomis Munriyl Statistics bait 52 hen, ORANGE COUNTY SANITATION DISTRICT Rados of Outstanding Debt Last Ten Fiscal Years r (5) Debt as a r Total (3) Percentage Outstanding Median of Median (4) Debt Fiscal COP Family Family Population per r Year Debt Income 1 Income Estimate(2) Capita 1998-99 $ 374,135,000 $ 83,478 0.017% 2,386,375 $ 156.78 1999-00 361,255,000 69,310 0.019% 2,213,925 163.17 r 2000-01 386,370,000 70,577 0.018% 2.400,425 100.98 2001-02 376,000,000 72,998 0.019% 2,336,400 160.93 2002-03 364,975,000 73,572 0.020% 2,408,050 151.56 r 2003-04 633,365,000 70,900 0.011% 2,441,350 259.43 2004-05 621.325,000 73,545 0.012% 2,467,850 251.77 r 200646 808,570,000 76.443 0.009% 2,481,540 325.83 2006-07 801,785,0D0 78,950 0.010% 2,505,180 320.05 2007-08 1,082,420,000 83,015 (0) 0.008% 2,522,820 429.05 r Notes 3 Data Sources r (1)-Data is for the entire County of Orange. (2)-Data is for the estimated population served by the Orange County Sanitation District. (3)-Data Source: Center for Economic Research, Chapman University. (4)-Data Source: Demographic Research Unit, California Department of Finance. (5)-Data Source:Orange County Sanitation District. (6)-Forecasted number. r r r r r r r 53 .r L ORANGE COUNTY SANITATION DISTRICT Comparison of the Volume of Wastewater Treated With Revenues and Expenses Last Ten Fiscal Years V Millions of Gallons of Collection, Waste. Treatment I water 8 Disposal Total Total Total Total L Treated Cost per Operating Non-Operating Operating Non-Operating Fiscal Per Million Costs Costs Revenues Revenues Year Day Gallons (In Thousands) (In Thousands) (In Thousands) (In Thousands) L 1998-99 241 580.06 $ 97,145 $ 18,451 $ 69,876 $ 62.863 1999-00 241 620.42 95.748 41.274 81,637 66,833 j . 2000-01 246 647.46 105,117 19.402 73,254 87,446 L 2001-02 234 794.05 114,266 23.302 80,005 81,975 2002-03 239 880.25 121,635 15,653 89,164 81,332 2003-04 238 1.068.43 139.815 21,626 102,327 63,855 2004-05 243 1,095.79 149,941 25,642 121,415 61,747 2005-06 235 1,216.77 155.519 38.645 155,165 69,493 I 2006-07 229 1,268.38 165,266 37,83 L 6 169,656 115,154 2007-08 221 1,541.18 179,657 40.335 185,376 105,274 IL W An Interim Strategic Plan Update to the year 2020 was completed in September 2002 that projects wastewater II treatment flows to increase to 284 millions of gallons per day(mgd)in 2010,to 302 mgd in 2015, and to 321 mgd in the 4 year 2020. In order to manage the anticipated increase in wastewater flows,the District has identified a$2.4 billion capital expansion plan through 2020. Total expenses in FY 2007-08 increased$104.4 million, or 90.3 percent since FY 1998-99, primarily as a result of(1) V OCSD's decision beginning in FY 2002-03 to maximize existing secondary treatment facilities as OCSD moves from a 50150 mix of primary and secondary effluent treatment to meeting secondary treatment standards by December 31, 2012, and(2)OCSD's decision to eliminate most bacteria from the ocean outfall discharge by disinfecting the effluent beginning in FY 2002-03 at an additional cost in chemicals of$7 million annually. Maintenance, chemicals,utilities, and other operating costs represent 37 percent of the increase, primarily due to the increase in the levels of treatment referred to above. Depreciation expense represents another 5 percent of the L, Increase as a result of the previous expansion in capital facilities and the financing associated with the expansion. In FY 2007-08, personnel expenses lose 17.0 percent over the prior year. This increase is mainly due to recognition of net pension and OPEB obligations as well as increases in health insurance and retirement premiums:the full-time equivalent positions authorized decreased by 10 in FY 2007-08. As depicted from the chart above, actual wastewater treatment flows have generally remained between 234 mgd and 244 mgd in the past,other than in FY 2000-01 which reached 246 mgd. Due to unusually dry weather conditions during the last two years, FY 2006-07 and FY 2007-08 had flows of only 229 mgd and 221 mgd respectively. L, Source: Orange County Sanitation District. L L 54 L ORANGE COUNTY SANITATION DISTRICT Authorized Full-time Equivalents by Function Last Ten Fiscal Years 350 300 260 200 160 100 50 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 uGeneral Mana9emenl AdminlsV ive Services GTeEll .1 Services GEngineeeng .Operallons -W.nlenaze _ Fiscal Year Ending June 30, 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 General Management 15 13 12 17 17 17 17 2 25 30 Administrative Services 81 87 88 97 107 116 123 145 102 98 Technical Services 93 88 87 95 94 100 112 114 119 109 Engineering 67 75 73 104 79 80 95 99 98 104 Operations and Maintenance 286 255 250 261 272 285 282 284 300 293 Total FTE's 542 518 510 574 569 598 629 644 644 634 Source:Orange County Sanitation District's Financial Management Division. 55 ORANGE COUNTY SANITATION DISTRICT Biosolids Produced r Last Ten Fiscal Years 55,000 60,000 r 45,000 40,000 r 35,000 30,000 25.000 20,000 a1996-99 •,M9 o2w0 i e2001L2 e2002U3 .2M3 o2WC 5 o2005L6 e29 7 2007L Fiscal Year Tonnaae 1998-99 41,127 _ 1999-00 42,831 2000-01 42,254 2001-02 42,505 2002-03 47,631 2003-04 50,519 2004-05 51,700 2005-06 49,554 2006-07 49,184 2007-08 50,884 .. Source:Orange County Sanitation District's Environmental Compliance&Regulatory Affairs Division. 56 ORANGE COUNTY SANITATION DISTRICT r Capital Asset Statistics Last Ten Fiscal Years r Mlles of Number Primary Secondary Trunk& of Treatment Treatment Fiscal Subtrunk Pump Capacity Capacity Year Sewers Stations (1) (1) 1998-99 650 22 276 200 1999-00 650 20 276 200 r 2000-01 650 20 266 200 2001-02 650 20 276 200 2002-03 650 20 276 200 r 2003-04 650 20 276 170 2004-05 620 18 306 170 2005-06 584 16 366 200 r 2006-07 581 16 372 200 2007.08 568 17 372 200 Notes (1)-Capacity is presented as million gallons treated per day. r r r r r r Source: Orange County Sanitation District r 57 r L ORANGE COUNTY SANITATION DISTRICT L Demographic Statistics Covering The Entire County of Orange(1) Last Ten Fiscal Years u Total (4) (6) L (A Personal Per Capita Median Public (6) Fiscal Population Income Personal Family School unemploymerd Year Estimates (in thousands) Income Income Enrollment Rate 1998.99 2.776.000 $ 96,288.099 (3) $ 34,686 $ 63,478 471.000 2.6% L 1999-00 2,828,000 106,003,904 (3) 37,484 69,310 483,000 2.9% 2000-01 2,880,000 109,010,278 (3) 37,851 70,577 494.000 3.0% 2001-02 2.940,000 111.750.294 (3) 38.010 72,998 503,000 4.1% 2002-03 2,979,000 117,722,500 (3) 39.517 73.572 512,000 4.0% 2003-04 3.017,000 125,798,400 (4) 41,697 70,900 517,000 3.6% u 2004-05 3,047.000 136,687,900 (4) 44.499 73,545 514,000 3.9% 2005-06 3.072.000 143,949,000 (4) 46.858 76.443 510,114 3.7% - 2006-07 3.098.000 150,271,700 (4) 48,506 78,950 503,955 3.9% 'V 2007-08 3,090,000 154,665,000 (4)47) 50,053 83,015 (7) 503.492 5.3% u Notes and Data Sources (1) - The Orange County Sanitation District services 471 square miles or 59% of the total 799 square miles that V make up the boundaries of the County of Orange. (2)-Data Source: Demographic Research Unit, California Department of Finance. L (3)-Data Source:Bureau of Economic Analysis, U.S. Department of Commerce (4)-Data Source: Anderson Center for Economic Research, Chapman University. L (5)-Data Source: California Department of Education, Educational Demographics Unit. u (6)- Data Source: State of California, Employment Development Department as of June 30 of each fiscal year, (7)- Forecasted number. iw V b+ L L 58 i L+ ORANGE COUNTY SANITATION DISTRICT r Estimated Populations Served by the Orange County Sanitation District June 30, 2008 r Population r as of January 1,2008 Anaheim 346,820 Brea 40,080 Buena Park 82,770 Costa Mesa 113.960 Cypress 49,540 Fountain Valley 57,930 Fullerton 137,440 Garden Grove 173,070 r Huntington Beach 201,990 Wine 209.810 La Habra 62.640 La Palma 16.180 Los Alamitos 12.190 Newport Beach 84,550 r Orange 140.850 Placentia 51,730 Santa Ana 353,180 r Seal Beach 25,990 Stanton 39,280 Tustin 74,220 Villa Park 6,260 Westminister 93,030 Yorba Linda 68,310 Subtotal City it) 2,441,820 Estimated Population Served in Unincorporated Areas(2) 81,000 2,522,820 r Data Sources, r (1)Demographic Research Unit, California Department of Finance. (2)Orange County Sanitation District Financial Management Division. r 59 r L ORANGE COUNTY SANITATION DISTRICT Principal Orange County Employers(1) L For the Current Fiscal Year and Nine Years Ago L Fiscal Year Ended 6130108 Fiscal Year Ended 6130/99 V Percentage of Percentage of Number of Total County Number of Total County L Employers Employees(2) Rank Employment(3) Employees(2) Rank Employment(4) Walt Disney Co. 20,000 1 1.29% 13,300 2 0.94% County of Orange 18.748 2 120% 15,408 1 1.09% L University of California,Irvine 17,579 3 1.13% 12,861 3 0.91% St.Joseph Health System 10.047 4 0.65% 8,150 5 0.58% Boeing Co. 9.961 5 0.64% 12,000 4 0.85%YUM! Brands Inc. 7,200 6 0.46% L AT 8 T, Inc. 6.000 7 0.39% California State University, Fullerton 5,634 8 0.36% Home Depot 5.450 9 0.35% Bank of America Corp. 5,000 10 0.32% 4,843 9 0.34% American Stores Co. 7,543 6 0.53% Tenet Healthcare Corp. 7.221 7 0.51% L Ralphs Grocery Co. 5,000 8 0.35% Tricon Global Restaurants, Inc. 4,820 10 0.34% — Total 105,619 6.79% 91,146 6.44% L L L Notes 8 Data Sources (1)- Data is for the entire County of Orange. (2)-Data Sources: Orange County Business Journal Book of Lists,County of Orange W (3)-Data Source:State of California,Employment Development Department. -Percentage is calculated by dividing employees by total employment of 1,555,900 as of June 2008. (4)-Data Source:State of California,Employment Development Department. L -Percentage is calculated by dividing employees by total employment of 1.417,301)as of June 1999. V L 6w L. 60 V ORANGE COUNTY SANITATION DISTRICT Operating Indicators June 30, 2008 r District Organization: The Orange County Sanitation District is one consolidated district made up of two revenue areas which service unincorporated county areas and twenty-three cities and related special districts, as follows: ,. Consolidated Revenue Area County of Orange(unincorporated areas) Cities: Anaheim Huntington Beach Santa Ana r Brea Irvine Seal Beach Buena Park La Habra Stanton Costa Mesa Le Palma Tustin r Cypress Los Alamitos Villa Park Fountain Valley Newport Beach Westminster Fullerton Orange Yorba Linda Garden Grove Placentia r Special Districts: Midway City Sanitary District _ Costa Mesa Sanitary District Revenue Area No. 14 County of Orange(unincorporated areas) Cities: Irvine Orange Tustin .,, Special District: Irvine Ranch Water District Governing Body: 25-member Board of Directors r Authorized Full-Time Equivalent Employees: 634 Operational Date: July 1, 1954 r Authority: California Health &Safety Code Section 4700 at. said, Services: Wastewater collection, treatment, and disposal Service Area: 471 square miles Population Served: 2.5 million r Total Miles of Sewers(including force mains): 568 miles Number of Pumping Stations: 17 r Wastewater System Treatment Capacities(Million Gallons per Day) Existing Primary Existing Secondary Planned Secondary Actual Flows Treatment Capacity Treatment Capacity Capacity by 2020 r Plant 1 92 204 110 170 Plant 2 129 168 90 Total ?ffi 324 r Source: Orange County Sanitation District's Financial Management Division. r 61 r u u u u (THIS PAGE INTENTIONALLY LEFT BLANK) W L� u u u u u 62 U i OCSD Other Data & Trends Section - V V V V V V V U u v g U a 'r ORANGE COUNTY SANITATION DISTRICT OTHER DATA &TRENDS Information within this section consists of other data and trends including additional annual disclosures as required by the Sanitation District's Certificates of Participation debt covenants beyond what is allowed to be reported in the Statistical Section. r r r r 63 r L ORANGE COUNTY SANITIATION DISTRICT L Cash and Investment Portfolio as of June 30,2008 Coat Market Value Net Un esl¢ed Gairdi L Slays Per BM Base %of Total ease Investment Portfolio: Cash and Cash Egurvalenls(US.Doltarl: pending Trades S f (4,111,613.]8) $ (4,111,813.75) -1.00% $ last- Cash - 1,338.00 1,338.00 0.00% - CeNOcatesofDeposll-Domestic 3.500.000.00 3,500,000.00 3,500,000.00 0.85% - CommercialPaper-Discount 17.400.000.00 17242,56521 17242.56521 4.18% - L Fed Hon Loan ark-Less Than 1 Year 18200.0011.00 18,009,449.67 18.099.449.67 4.35% - Federal Home Loan Mortgage-Less Than 1 Yr 40,800,000.00 40,818,774.11 40,618,774.11 9.54% - FNMA Issues-Less Than 1 Year 15.771.000.00 15,634,628.35 15.634.628.35 3.7911, - 1 ; Mutual Funds 470.403.61 470.40351 470.403.61 0.11% - RepurchaseAgreamens 15.700.000.O0 15,700,000.00 157W,000.00 3.80% - W Treasury Bills-Less Than 1 Year 7,300,000.00 7.262.824.64 7262.824.84 1.76% Sublotal 119.141.403.61 114,418,170.03 114,418,170.03 27.71% Fixed Income Securities(US.Dollar): L Asset Backed Sacunties-Home Equal, 806.974.48 796.33427 72111 0.18% (69.52126) Asset Backed Securities-small Sure Adman 1.812A21.50 1,812,621.60 1,873,36429 0.45% Si Banking 8 Flm ince 6725D,000.00 67,078=.00 56.4 F.W.66 11 (631.100.32) I Collateralved Mortgage Obligabon 681,3111.37 677.901.96 683,656.96 0.17% 5,755.00 YY FHLMC Mulsdass 1296.629.44 1,282,663.50 120D,635.98 0.31% 17,962.48 FHLMC Pools 24.344.943.64 24,486,055.85 24,305,127.37 5.Be% (180.928.48) FNMA Pools 17.818.120.01 iajili 1.28 17,734,585.86 429%Ferric (350.t3l 42) L FNMA Ferric 389.810.46 375.611.80 395.480.93 0.09% 9,889.13 GNMA Multi Family Pools 860.845.48 859.377.70 866,506.46 021% ].1281 GNMA Single Family Pods 3,156.66 3.313.01 3280.18 01 (32.83) PVT Placements-Mae Than l Year 752.000.00 a26,199.84 826.199.84 020% U.S.Agencies 116.471.84829 120.790.497.22 120.60.594.89 2921% (143.912M) U.S.Govemments 59.710.000.00 60.996.an.50 110,758,825.13 14.71% (230201.3]) Ulddy-Electric 900.000.00 900.000.00 897.606.00 02M (2.394.00) Ukllty-Telephone 701),OO1 70f1,000.00 699. 5 .DD 0.17% ("1 in) � Subtotal 293.800251.83 299,6931 298.155.754.58 92.20% (1,537,518.15) V Convertible Securities(US.Dollar): ComertiMa Bonds 400,000.00 4DD,200.00 393,000.011, elm (2200.00) sublotel 400,000.00 400.200.00 398.DDO.00 0.10% (2200.00) Total Investment For6dip S 413.341.655.24 414,511,642.76 412,971,924.61 100.00% 9 (1.53971a15) Contend Cash Accounts 3209.946.01) 3209,946.00 Monies Held With Fiscal Agents 98,566,293.00 98,566,293.00 Monies with the Local Agei Investment Fund 17,993,467.50 17,992,591.75 Total Cash and investments S 534281,38826 S SM.740,755.37 L V u V✓ V Source: Mellon Trust and the Orange County Sanitation District's Financial Management Division. v 64 ICI ORANGE COUNTY SANITATION DISTRICT r Property Tax Rates-Direct and Overlapping Governments Last Ten Fiscal Years r Tax Rate OCSD 1958 OCSD's r General Average Fiscal Basic Obligation Total Share of Year Levy Bonds Tax Rate Basic Levy 1998-99 1.00% 0.02% 1.02% 2.80% 1999-00 1.00% 0.00% 1.00% 2.80% 200D-01 1.00% 0.0D% 1.00% 2.80% 2001-02 1.00% 0.00% 1.00% 2.80% 2002-03 1.00% 0.00% 1.00% 2.80% 2003-04 1.00% 0.00% 1.00% 2.80% 200405 1,00% 0.00% 1.00% 1.60% 2005-06 1.00% 0.00% 1.00% 1.60% 20D6-07 1.00% 0.00% 1.00% 2.80% 2007-08 1.00% 0.00% 1.00% 2.80% Notes r In 1978, California voters passed Proposition 13 which set the property tax rate at a 1.00% fixed amount of assessed value. This 1.00% is shared by all taxing agencies within which the subject property resides. In addition to the 1.00% fixed amount, r property owners were charged taxes as a percentage of assessed property values for the payment of OCSD general obligation bonds (which were paid in full In fiscal year 1998-99). Source:County of Orange Auditor-Controllers Office. r r r r 65 ORANGE COUNTY SANITATION DISTRICT Assessed and Estimated Actual Value of Taxable Property Last Ten Fiscal Years xzwwo,wo rxw.aoo.wo rzw.00a.wo nw,wo 000 r�w,wo.aoo zw,wowo m w.a waw zmu xwwz zwz.m 2ow.w 1 .. xws.w 2..1 .1.m esxwae au.rW Percent Change in Fiscal Assessed Year Secured Unsecured Total Value 1998-99 131,295,000 3,394.000 134.689,000 2.21% 1999-00 142,126,000 3.507,000 145.633.000 8.13% 2000-01 155,544,000 3.778.000 159.322.000 9.40% 2001-02 169,357,000 4.066.000 173,423,000 8,85% 2002-03 183,223,000 5.657.000 188,880,000 8.91% 2003-04 197,143,000 4.309.000 201,452,000 6.66% _ 2004-05 214,529,000 4,743.000 219,272,000 8.85% 2005-06 236,826,573 5,023,423 241,849,996 10.30% 2006-07 264,241,033 6.452,111 270,693,144 11.93% 2007-08 208,051,467 4.681,838 292,733,305 8,14% In 1978,the voters of the Stale of California passed Proposition 13 which limited property taxes to a total maximum rate of 1% based upon the assessed value of the property being taxed. Each year, the assessed value of property may be increased by an inflation factor which is limited to a maximum increase of 2%. With few exceptions, property is only reassessed at the time that it is sold to a new owner. Al that point,the new assessed value in reassessed at the purchase price of the property sold, The assessed valuation data shown above represents the only data currently available with respect to the actual market value of taxable property and is subject to the limitations described above. Consequently,the assessed and estimated values are the same, Source: Orange County Auditor-Controller's Office. 66 ORANGE COUNTY SANITATION DISTRICT Property Tax and User Fee Levies and Collections (Dollars in Thousands) Last Ten Fiscal Years $250.000 $200.000 S150.000 $100.000 S50 000 S- 199&99 1W9 00 2000-01 2001-02 200243 20C3-04 2004-05 2005-06 2006-07 2007-06 oroui TU and uae,Fee Ley arum 7aadu:a Fee totem Current Total Tax %of Total Tax Tax and Percent of Delin- and User %of Total OIS Delinquen- Fiscal and User ERAF III User Fee Levy quart Fee Collection Delinquen- cies to Tax Year Fee Levy Deduction Collection Collected Collection Collection to Levy Cie. Levy 1998-99 $98.557 $ - $ 98,267 99.71 S 74 $ 98,341 99.78 $ 291 0.30 1999-00 107.948 - 107.794 99.86 72 107.866 99.92 154 0.14 2000-01 105.890 - 105,646 99.77 94 105.740 99.86 245 023 2001-02 112.419 - 112.087 99.70 83 112,170 99.78 332 0.30 2002-03 122.450 - 122,210 99.80 98 122,308 99.88 241 0.20 2003-04 134,389 - 134,132 99.81 94 134.226 99.88 257 0.19 2004-05 153,187 (16,198) 152.745 99.71 92 152,837 99.77 442 0.29 20D5-06 191,711 (16,198) 191.290 99.78 122 191.412 99.84 421 0.22 2D06-07 209,766 - 209.206 99.73 215 209.421 99.84 560 0.27 2D07-DB 228,622 - 228,635 100.01 329 228,964 100.15 (13) (0.01) Source:Orange County Auditor-Controller's Office. 67 ORANGE COUNTY SANITATION DISTRICT Property Value and Construction Covering The Entire County of Orange(1) (Dollars In Thousands) L Last Ten Fiscal Years Non- L Assessed Residential Residential Property Value(2) Constr.(3) Construction(3) Total Fiscal Calendar No.of Construction Year Value Year Value Units Value Value(3) L 1998-99 $ 192,625,739 1999 $ 1,614,422 12,348 $2,282,492 $ 3,876,914 1999-DO 209.136.472 2000 1,762.142 12,367 2,210,775 3.972,917 2000-01 228,548,301 2001 1,349,607 8,646 1,9D5,321 3,254,928 2001-02 248.966,581 2002 1.208.626 12,020 2.328,123 3,536,749 2002-03 289,684,864 2003 1,005,547 9,311 2.076,978 3082523 2003-04 287,923,828 2004 1,132.848 9,322 2.243,642 3:376:490 L 2004-05 311.802,395 2005 1,494,759 7,206 2,100,436 3,595,195 2005-06 342,576,859 2006 2,400,569 8,371 2,316,948 4717517 2006-07 381,007,391 2007 2,005,173 7,070 1,791,488 3:796:661 L 2007-08 412.669,779 2008 (4) 1,466.990 5,824 1,494,697 2,960,687 Notes and Data Sources L (1) - The Orange County Sanitation District services 471 square miles or 59% of the total 799 square miles that make up the boundaries of the County of Orange. (2)-Data Source-Orange County Auditor-Controller's Office. L (3)-Data Source-'The Chapman University Economic 8 Business Review." (4)-Forecasted numbers. V L L L it U L Li 68 ORANGE COUNTY SANITATION DISTRICT Insurance in Force As of July 1,2008 Type Insurer Deductible Limit All-Risk PropsM Fire and Other Perils Public Entity Property $25,000 per $1 billion/occumence Insurance Program occurrence (Lexington and others) Flood Public Entity Property $100,000 per $300 millioNoccurrence Insurance Program occurrence Earthquake Not Applicable Not Applicable Self-insured Boiler& Machinery Public Entity Property $25,000 to $100 milliordoccumence Insurance Program $350,000 (Lexington and others) Employee Dishonesty/ National Union Fire $25,000 $1 millionfloss; Faithful Performance/ $4 million excess policy Errors&Ommissions Excess Everest National Insurance Co. $250,000 $30 milliordoccumence General Liability (first$10 million layer); $500,000 for and annual aggregate American Merchants Casualty EPLI Ins. Co.($20 million layer excess$10 million) Travel &Accident Chubb Group of Insurance None Accidental Death& Dismemberment: Companies Class 1: Elected Officials, $500,000 per occurrence Class 2: Employees, 10X annual salary,up to$500,000 per occur. Excess Workers' CSAC Excess Insurance $500,000 Unlimited statutory coverage Compensation Authority Each Accident each accident,each employee $5 million employees liability Pollution Liability CSAC Excess Insurance $100.000 $10,000,000 per loss Authority Watercraft Liability Northern Assurance Co.of Am. $15,000 $10 million r Hull&Machinery Northern Assurance Co.of Am. $15,000 $1.3 million Pollution Liability Great American Ins. Co, None $5 million OCIP Main Basket("OCIP"=OWner Contolled Ins.Program for Construction) ` Workers Comp. Liberty Mutual $250,000/occur. Unlimited statutory coverage General Liability Liberty Mutual $250,000/occur. $2 millionloccurrence;$4 million agg. r OCIP Excess Liability AIG $10.000 $100 million OCIP Pollution Liability Liberty Surplus $250,000 $15 million r Source: Orange County Sanitation District's Risk Management Office. r 69 I u u u u u u u (THIS PAGE INTENTIONALLY LEFT BLANK) ) u u u u u u u 70 ORANGE COUNTY SANITATION DISTRICT Financial Management Division 10844 Ellis Avenue Fountain Valley, California 92708-7018 (714) 962-2411 www.ocsd.com 6/30/08